Stay Ahead: The Ultimate Guide to Corporate Governance Compliance in Kenya’s Business Landscape

Introduction

In Kenya’s dynamic economic landscape, corporate governance and compliance have evolved from mere regulatory requirements to crucial strategic tools that shape an organisation’s trajectory. Despite this evolution, many businesses continue to grapple with significant governance challenges, which can undermine their stability and growth.

Common reasons for corporate governance failure include inadequate oversight and accountability mechanisms, conflicts of interest, and ineffective risk management. For instance, Tuskys’ downfall in 2020 was primarily attributed to a lack of accountability, transparency, ethical breaches and conflicts of interest. Allegations of manipulated financial statements, unreported revenue, and executives prioritizing personal gain over the company’s wellbeing led to significant losses, an inability to pay suppliers, and ultimately, the chain’s demise.[1]

This is not an isolated occurrence. Globally, corporate governance failures have profound impacts, such as the infamous collapse of Enron Corporation in USA due to unchecked financial misreporting by its executives. This company went from $100 billion in revenue and 29,000 employees at the beginning of 2001, to filing for bankruptcy at the end of the same year.[2]

Understanding these pitfalls is crucial for both startups and established multinationals aiming to thrive in Kenya’s competitive market. This article offers a comprehensive guide to mastering corporate governance, addressing these common failures head-on, and providing practical solutions to ensure robust governance structures. By focusing on effective board management, transparent shareholder relations and meticulous compliance with applicable laws, businesses can navigate these challenges, build trust with stakeholders, and position themselves for sustainable growth.

• Building a Robust Corporate Governance Framework

Corporate governance is the system by which companies are directed and controlled. It involves a set of rules, processes, and practices that dictate how decisions are made within a company. Good corporate governance ensures that there is accountability, fairness, and transparency in a company’s relationship with its stakeholders, including shareholders, management, customers, financiers, government, and the community. Businesses that uphold strong governance structures attract investors, retain talent, and mitigate risks associated with poor decision-making or lack of oversight.

• Understanding Kenya’s Corporate Governance Landscape
  • The Companies Act, 2015

The Companies Act is the cornerstone of corporate governance in Kenya. It replaced the earlier 1978 Act (Chapter 486) and introduced governance structures to align with global standards. Key areas regulated by the Companies Act include:

• Board Structures and Responsibilities

Part IX of the Companies Act underscores the importance of appointing directors who bring diverse skills, expertise, and independence to ensure robust governance. It is crucial that the board reflects a balance of experience, reflecting both local and global market conditions.

Key responsibilities of the Board include:

• Adherence to Legal Duties

Directors must act in accordance with the company’s constitution and exercise their powers solely for the purpose for which they are conferred. In addition, they are to act in good faith to promote the success of the company for the benefit of its members as a whole, considering the long-term consequences of their decisions, the interests of employees, and the impact on the community and arrangement.

• Independent Judgment and Care

Directors must exercise independent judgment and ensure that their decisions are not unduly influenced by external factors. Further, they are expected to perform their functions with reasonable care, skill, and diligence, as would be expected of a reasonably diligent person with similar knowledge and experience.

• Conflict of Interest Management

Directors must avoid situations where their interests conflict with those of the company and must disclose any potential conflicts of interest. They should also ensure that any such conflicts are properly authorized according to the company’s governance procedures.

• Declaration of Interest

Directors must declare their interests in any proposed or existing transactions or arrangements with the company, ensuring transparency and mitigating potential conflicts.

• Compliance Oversight

It is the board’s responsibility to ensure the company’s compliance with legal requirements, review and approve financial statements, and provide strategic direction that aligns with the company’s long-term goals and shareholder value.

• Shareholder Rights

Shareholders are the ultimate beneficiaries or loss carriers of a company. They must therefore play a pivotal role in the governance and strategic direction of companies, as enshrined in Part VIII of the Companies Act. Shareholders possess a range of rights, including the power to vote on key company matters such as the appointment and removal of directors, amendments to the Articles of Association, alterations of share capital, and decisions involving the liquidation or restructuring of the company. These powers are typically exercised through resolutions passed at general meetings or, in certain cases, through written resolutions.

