There are various forms of organisations under Kenya law. The focus in this Section is on the organisations established under the Companies Act and the State Corporations Act.
Companies limited by guarantee/shares
A company is limited by shares if the liability of members is limited by the company’s articles in respect of any amount unpaid on the shares held by its members.
A company is limited by guarantee if it has no share capital, the liability of its members is limited by the company’s articles in respect of the amount members undertake and if its certificate of incorporation states that it is limited by guarantee.
A company is unlimited if it has no limit on liability in respect of its members and its certificate of incorporation states that it is unlimited.
A company is private if:
A company is a public company if:
State Corporations Act
A State Corporation, as established under the State Corporations Act, is defined to include:
The principal sources of corporate governance requirements for companies are outlined below.
The Constitution of Kenya 2010 ("the Constitution")
The Kenyan Constitution is expansive and inclusive in nature and contains articles that provide the values of governance and principles of leadership that have been adopted and applied in corporate governance guidelines used by state organs and corporations.
It is worth noting that the Constitution provides that the national values and principles of governance in Article 10 shall bind all state organs, state officers and public officers and all persons whenever they are applying/interpreting the Constitution, enacting/applying or interpreting any law and making or implementing public policy decisions.
The national values and principles of governance that are set out in the Constitution include:
The application of these values and principles by all the arms of the government that is the executive, the judiciary and the legislature ensures that the government is able to maximise productivity and growth by implementing guidelines that ensure transparency and accountability, hence minimising practices that would open the country to runway corruption.
The Constitution further provides guidelines on values and principles of public service which include:
Again, as above stated the Constitution further provides that these values and principles of public service shall apply to public service in all state organs in both levels of government and in all state corporations.
The Companies Act 2015 ("the Act")
The Companies Act, among other provisions, requires the establishment of corporate governance principles for quoted companies and sets minimum standards thereof.
The Act further provides the guidelines on the rights of minority shareholders, the duties of directors and the measures that companies are required to adopt to ensure compliance.
The Act is extremely broad in nature and the drafters ‒ in complying with the requirements set out in the Constitution ‒ ensured that it covers most of the corporate governance requirements.
The Act provides for the exercise of rights of members, the appointment and removal of directors, the directors' duties, the declaration of interest in existing transactions or arrangements by members, the list of transactions with directors that require members' approval, payments for loss of office, requirements with respect to directors' service contracts, contracts with a sole member who is a also a director, directors’ liabilities, protection of information relating to directors from being disclosed by the company and other supplementary provisions.
Companies make decisions through resolutions and meetings. The Act has also sufficiently provided the procedure through which these meetings can be convened and the manner in which the written resolutions can be passed, the voting rights and the admissibility of votes, use of proxies, the notice period, the records relating to resolutions and meetings, among other provisions.
Corporate governance ensures that companies are directed and managed as per the stakeholders’ desires by the board of directors and the concerned committees for the company’s stakeholders’ benefit. The shareholders, board of directors, and company’s management are greatly involved in the running of the company with the aim of realising profits. Issues such as conflicts of interest among key stakeholders are greatly discouraged and a declaration of such interest is made mandatory. Each of the three bodies must demonstrate their individual performance to ensure that investors get their return in a company. The market-oriented nature of the current companies means that companies have a greater obligation to their investors, hence increased vigilance to ensure that risks are mitigated.
The board of the directors under the Act is therefore mandated to make strategic decisions to achieve profitability and therefore economic growth.
With the aim of improving the ease of doing business and to create an enabling environment, the government enacted the Companies Act 2015 which has enriched the corporate governance structure and built investor confidence.
The Capital Markets Authority (CMA) of Kenya, Established under the Capital Markets Act
The CMA is a regulating body which supervises, licences and monitors the activities of market intermediaries, including the stock exchange and the central depository and settlement system and all the other persons licensed under the Capital Markets Act. It facilitates the mobilisation and allocation of capital resources to finance long-term productive investments, hence boosting the economy.
The Authority derives its powers to regulate and supervise the capital markets industry from the Capital Markets Act and the regulations issued there under.
