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UNDERSTANDING CORPORATE GOVERNANCE IN KENYA

CORPORATE GOVERNANCE

Corporate governance is a crucial aspect of how companies are run and managed. It involves the rules, practices, and processes that guide a company’s operations and ensure that it acts in the best interests of its shareholders and stakeholders.

In Kenya, corporate governance is shaped by various laws and regulations, with the Companies Act of 2015 being one of the most important.

What is Corporate Governance?

Corporate governance refers to the systems and processes that control and direct a company.

It defines the relationships between different stakeholders, including shareholders, directors, management, and employees.

Good corporate governance ensures that companies operate transparently, responsibly, and ethically, which helps build trust among investors and the public.

The Regulatory Framework in Corporate Governance

In Kenya, corporate governance is primarily governed by the Companies Act (No. 17 of 2015).

This law outlines the responsibilities of directors and shareholders, as well as the rules for running a company.

Additionally, the Capital Markets Authority (CMA) plays a vital role by providing guidelines that companies registered and operating in Kenya must follow to ensure good governance practices.

Roles and Responsibilities of Directors

Directors are key players in corporate governance. The Companies Act sets out several important duties for directors:

  • Acting in the Best Interest: Directors must always make decisions that benefit the company as a whole.
  • Independent Judgment: They should use their own judgment when making decisions rather than being influenced by others.
  • Avoiding Conflicts of Interest: Directors need to declare any personal interests that could conflict with their duties to the company.

Having a diverse board of directors is also essential because it brings different perspectives to decision-making, which can lead to better outcomes for the company.

Shareholders’ Rights in Corporate Governance

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Shareholders are the owners of a company and have specific rights under Kenyan law:

  • Voting Rights: Shareholders can vote on important matters during general meetings, such as electing directors or approving major changes.
  • Access to Financial Information: They have the right to receive financial reports to understand how well the company is doing.
  • Dividends: Shareholders are entitled to receive dividends when the company makes profits.

These rights empower shareholders and allow them to hold directors accountable for their actions.

Importance of Corporate Bylaws

Corporate bylaws are internal rules that govern how a company operates. They are crucial for several reasons:

Bylaws outline procedures for decision-making, such as how meetings are conducted and how votes are taken.

They help companies stay aligned with the Companies Act and other regulations.

Regularly reviewing and updating bylaws is essential to ensure they reflect current laws and business practices.

Principles of Good Corporate Governance

Good corporate governance is built on several key principles:

  • Transparency: Companies should be open about their operations and decisions.
  • Integrity: Ethical behavior should be at the core of all business activities.
  • Accountability: Directors and management must be accountable for their actions.

These principles help improve relationships with stakeholders and enhance trust in the company.

Recent Reforms in Corporate Governance

In recent years, Kenya has made significant reforms to strengthen corporate governance.

The CMA has introduced new guidelines aimed at improving accountability and transparency. Some key aspects of these reforms include:

  • Enhanced Reporting Requirements: Companies must provide more detailed reports about their financial status and governance practices.
  • Focus on Ethical Leadership: The reforms emphasize the need for ethical behavior among directors and management.

These changes aim to boost investor confidence by ensuring that companies operate responsibly.

Challenges Facing Corporate Governance

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Despite these advancements, there are still challenges in implementing effective corporate governance in Kenya:

  • Compliance Issues: Smaller companies often struggle to comply with governance requirements due to limited resources.
  • Need for Training: Continuous education for directors is essential to keep them informed about best practices in corporate governance.

Addressing these challenges is vital for improving overall governance standards across all sectors.

How Kenyan Companies Act Influences Corporate Governance

The Companies Act in Kenya is a law that sets the rules for how companies should be run.

This law plays a big role in shaping corporate governance, which is about making sure companies are managed well and act responsibly.

Here’s how the Companies Act influences corporate governance in Kenya:

1.  It Defines Responsibilities of Directors

The Companies Act clearly states what directors (the people who make decisions for the company) must do. For example:

Directors must always make choices that are good for the company and its shareholders (the owners).

If directors have personal interests that could affect their decisions, they must disclose them to others.

