Pursuant to the Companies Act, 2015 (the Act), directors of a company are required to prepare a directors’ remuneration report for each financial year of the company. The Act requires regulations to be in place, which regulations shall prescribe the information to be included in a directors’ remuneration report, how the information is to be set out in the report and what is to be the auditable part of the report. Previously, the Companies (General) Regulations, 2015 (the 2015 Regulations) were in place. The 2015 Regulations had set out the information to be disclosed in a directors’ remuneration report. This included an aggregate amount of remuneration and benefits paid to or receivable by the directors of the company, in respect of their qualifying services.
In September 2017, the Companies (General) (Amendment) Regulations, 2017 (the 2017 Regulations) came into effect. The 2017 Regulations have amended the 2015 Regulations and seek to introduce more disclosure requirements for the directors’ remuneration report. The 2017 Regulations now require disclosure to be made with regard to each individual director as opposed to the aggregate amount of the directors’ remuneration, as was the case in the 2015 Regulations. Consequently, disclosure requirements in the directors’ remuneration report are now more extensive. In addition to the requirement for the report to disclose the remuneration of each individual director, the 2017 Regulations also seek to provide further guidelines for additional information that the directors’ remuneration report should contain. The information to be contained in the directors’ remuneration report is broadly categorised into two; information not subject to audit and information subject to audit.
Not Subject to Audit
The directors’ remuneration report needs to capture major decisions on directors’ remuneration, including any substantial changes relating to the directors’ remuneration, made during the year and the context in which the decisions and changes were made. To this extent, the 2017 Regulations require the report to contain a statement of voting at the previous general meeting as follows:
The 2017 Regulations further require that where there is a significant percentage of votes against the resolutions highlighted above, the report should contain a summary of the reasons for those votes, as far as the directors are aware and any actions taken by the directors in response to those concerns. Directors are also required to prepare a policy statement detailing the summary of each director’s performance conditions for the director to be entitled to share options or a long-term investment scheme. A summary of the methods to be used in assessing performance conditions also needs to be stated. The policy statement should also disclose the duration of directors’ contracts, notice periods and termination payments under the contract. In relation to a director’s contract of service, the report shall state whether a director is entitled to compensation in the event of early termination of a contract and such details that enable members of the company to estimate the liability of the company, in the event of such early termination.
The above information though not subject to audit is required to be in the directors’ annual remuneration report.
Subject to Audit
The following information required to be disclosed in the directors’ report is subject to audit:
Under this, the following information should be disclosed:
The report should also contain, in respect of each director of a company, the details of their share option information. This includes the number of shares that are subject to a share option at the beginning and end of the financial year, the number of shares that have been awarded, exercised or have expired or if there has been any variation to the rights. With regard to unexpired share options, the report should state the price paid for each share and the period within which a right should be exercised.
Any details of a scheme of interests that a director may have at the beginning of a financial year or if later, on the date of their appointment as a director of the company, should be disclosed. The details of the schemes of interests awarded to the director in the relevant financial year, as well as those that the director may have at the end of the financial year, also need to be disclosed.
The 2017 Regulations recognise the fact that the long-term incentive schemes are subject to certain qualifying conditions and require that the report sets out the period within which the qualifying conditions for the long-term investment scheme have to be fulfilled and whether there are any variations. A long-term incentive scheme for purposes of the 2017 Regulations means an interest in respect of which assets may become receivable, in respect of the qualifying services of a director.
The report also needs to disclose pension information of a director of a company who has served during the relevant financial year and has rights under the pension scheme. The pension information includes the details of the pension arrangement and any changes to those arrangements and the management of the assets and financial affairs of the pension scheme.
The details of any significant award made in the relevant financial year to any person who was not a director at the time of making the award, but was previously a director of the company must be disclosed.
The directors’ remuneration report should also contain the aggregate amount of any consideration paid or receivable by third parties, for making available the services of a director of a company. Payments made to a person who is a director of a company and is involved as the director of any of the company’s subsidiary undertakings or has dealt with any other undertaking by virtue of the company’s nomination should be disclosed.
It is important to note that the Regulations require the above information to be provided with respect to each individual director, save for information relating to share options, where the Regulations allow for aggregation, in the opinion of the directors. Disclosure in respect of each individual director will result in a disclosure of excessive length.
The 2017 Regulations will with no doubt enhance transparency in the remuneration of company directors. With the new rules in place for instance, it is now mandatory that companies integrate details of individual director remuneration into their annual financial reports. The 2017 Regulations are also expected to bring an end to the current reporting practice where listed firms only provide an aggregate amount of total director emoluments, leaving shareholders to guess what each executive or director takes home. Shareholders will now more transparently have the power to approve directors’ pay at general meetings, a move that may see boards of loss-making companies take a pay cut to match the company’s economic situation.
The liability of companies at the time a director joins and leaves a company, as well as after a director has left a company, will now be more certain and can be projected without causing any economic effect to the performance of listed companies.
Notably, the 2017 Regulations are in line with constitutional requirements that every citizen has the right of access to information. The 2017 Regulations are also in line with the guidelines on corporate governance practices by publicly listed companies in Kenya, which require companies to establish a formal and transparent procedure for remuneration of directors, which should be approved by the shareholders. The Regulations are therefore a remarkable and progressive legislative development.
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