The regulatory functions of the Authority as provided by the Act and the regulations include:
The Authority carries out its mandate of regulating and developing the Kenyan capital markets through a regulatory framework designed to meet this objective. The capital markets industry operates within a regulatory framework which the players in this industry must adhere to in the course of offering their services.
The regulatory framework of the Authority is comprised of the following: the Capital Markets Act and the Central Depositories Act 2000.
Regulations and rules
The CMA provides the institutional framework for corporate governance to the licensees.
Mwongozo, The Code of Governance for State Corporations, 2015 ("the Mwongozo Code")
The Mwongozo Code was issued by the Public Service Commission (PSC) and the State Corporations Advisory Committee (SCAC). The Code was issued in fulfilment of the Constitution of Kenya 2010 with the objective of improving state corporations' profitability, accountability and leadership.
The Mwongozo Code is made up of the six principles of good governance developed by the OECD, which include:
The Mwongozo Code is made up of eight chapters relating to the following matters.
The board of directors
This chapter provides for the composition of the board, the role and functions of the board, duties of individual board members, role of the chairperson, term limits for board members, multiple directorships (which is discouraged), committees of the board, board meetings, board workplan, board charter, board evaluation, governance audits, board remuneration, board independence in decision making, appointment and role of the CEO, appointment and role of the corporation secretary and separation of roles.
Transparency and disclosure
The transparency chapter is meant to ensure that it creates an environment that boosts confidence of investors, stakeholders and society.
The chapter provides for organisational vision and values, policy on corporate governance, key stakeholders groups, governance structures, board performance and remuneration structure, code of ethics and conduct and whistle-blowing policy, key organisational risks, financial reporting, corporate citizenship, procurement, compliance with laws, regulations and standards and sustainability reporting.
Accountability, risk management and internal control
The board is tasked with ensuring that it has adequate systems and processes of accountability, risk management and internal controls. This chapter provides for financial reporting, risk management, internal controls, audit committee and the external auditor, procurement process, and information communication technology.
Ethical leadership and corporate citizenship
This chapter provides the operations, structure and framework that promotes good corporate governance. It provides for ethics and integrity, code of conduct and ethics, conflict of interest mechanisms, corporate reputation and image, corporate social responsibility and investment and whistle-blowing policy.
Shareholder rights and obligations
The Mwongozo Code recognises the rights of shareholders and ensures equitable treatment. It provides for ownership rights and interests, shareholder obligations, minority shareholders and oversight by the SCAC.
The Mwongozo Code seeks to manage shareholder relations in order to harmonise and achieve corporate objectives. In so doing the Code contains stakeholder engagement, stakeholder rights, dispute resolutions and relationships with government.
Sustainability and performance management
The Mwongozo Code amplifies the need to embrace present needs while ensuring that futuristic development and objectives are catered for. The Code provides for sustainability goals and strategy and performance management.
Compliance with laws and regulations
The Mwongozo Code provides that state corporations should conduct their affairs in compliance with the Constitution and applicable laws, regulations and standards. To achieve this, state corporations should have compliance strategy, legal compliance audits and reporting.
The Mwongozo Code is implemented on a “comply or explain” basis, which means that each state corporation will be at a different level of compliance with corporate governance norms. The compliance by the state corporations will be pegged on a realistic approach depending on the circumstances at hand.
The Code of Corporate Governance for Issuers of Securities to the Public
The guiding principle of all these sources of corporate governance is to ensure that the core values of corporate governance are adopted by companies and state corporations in their day-to-day operations and in their reporting and duties to shareholders and stakeholders.
The Code of Corporate Governance, which governs public listed companies, envisages accountability of the board of directors of the company before all shareholders and stakeholders in accordance with the legislation in force. It is the governing document for the board of directors in issues related to strategy planning, administration and control over the company’s executive bodies.
Companies are mandated to protect the rights of its shareholders and treat all (majority and minority rights) shareholders on an equal basis. The board of directors enables its shareholders to receive efficient protection if their rights are violated.
Companies provide timely disclosure of credible information on all the important facts related to the company's activities, including information on its financial status, social and environmental measures, results of activities, ownership and management structures; the company shall provide free access to such information for all interested parties.
The company acknowledges the rights of all interested parties envisaged by the legislation in force and aims to achieve effective co-operation with such parties in order to provide steady development and ensure financial stability of the company.