By outlining these responsibilities, the Act helps ensure that directors act responsibly and in the company’s best interest.

2.  Protects Shareholder Rights

The Companies Act gives rights to shareholders, which are the people who own shares in a company. Some of these rights include:

Shareholders can vote on key decisions, like electing directors or approving major changes.

Shareholders have the right to see financial reports and understand how the company is doing.

By protecting these rights, the Act ensures that shareholders have a voice and can hold directors accountable for their actions.

3.  Promotes Transparency

The Companies Act encourages companies to be open about their operations.

For example, companies must provide regular financial reports and disclose important information to shareholders.

This transparency helps build trust between companies and their stakeholders because everyone can see how decisions are made and how money is managed.

4.  Sets Up Rules for Meetings

The Companies Act includes rules about how meetings should be conducted. This includes:

  • How often meetings should happen.
  • How votes are taken.
  • How decisions are made.

These rules help ensure that meetings are fair and that everyone has a chance to participate, which is important for good governance.

5.  Encourages Ethical Behavior

The Companies Act emphasizes the importance of ethical behavior in business. It encourages directors and managers to act honestly and responsibly.

When companies follow ethical practices, it leads to better decision-making and helps prevent corruption or misconduct.

6.  Facilitates Accountability

The Companies Act provides mechanisms for holding directors accountable for their actions.

If directors do not follow the rules or act against the interests of the company, shareholders can take legal action against them.

This accountability is crucial for ensuring that directors take their responsibilities seriously.

Implications of the Capital Markets Authority Guidelines on Corporate Governance

CAPITAL MARKETS AUTHORITY

The Capital Markets Authority (CMA) in Kenya sets important rules called guidelines that help companies manage themselves better.

These guidelines focus on how companies should operate, especially those that sell shares to the public. Here’s how these guidelines influence corporate governance:

1.  Improved Accountability

The CMA guidelines require companies to be more accountable for their actions. This means that directors and management must take responsibility for their decisions.

If they do not follow the guidelines, they must explain why not. This helps ensure that everyone in the company acts in the best interest of shareholders and other stakeholders.

2.  Clearer Roles and Responsibilities

They specify what is expected from each group, which helps prevent confusion and ensures that everyone knows their responsibilities.

This clarity leads to better decision-making and smoother operations within the company.

3.  Focus on Transparency

Companies are required to share important information with shareholders and the public, such as financial reports and details about their operations.

This openness helps build trust between companies and their investors, making it easier for shareholders to make informed decisions.

4.  Encouragement of Ethical Behavior

They encourage boards of directors to create a Code of Ethics, which outlines acceptable behavior for everyone in the company.

By setting high ethical standards, companies can avoid scandals and maintain a good reputation.

5.  Flexibility with “Apply or Explain” Approach

The new guidelines use an “apply or explain” approach instead of a strict “comply or explain” method used before.

This means that companies can choose how to implement the guidelines but must explain their choices if they do not follow specific recommendations.

This flexibility allows companies to adapt the rules to fit their unique situations while still being held accountable.

6.  Stronger Shareholder Rights

The CMA guidelines emphasize the rights of shareholders, ensuring they have a voice in important company decisions.

Shareholders can vote on key issues, such as electing directors or approving major changes.

This empowerment helps protect their interests and encourages active participation in governance.

7.  Enhanced Risk Management

The guidelines require companies to have strong risk management practices in place.

This means they need to identify potential risks and have plans to deal with them effectively.

Good risk management helps protect the company’s assets and ensures long-term success.

8.  Regular Assessments and Reporting

Companies must regularly assess their governance practices and report on them to shareholders.

This includes evaluating how well they are following the CMA guidelines and identifying areas for improvement.

Regular reporting keeps everyone informed about the company’s governance health.

Conclusion

Understanding corporate governance is essential for anyone involved in or interested in business in Kenya.

Ongoing reforms will likely continue to shape the landscape of corporate governance in Kenya, ensuring that it evolves to meet new challenges and opportunities.

By promoting transparency, accountability, and ethical behavior, we can create a stronger foundation for businesses that benefit everyone involved in Kenya.

Written By:

James Chepchieng

Advocate of the high court of kenya

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