• Company Secretary Requirements

The role of a company secretary is critical in facilitating compliance and good governance. They support strategic decision making by providing insights thus contributing to the long-term success and sustainability of the company. The Companies Act mandates that all public companies and private companies with a paid up capital of at least five (5) million Kenya shillings appoint a qualified company secretary, who holds a valid practicing certificate issued under the Certified Public Secretaries Act and possess the necessary knowledge and experience to fulfil the role.

• Statutory Filings and Timelines

Failure to adhere to statutory filing deadlines can attract penalties and, in extreme cases, deregistration of the company. To mitigate these risks, companies must adopt a diligent approach to compliance. For instance:

• Annual Returns: Companies must file their annual returns with the Registrar of Companies within 42 days following the end of their financial year. This ensures that the company’s financial position is current and available to stakeholders, reflecting accurate and up-to-date information.

• Changes in Company Structure: any alterations in shareholding or directorship must be reported to the Registrar within 30 days of the change. This includes updates on changes in the company’s share capital, appointments or resignations of directors, and adjustments to the company’s registered office or financial year-end. Timely and accurate reporting of these changes is vital for maintaining transparency and upholding the trust of stakeholders.

• Financial Statements: Directors must submit the company’s financial statements within a specific period after the financial year ends. Public companies and companies limited by guarantee have six months, while private companies have nine months. These statements, along with the auditors’ and directors’ reports, must be filed to ensure compliance and provide a clear financial picture of the company.

• Ultimate Beneficial Ownership: Under the Beneficial Ownership Regulations of 2020, companies are required to disclose their Ultimate Beneficial Owners and maintain a register of these individuals. This information must be filed with the Registrar of Companies, emphasizing the need for privacy and accurate record-keeping.

To avoid the complications of non-compliance, such as penalties, reputational damage, and potential legal consequences, companies should prioritize timely and accurate statutory filings. Adhering to these requirements not only ensures regulatory compliance but also supports the company’s integrity and operational transparency.

• Guidelines on the Implementation of Good Governance

In alignment with its mandate under Section 11(3)(v) of the Capital Markets Act (Cap 485A), the Capital Markets Authority published the Code of Corporate Governance Practices for Issuers of Securities to the Public, 2016. The Code delineates the foundational standards for corporate governance expected of directors, shareholders and executive management of both listed and unlisted public companies.

The Code outlines critical governance principles and practices aimed at enhancing transparency, accountability, and stakeholder trust. Key areas of focus include:

• Timely and Balanced Disclosure

The Board is required to ensure that the company adopts robust disclosure policies and procedures. These include:

• Audit Committee: Disclosing the existence, composition, qualifications, and responsibilities of the Audit Committee in the annual report.

• Board Charter: Making the Board Charter publicly accessible on the company’s website.

• Board Evaluation: Reporting on the evaluations of the Board, Chairperson, CEO, and Company Secretary.

• Board Structure: Ensuring that independent and non-executive directors make up at least two-thirds of the Board.

• Ethics and Conduct

The Code mandates that companies publish their Code of Ethics and Conduct on their website and disclose policies related to corporate social responsibility and conflict of interest.

• Financial Reporting

Companies must provide a comprehensive management discussion and analysis, disclose compliance with International Financial Reporting Standards (IFRS), and report any deviations from these standards.

• Governance and Compliance
• Governance Audit: Confirm the completion of a governance audit.

• Governance Structures: Detail the governance framework, including Board composition and committee mandates, in the annual report.

• Compliance: Report on compliance with relevant laws and standards, including any material deviations and corrective actions.

• Environmental, Social, and Governance (ESG) Policies

Disclose ESG policies and their implementation, including the company’s approach to environmental stewardship and social responsibility.

• Remuneration and Related Party Transactions
• Remuneration: Annually disclose remuneration policies, including the compensation for directors and senior management.

• Related Party Transactions: Fully disclose all related party transactions to ensure transparency.

• Stakeholder Information

Include details on major shareholders, the parent company, and key stakeholders who influence company performance.