The Code of Corporate Governance Practices for the Issuers of Securities to the Public 2015 (“the Code”) forms the basis for reporting requirements for issuers.
The Code adopted the approach of “apply or explain” which is a principle-based approach and recognises that a satisfactory explanation for any non-application will be acceptable in certain circumstances. However, the Code contains mandatory provisions that have been replicated in the Capital Markets (Securities) (Public Offers, Listing and Disclosures) Regulations 2002.
Boards of issuers are also required to formulate additional internal policies and strategies to enable their companies to grow while protecting the interests of shareholders, stakeholders and the community at large.
All issuers are required to file a Reporting Template for Disclosing Application of the Code of Corporate Governance Practices for Issuers of Securities to the Public, 2015 with the Capital Markets Authority. The Reporting Template has to be filed annually, within four months after the year end of a company.
The Capital Markets Authority assesses issuers of securities who have filed the Reporting Template every financial year and publishes the report to raise visibility of the state of corporate governance of issuers of securities to the public in Kenya in order to empower investors and to encourage the continuous improvement in good practices among respective boards.
There are other regulations that have been adopted in corporate governance as set out below.
The regulations that are aimed at ensuring disclosure of listed companies are
The Capital Markets Authority issued the Stewardship Code for Institutional Investors, 2017 which is applicable to asset owners and asset managers investing in the debt and equity of companies listed on a licensed securities exchange with the primary focus being domestic investors domiciled in Kenya.
The Stewardship Code is aimed at encouraging the institutional investment community to take action to serve as responsible stewards for their beneficiaries and to help promote good corporate governance and the sustainable success of listed companies in the capital markets.
The Stewardship Code is based on various core principles of:
Below is a summary of some recent and forthcoming developments in relation to corporate governance in Kenya.
Better Annual Reporting, Disclosure and Transparency Mechanisms for Issuers in Kenya
Corporate Governance is increasingly requiring companies to improve their annual reporting, disclosure and transparency techniques with a view of improving accountability and boosting confidence as it provides checks and balances on the governance information and reports given.
There is also an increasing need to report in a manner that helps stakeholders make decisions and review systems of the organisation to ensure that they are working effectively and give an overview of the expected outlook in the future.
Ethics and Stakeholder Engagement
Corporate governance trends are moving towards certainty and openness by having systems and personnel that provide information which portrays a fair view of what is happening on the ground.
Integrated Reporting and Integrated Thinking
Companies are encouraging integrated reporting which helps in uncovering misstatements and frauds thereby providing confidence in any entity to external and internal stakeholders.
Over the years IT has greatly improved companies' overall performance and continues to add value to companies. Companies are increasingly working towards ensuring that their IT platforms are covered by having secure systems that protect the companies' information.
Kenya is yet to publish ESG reporting for its market although stakeholders have been engaging the Capital Markets Authority (CMA) and the Nairobi Securities Exchange (NSE), Sustainable Stock Exchanges Initiatives (SSE) and International Finance Corporation (IFC) with a view of building more rigorous capital markets. Companies are also incorporating ESG to improve on reporting.
The COVID-19 pandemic has seen a shift in governance where companies have embraced technology to ensure that they comply with the health guidelines on social distancing and limited gatherings.
In a joint press conference the Capital Markets Authority, Nairobi Securities Exchange and Central Depository and Settlement Corporation urged companies to defer their annual general meetings (AGMs) for the months of April and May as they devised measures to contain the spread of the disease. However, companies have innovated and adopted technology to hold virtual meetings.
According to a report published in the Daily Nation on 1 June 2020, WPP Scangroup, an NSE-listed company, held a virtual meeting of its shareholders to approve the sale of one of its subsidiaries, a move sanctioned by the courts.
Other companies have streamed their AGMs and embraced mechanisms that ensure transparency and response to shareholder queries.
The board of directors and management are involved in the governance and management of a company.
The board of directors is, among other roles, mandated to undertake the following functions:
Management functions on the other hand include ensuring that:
In order to discharge its responsibilities, the board prepares and writes a charter that:
The board may also develop a code of conduct for directors, management and staff that addresses all the issues set out in the company's code of conduct.
