Defining Boundaries: A Closer Look at the Code of Corporate Governance Practices for Issuers of Securities to the Public, 2015

Defining Boundaries: A Closer Look at the Code of Corporate Governance Practices for Issuers of Securities to the Public, 2015

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 Section 11(3)(v) of the Capital Markets Act, Cap 485A Laws of Kenya authorizes the Capital Markets Authority (the Authority) to discharge its functions by prescribing notices or guidelines on corporate governance of companies whose securities have been issued to the public or a section of the public. In furtherance of this mandate, the Authority has recently published in the Kenya Gazette (on 4th March, 2016) the Code of Corporate Governance Practices for Issuers of Securities to the Public, 2015. It has also published the Guidelines on the Prevention of Money Laundering and Terrorism Financing in the Capital Markets, 2015.
 

This review focuses on the Code of Corporate Governance Practices for Issuers of Securities to the Public, 2015 (the Code) which succeeds the Guidelines on Corporate Governance Practices by Public Listed Companies in Kenya, 2002 and highlights the principles and specific recommendations on structures and processes which companies should adopt in making good corporate governance an essential part of their business dealings and corporate culture.

 

The Code is intended to establish the minimum threshold of standards expected of the various stakeholders such as directors, shareholders, chief executive officers and top tier management of listed or unlisted companies, as long as such companies issue securities to members of the public, or a section of the public. This, in turn, will ensure that the above-mentioned stakeholders exercise their responsibilities with clarity, assurance and effectiveness.

 

The Code comprises seven chapters titled: Introduction, Board Operations and Control, Rights of Shareholders, Stakeholder Relations, Ethics and Social Responsibility, Accountability, Risk Management and Internal Controls, and lastly, Transparency and Disclosures.

 

With respect to Board Operations and Control, it is noteworthy that there is a restriction on multiple directorships, especially in listed companies. With the exception of a corporate director, a director of a listed company is precluded from holding such a position in more than three public listed companies, at any one time. This is a shift from the previous position where a director was precluded from holding such a position in more than five (5) listed companies at any one time. The purpose of this is to ensure effective participation by the directors constituting the board of such companies. With respect to alternate directors, the Code provides that the appointment of an alternate director by a corporate director, shall be restricted to two public listed companies at any one time. This has been reduced by one. Similarly, a chairperson of a public listed company is precluded from holding such a position in more than two public listed companies at any one time. Again, the significance of this, is to enable the individual occupants of the aforementioned offices devote sufficient time to the various boards they sit on. It is noteworthy that any executive director of a listed company shall now be restricted to one other directorship of another listed company. This requirement ought to be read in tandem with the provisions of the Companies Act, 2015 on directorships.

 

Another important highlight is the fact that the Code distinguishes the functions of the Chairperson and the Chief Executive Officer of a Company. The implication of this is that the functions of the Chairperson and those of the Chief Executive Officer, cannot be exercised by the same individual; this is a mandatory requirement.

 

Additionally, the boards of companies issuing any securities to members of the public will now be required to conduct a performance appraisal of all its board members, including the Chief Executive Officer and the Company Secretary. This is shift from the previous position where the board was only tasked with reporting requirements on the activities of the board in a given financial year.

 

Whereas listed companies were previously required to have periodic legal and compliance audits, the Code now requires such companies to have annual governance audits in addition to the legal and compliance audits. The purpose of this is to ascertain that the company is operating on sound governance practices.

 

With respect to the rights of the Shareholders, the Code mandates the boards of companies to recognize, respect, and protect the rights of the shareholders. The code does this by providing an enabling environment for the exercise of the entitlements or rights of the shareholders.

 

Further, the salaries of the management team are to be pegged on the company’s performance.

 

One significant highlight in the provisions touching on Stakeholder Relations, Ethics and Social Responsibility is the fact that the boards of listed or unlisted companies issuing securities to members of the public, are expected to constitute and put into effect a whistle blowing policy for such companies.

 

Lastly, it is noteworthy that the reporting requirements of listed companies have been enhanced to include an element of independent reporting. This is captured from the chapters of the Code touching on Accountability, Risk Management and Transparency and Disclosure Requirements, which generally require the boards of such companies to rotate independent auditors every six to nine years. No listed company will be in a position to retain the services of an audit firm indefinitely. The significance of this is that it ensures the integrity of any data or audit reports issued. This is also in line with the International Financial Reporting Standards.

 

In phase two of our analysis we will review the Guidelines on the Prevention of Money Laundering and Terrorism Financing in the Capital Markets, 2015 and their impact on the operations of listed companies. In the meantime, if you have any questions relating to the Code please do not hesitate to contact our lawyers (see contacts below).

 

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