The majority of listed firms breached the Capital Markets Authority (CMA) rule barring non-executive directors from holding executive or employee positions in related entities during the financial year ended June 2024, pointing to the compliance headache facing companies.
The latest CMA report on the state of corporate governance for Nairobi Securities Exchange (NSE)--listed firms show the aggregate score onboard operations and control dropped to a six-year low of 67.93 percent in the review period from 71.64 percent in the previous period.
The score was at 62.28 percent in the year ended June 2019.
CMA said the drop in rating onboard operations and control, which ultimately pulled down the overall governance score of listed firms to 73.56 percent from 75.71 percent, was mainly due to the failure of many firms to comply with the rule barring cross-directorship to promote independence and objectivity in decision-making.
The regulator on December 15, 2023, gazetted Capital Markets (Public Offers, Listings, and Disclosures) Regulations, 2023 (POLD Regulations, 2023) transitioning the code of corporate governance practices it had issued in 2015 to a mandatory obligation from being voluntary.
According to CMA, most of the firm’s performance dropped on the ‘board operations and control’ principle which has the highest weighted score of 35 percent among all principles it was reviewing and therefore led to a reduction in overall performance for the first time since the rating was introduced in 2018/2019 financial year.
“The drop in performance was a result of Issuers failing to comply with POLD Regulations 2023 definitions of directors. Specifically, the designation of individuals as non-executive directors of an issuer where these individuals are employees and executive directors of related entities contrary to the provisions of POLD Regulations 2023,” says CMA in the report.
CMA says in the report, many firms argued the secondment of independent non-executive directors to boards of related entities was helping them to harness synergies between the group and subsidiaries.
According to the regulator, whereas POLD regulations recognise the need for synergy by allowing non-executive directors to sit on boards of subsidiaries, some issuers opted to second independent non-executive directors to these boards.
CMA says having independent non-executive directors sitting on boards of related entities impairs the ability of such directors to provide an independent view on corporate strategy, performance, resources, and appointments.
The report notes that some of the firms also appointed members of management to be alternate directors of non-executive directors of the company against the corporate governance code.
CMA introduced the annual corporate governance audit in the 2017/2018 financial year through which it independently assesses NSE firms’ corporate governance practices against the principles, recommendations, and guidelines outlined in the Code of Corporate Governance Practices for Issuers of Securities to the Public, 2015.
Firms are required to implement the provisions in this code and appraise themselves at the end of each financial year. CMA then independently evaluates each firm’s self-assessment report alongside publicly available information.