The board is also responsible and accountable for the performance and conduct of the business of the company; it keeps and maintains a schedule of the matters reserved for its decision and ensures that it directs and controls the company's functions. It is worth noting that the decisions of the board are collective and not individual.
For public companies, the board is usually composed of a minimum of three directors of which at least two should be natural persons. One third of the board should be made up of an independent non-executive director and not more than another one third should be closely related to any other directors.
The board should consist of the main board which has a chairperson and various committees (eg, audit and risk committee, nominations and HR, finance committee, governance committee etc) which are formed in accordance with the size of the company and its needs to help the board to effectively and sufficiently run the company.
The chief executive officer is responsible to the board for the day-to-day running of the company by:
The chairman on the other hand provides overall leadership to the board, sets an agenda of the board meetings, conducts efficient board meetings while ensuring that they encourage board members to fully participate in the meetings.
The chairperson also leads the board in their annual board evaluation process, ensures there is a balance of power between the CEO and the board, maintains close but independent working relations with the CEO, ensures proper induction of new board members and promotes a good image of the board.
The chairperson is responsible for addressing the development needs of the board as a whole and enhancing the effectiveness of the whole team, as well as meeting the development needs of individual directors.
In a nutshell the chairperson is the head of the board and provides the link between the board and shareholders.
The board is comprised of executive and non-executive directors, with a majority of non-executive directors. An executive director normally refers to the CEO or managing director of an organisation. Usually this post is the preserve of an employee. Independent non-executive directors represent at least one third of the total number of board members. A non-executive director usually serves on a part-time basis. Non-executive directors are often appointed for their expertise in specific fields and to provide an objective view to the board on policy matters. Non-executive board members provide independence, impartiality, wide experience, specialist knowledge and personal qualities.
Directors of a company are appointed by the board through a resolution and based on their skills and competencies coupled with other factors which are taken into consideration.
Similarly, directors may be removed through a resolution or at the expiry of their cumulative term of nine years unless they continue to serve on the board on a re-designation basis. Many boards prefer to re-designate the roles of the directors at the expiry of their terms to ensure that they do not lose their experience, insights into the company and its operations and, therefore, provide an increasing contribution to the board as a whole.
The Code requires that a board should consist of at least one third independent directors whose tenure shall not exceed a cumulative term of nine years. Upon completion of the nine years, an independent board member may continue to serve on the board subject to re-designation as a non-independent member.
The Act requires directors to act in the best interest of the company and prohibits the directors from having conflicts of interest.
Directors are bound by the common law duties of directors and as more particularised in the Companies Act. Directors owe the duty of reasonable care, skill and diligence in their actions. They are required to exercise independent judgement in their dealings and to avoid conflicts of interest while promoting the success of the company. Directors are also required to act within their powers and not to accept benefits from third parties.
Directors owe the company the fiduciary duty of acting in the best interest of shareholders and stakeholders.
Directors owe their duties to the shareholders who are the owners of the company.
Directors are required to consider the impact of their decisions on the shareholders and stakeholders at large affected by such decisions, hence their decisions should be made in the best interests of the stakeholders.
Whistle-blowers, fellow directors, shareholders or any other stakeholders may enforce a breach of the duties of the directors as enumerated herein.
The consequences of a breach (or threatened breach) of the general duties of directors set out above (see 4.6 Legal Duties of Directors/Officers) are the same as would apply if the corresponding common law rule or equitable principle applied. Those duties (with the exception of the duty of reasonable care, skill and diligence) are enforceable in the same way as any other fiduciary duty owed to a company by its directors.
The general duties applicable to directors have effect:
Director’s long-term service contracts, loans to directors and substantial property acquisition by a director or their relative requires members’ approval and such an approval can only be issued if there is a resolution.
In their annual integrated reports, companies are required to disclose matters of the board, including their skills, attendance in meetings, their skills and training programmes attended during the year and their remuneration as part of transparency and disclosure under the Governance Code.
Shareholders are responsible for appointments made by the board and the Code provides that the nomination committee shall recommend to the board candidates for directorships to be considered for appointment by the shareholders.
Shareholders approve directors' remuneration during the AGM as proposed by the remuneration committee.