• Extending Corporate Governance Standards to Private Companies

Despite these robust guidelines for public companies, it is evident that the current governance framework does not extend to private companies, creating a gap in promoting sound management practices across the board. To promote sound management practices and foster accountability across all business sectors, several key measures can be considered:

• Enhance awareness of the existing guidelines that support corporate governance in private companies. For instance, the Code of Governance for Private Organizations in Kenya, 2014,[3] issued by the Institute of Certified Public Secretaries of Kenya (ICSPK), provides a comprehensive framework for strengthening corporate governance in the private sector, addressing crucial aspects of governance, including the roles, responsibilities and leadership of the board, transparency and disclosure, building systems for oversight and risk management, promoting ethical conduct and social responsibility, protecting and respecting shareholder interests, managing and fostering relationships with stakeholders, aligning operations with long-term sustainability goals, and ensuring adherence to legal and regulatory compliance;

• Alternatively, we could adopt a Corporate Governance Guidance Code tailored specifically for private and unlisted companies; and/or

• Best Practices for Corporate Governance in Kenya

To maintain good standing with regulators and ensure smooth operations, businesses should adopt the following corporate governance best practices:

• Regular Board Meetings and Clear Reporting Lines: Hold regular board meetings to evaluate the company’s performance, set strategic goals, and address any governance-related issues. Establish clear reporting lines to ensure that board members receive timely and relevant information, enabling them to make well-informed decisions. Effective board reporting should include comprehensive and accurate reports that support strategic planning and oversight.

• Key Committees: Create specialized committees within the board, such as audit, risk and remuneration committees, to help streamline decision-making and enhance oversight. These committees should operate with clear terms of reference and ensure robust governance practices, including the review of financial statements, risk management, and executive compensation.

• Embrace Corporate Social Responsibility (CSR): Integrate CSR into your corporate governance strategy to enhance the company’s reputation and demonstrate a commitment to ethical business practices. CSR initiatives should align with the company’s values and address the needs of stakeholders, contributing to positive community relations and sustainable business practices.

• Continuous Training and Development: Invest in ongoing training for directors, management, and key personnel on corporate governance practices, regulatory changes, and compliance issues. This will help ensure that the board and management stay ahead informed of evolving regulatory environment and maintain high standards of governance.

• Effective Stakeholder Engagement: Foster transparent and proactive communication with stakeholders, including shareholders, employees, regulators, and the community. Effective stakeholder engagement involves addressing concerns promptly, providing clear information, and fostering trust, which can help mitigate governance-related disputes and enhance the company’s public image.

• Strong Governance Frameworks: Develop and maintain a comprehensive governance framework that defines roles, responsibilities, and accountability. This framework should ensure that governance practices are consistently applied and aligned with the company’s strategic objectives and regulatory requirements.

• Rigorous Documentation of Processes and Procedures: Ensure that governance processes and procedures are well-documented and up to date. This documentation should reflect actual practices, provide clear guidelines for decision-making, and serve as evidence of compliance for regulators and stakeholders.

• High Ethical Standards and Integrity: Cultivate a culture of ethics and integrity within the organization. Implement policies on conflicts of interest, codes of conduct, and whistleblowing to support ethical behaviour and transparency. Directors and employees should adhere to these standards in all business dealings to uphold the company’s reputation and regulatory compliance.

• Conclusion

Corporate governance and compliance have become imperative for businesses navigating Kenya’s vibrant yet challenging market landscape. The collapse of prominent enterprises such as Tuskys and Enron Corporation underscores the critical need for robust governance structures, transparency and accountability.

To future-proof their operations and foster sustainable growth, business must go beyond mere compliance. Whether you are a launching a startup or steering a multinational, mastering corporate governance is not just about meeting regulatory requirements but about positioning your business for long-term success. Establishing a solid governance framework, even within private companies, is key to building resilience against potential pitfalls. By implementing effective board management, fostering transparent shareholder relations, and rigorously adhering to statutory obligations, companies, whether public or private, can mitigate risks and cultivate a culture of integrity that resonates with stakeholders.

[1] Waihiga Mwaura, “The Tragedy of Tuskys And The Slippery Retail Business” (March 13, 2023)

[2] Peter Bondarenko “Enron Scandal: June 2001-December 2,2001” (29^th July 2024)

[3] https://www.ics.ke/download/cs-practitioners-corner/