Kenyan capital markets regulator raises threshold on transparency

Directors of CMC are alleged to have approved a deal in which a transport company associated with a director and key shareholder overcharged the company. Photo/FILE 

By PETERSON THIONG’O The EastAfrican

In Summary

• Capital Market Authority (CMA) has proposed the establishment of an independent oversight body to scrutinise corporate governance, accounting and auditing standards of companies listed on the Nairobi Securities Exchange (NSE).
• According to the regulator, setting up an independent oversight body for listed firms will put Kenya in the ranks of other key international financial centres like Egypt, Mauritius and South Africa that already have such arrangements.
• Corporate governance experts have welcomed the move, saying it will increase transparency in the management of public organisations.

Kenya’s listed firms are expected to come under renewed scrutiny as capital markets regulator introduces new rules that will transform how they appoint board members and report their earnings.

The Capital Market Authority (CMA) has proposed the establishment of an independent oversight body to scrutinise corporate governance, accounting and auditing standards of companies listed on the Nairobi Securities Exchange (NSE).

The proposed regulations are expected to further tighten corporate governance rules by ensuring proper checks on the independence of directors in order to eliminate conflicts of interest. These will also reduce the influence of principal shareholders on boards as well as safeguard the interest of minority investors.

According to the regulator, setting up an independent oversight body for listed firms will put Kenya in the ranks of other key international financial centres like Egypt, Mauritius and South Africa that already have such arrangements.

CMA says the existing inspection arrangements by the Institute of Certified Public Accounts of Kenya (ICPAK), while welcome, fall short of international best practice, which now requires independent oversight of public interest entities, including listed companies and financial institutions.

In proposals contained in the regulator’s 10-year master plan released last week, the regulator says setting up an Auditor Oversight Authority (AOA) as well as a code of corporate governance for listed firms, will help improve transparency and reduce fraud and abuse of office by both directors and management.

Some Kenyans firms have recently been in the spotlight over their corporate governance credentials as well as how they report their earnings.

A May 2013 survey by audit firm Ernst & Young said at least 53 per cent of managers polled in Kenya believed their companies over-report their financial performance, driven by increased pressure to meet targets in an increasingly challenging business environment.

READ: Creative accounting: Are Kenyan firms padding out their profits?

The global survey, in which 100 Kenyan firms participated, showed one in five employees said they were aware of financial manipulation in their own company.

The Ernst & Young findings, governance experts said, are raising questions over the ability of local boards, regulators and auditors to police management and detect “cooked” financial figures.

In July last year, US financial behemoth Citi Group Global Markets released a controversial report that claimed Kenyan banks were overstating their profits, a claim that was dismissed by bank executives.

The report, “don’t get caught when the music stops,” warned about the exposure banks have to bad loans. The analysts said banks had not provided for bad loans worth Ksh20.8 billion ($247 million) for the full year 2011.

The regulator argues that the radical proposals will help raise international investor confidence in firms listed at the NSE, increasing foreign participation in the bourse. Foreign investors drive nearly half of all market activity at the NSE.

The CMA wants to make it mandatory for companies to seek an independent audit of their corporate governance structure — in the same way as financial statements are audited by external auditors — instead of the current requirement that boards do a self-evaluation and include it in the annual company report.

“The CMA could consider whether the code should make it compulsory for companies to issue an externally audited governance report to make sure they are compliant with key standards and requirements. Such external governance audits could be conducted by Certified public secretaries,” said the CMA.

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The authority revealed that it had produced a first draft of a new code of governance, that among other things, sets standards on how directors are appointed and their minimum skills. The blueprint is expected to be released for industry scrutiny in March before it is adopted and rolled out.

Corporate governance experts have welcomed the move, saying it will increase transparency in the management of public organisations.

“It is a welcome move and in line with global standards… self-assessments by boards are subjective and thus not entirely dependable,” said Karugor Gatamah, chief executive at the African Centre for Corporate Governance.

The CMA also wants to formulate laws that will give it powers to review the role of directors through a periodic review of board operations to ensure that independent directors remain independent.

“The CMA should consider an explicit formulation of the CMA’s powers in relation to board charters and to disputes between directors or between directors and shareholders,” said the CMA.

The Central Bank of Kenya (CBK) has meanwhile, given lenders until the end of June to ensure at least a third of their board members are independent directors but experts say the enforcement of this requirement is tricky.

On Tuesday, Housing Finance, the NSE listed mortgage lender, said it had appointed Gladys Ogallo, a human resource practitioner to its board as it sought new directors to meet governance rules set by CBK.

Housing Finance’s eight-member board is dominated by representatives of its principal shareholders including the National Social Security Fund, Britam and Equity Bank.

CMA is seeking to tighten this rule further by proposing independent background checks on the proposed directors to ensure they meet the threshold of independence.