The company communicates to the shareholders through the AGMs where shareholders vote to exercise their rights. Notices for AGMs are given in sufficient time, and all measures are taken to ensure that the shareholders are able to exercise their rights. There is an increased need for use of videoconferencing, teleconferencing and proxies as the world moves towards a robust adoption of technology to curb the spread of COVID-19.
Derivative claims can be brought by the company under leave of court as against the directors if the member proves that their action is in good faith and that the cause of action is yet to occur, among other reasons.
With a view of extending stewardship, institutional investors are encouraged to make direct contact with a company’s management and board to discuss performance and corporate governance matters as well as vote during the company's AGM.
Companies are subject to the following financial reporting requirements, among others:
A company's corporate governance arrangements are considered public information and hence this information available even on companies’ websites and in integrated annual reports detailing how the companies operate and the measures put in place to protect stakeholders' interests.
A company is required to file a return on an annual basis and notify the registrar of any changes that may take place from time to time, including change of directors, transfer or allotment of shares, registered office, company secretary (if any), share capital increase or decrease etc.
The only information available to the public is the ownership of the company ie, shareholders and shares held, directors, company number, share capital and the registered office. Personal information is not available due to the Data Protection Act in force which protects the disclosure of personal and sensitive information.
It is a requirement for companies to appoint external auditors and shareholders appoint an external auditor at every AGM.
The key requirements governing the relationship between the company and the auditor is that the external auditor shall be appointed by shareholders. The auditor is answerable to the board's audit committee and management should only support the auditor with information required to carry out the audit while ensuring independence.
The audit committee is mandated to review any communication between external auditor(s) and management from time to time to ensure that the board safeguards the integrity of the financial reporting process.
The board has a responsibility to ensure that adequate systems and processes of accountability, risk management and internal control are in place in order to achieve its strategic objectives.
The board is required to put in place a structure of review and authorisation designed to ensure the honest reporting of the company’s financial position. This comprises:
Integrated reporting, ie, material information about an organisation’s strategy, governance, performance and prospects, should be communicated in such a way that reflects its commercial, social and environmental context within which it operates.
The board is required to conduct an annual review of the risk management practices and internal control systems and report to shareholders.
Audit committee and internal audit functions are at the core of ensuring that the internal controls of a company are sufficient in managing risks.
Virtual Meetings and Dealings by Companies in the Era of COVID-19 in Kenya
On 13 March 2020, the government of the Republic of Kenya, in a press release from the Cabinet Secretary for Health, announced to the public that the country had recorded its first case of the novel COVID-19 that has been spreading throughout the world at an alarming rate. Two days and two new confirmed cases later the President also issued a public statement wherein he assured the public that the national government was putting the health of its citizens first and in so doing announced measures aimed at curbing the spread of the disease. Fortunately, like most of the other African countries, Kenya had time to prepare for the onset of the current pandemic.
A myriad of directives were issued by the President which were all aimed at avoiding or limiting contact among the Kenyan public through social distancing, including:
The country was undergoing a shift and rapidly evolving situation that had never been witnessed before.
In a circular dated 24 March 2020 (No CMA/MRT/003/2020), the Capital Markets Authority of Kenya issued an Assessment of the Kenya Capital Markets and Additional Guidance to the Industry in light of the COVID-19 pandemic. It was observed that there was economic slowdown occasioned by the pandemic and the containment measures undertaken by the national government.
The Capital Markets Authority, in a move to cushion various market players and ensure continuity, extended the deadlines for submission and publication of audited financial statements by licensed intermediaries and issuers of securities to the public, approved collective investment schemes and other approved persons due in the months of March and April for one month respectively.
The disclosure obligations with respect to publication of announcements and financial statements in two newspapers of national circulation have also been relaxed up to 30 June 2020. Companies have been encouraged to utilise their own websites and social media, the Nairobi Securities Exchange website for all issuers and trading participants, and the Capital Markets websites for all entities affected by the guidance.
The Nairobi Securities Exchange was experiencing shock waves due to the pandemic and, as a result, on 4 April 2020 the Capital Markets Authority, Nairobi Securities Exchange and Central Depository and Settlement Corporation issued a press release announcing the measures that the capital markets were undertaking to mitigate the adverse effects of the pandemic.
The acting chief executive of the Capital Markets Authority, Mr Wyckliffe Shamiah, made the following statement in the press release, “Given the need to postpone AGMs, to help eligible shareholders access dividends during these difficult circumstances, the respective boards of issuers of securities have been allowed to proceed to declare and pay the dividends to their shareholders. This will be subject to the companies’ dividend policies, procuring all other relevant internal approvals, and making available the audited financial statements to the Capital Markets Authority, Nairobi Securities Exchange and the public in the prescribed channels as explained in an earlier guidance.’’
COVID-19 has pushed organisations to quickly adapt and innovate. The call for social distancing and restrictions on gatherings have led to companies embracing technology faster and more efficiently. The Capital Markets Authority has been at the forefront of ensuring that the industry is not lagging behind while ensuring accountability, fairness, transparency and responsibility. This new trend has had a tremendous impact.
Convening and conducting virtual general meetings by issuers of securities to the public
Pursuant to an order issued by the High Court of Kenya (Miscellaneous Application Number E.680) delivered on 29 April 2020 and relevant laws and regulations, via a circular dated 27 May 2020 (No CMA/MRT/005/2020), the Capital Markets Authority issued further guidance to companies which has since allowed and enabled companies to conduct virtual/el/electronic meetings and general meetings. This was previously impossible or impractical on account of restrictions contained in the articles of association of most companies and the Companies Act which required the holding of AGMs physically at a disclosed venue and requiring physical attendance by the members of the company. It is worth noting that some companies had amended their articles of association to allow for the conduct of virtual/el/electronic meetings and AGMs.
Prior to convening virtual/el/electronic meetings and AGMs, the company is required to procure a no objection from the Capital Markets Authority and to specify in the notice of the AGM as properly issued under the law, the following:
The Capital Markets Authority has introduced a further detailed questionnaire that companies seeking to have virtual AGMs are required to complete. The questionnaire ensures that the rights of shareholders are protected, and the responsibility of directors and the board is not diluted during the virtual meetings. Furthermore, the systems and security of the hosting platform are subjected to high scrutiny and standards by the Capital Markets Authority whilst ensuring that they are accessible and simple to use.
It is worth noting that various companies have adopted these guidelines and are proceeding to hold virtual meetings. The courts have been progressive in their decisions in High Court Miscellaneous Application Number E.680 and High Court Miscellaneous Application Number E.756 to allow both public listed companies and public non-listed companies to hold virtual meetings.
The Institute of Certified Secretaries (ICS) has also issued a Governance Guideline for Virtual Meetings for the purpose of providing guidance for the convening and conduct of virtual meetings for the board, members or other stakeholders of an organisation in order to promote effective decision-making, professionalism, uniformity and consistency. The ICS Guideline applies to all organisations and provides the legal framework and governance standards, law, policy and proceedings, preparation and planning, and virtual meetings checklist.
The Business Registration Service (BRS), under the office of the Attorney General, has also published Guidelines on the Conduct of Hybrid and Virtual General Meetings by Companies. The guidelines issued pursuant to Section 867of the Companies Act are applicable to all companies registered under that Act.
Digital execution of resolutions and minutes
Coincidentally, with the onset of the COVID-19 pandemic the Business Laws Amendment Act, 2020 was enacted with a view to improving the ease of doing business in Kenya. The Business Laws Amendment Act, 2020 is an omnibus law that has amended several laws including the Law of Contract Act by introducing the definition of an electronic signature and recognising an electronic signature as a valid form of execution of documents. The Companies Act, which has also been amended, has dispensed with the requirement for the affixing of a Company Seal on company documents. These amendments are timely in view of the disruptions caused by the COVID-19 pandemic and have been instrumental in assisting companies which have already adopted electronic signatures through appropriate tools.
While many believe that the COVID-19 pandemic will change the way of doing business for the long-term, the Capital Markets Authority and various stakeholders in the industry have been quick to embrace change in an environment where the national government of Kenya has been instrumental in pushing for the adoption of digital instruments by way of digitisation to improve the ease of doing business.
Technological advancement in the area of governance can only blossom under proper guidelines, which will, in the long run, ensure that the principles of transparency and accountability are adhered to.