According to a London Business School's 2003 report on corporate governance in Africa, the governance and efficacy of listed companies had improved in the years prior to the report, making it comparable to the rest of the world's capital markets. By introducing and enforcing the necessary regulations, the Capital Market Authority (CMA) and Nairobi Stock Exchange have improved governance. However, legal processes are lengthy, and the legal system's ability to resolve complex commercial disputes is questionable. Also, minority shareholders rights are lacking in some respects. The CMA released its Guidelines on Corporate Governance Practices by Public Listed Companies in 2002. They were given legal status in the Capital Markets Act 485A. The Guidelines require that entities either comply with the 1999 Private Sector Corporate Governance Trust's corporate governance code or provide reason for noncompliance in the statement of the director in the annual report. In addition, they must state the steps being taken to achieve compliance. However, overall, there is insufficient publicly available information that directly addresses Kenya's compliance with this standard.

General Overview

Writing on corporate governance for the London Business School in 2003, Nganga et al. report that Kenya has the best developed economy in East Africa. The authors add that Kenya had improved the governance and efficacy of listed companies in the years prior to the report, making it comparable to "any other market in the world" (p. 20). By introducing and enforcing the necessary regulations, the Capital Market Act (CMA) and Nairobi Stock Exchange (NSE) have improved governance. However, legal processes are lengthy, and the legal system's ability to resolve complex commercial disputes is questionable. Also, minority shareholders rights are lacking in some respects. A large number of companies have majority shareholders, and these oftentimes are multinationals. In cases where the majority shareholder is not the government, unsatisfied minority shareholders only have two options: sell their shares or sue the company. The report asserts that while this may be a problem, minority shareholders in Kenya nonetheless receive better treatment than in most other emerging markets. On the other hand, the report cites shareholder apathy and ignorance as a problem in Kenya, but notes that the Private Sector Corporate Governance Trust (PSCGT) is taking measures to train shareholders and establish a shareholders association to heighten shareholder involvement.

Listed companies are governed by the Companies Act, CMA regulations, and the NSE listing rules. The 2003 report by Nganga et al. indicates that the CMA released its guidelines on corporate governance practices by public companies in 2002. They were given legal status in the Capital Markets Act 485A. According to Grace Kibuthu's 2005 report on Kenya's capital market, the intention of the guidelines is to improve corporate governance practices, encourage self-regulation, and align Kenya's governance practices with international standards. The CMA requires that companies adopt minimum standards with regard to the chairman and chief executive officer, board of directors, shareholders, chief financial officers, and disclosure. The Nganga et al. report adds that companies are required to either comply with the PSCGT's corporate governance code, which was first issued in 1999, and updated in 2002, or provide reason for noncompliance in the statement of the director in the annual report. In addition, they must state the steps being taken to achieve compliance. Grace Kibuthu's 2005 report notes that it is difficult to judge the impact of the guidelines, because they are not obligatory. However, listed companies have made an effort to disclose information on quarterly and annual performance, principal shareholders, and the level of compliance with the corporate governance principles.

Also according to Kibuthu's 2005 report, the CMA has an enforcement program to ensure compliance with regulatory rules and requirements. This program utilizes a surveillance program and annual market license reviews. The NSE also monitors the compliance of listed companies through its compliance department. When it detects a problem, the NSE forwards the complaint to the CMA for investigation and action. The Nganga et al. 2003 report indicates that the PSCGT, a private organization backed by international donor agencies and business leaders, has played a major role in inciting changes in the corporate governance practices in Kenya and the rest of East Africa since 1999.

The capital market in Kenya is small, consisting of the NSE, 15 investment advisory firms, 11 investment banks, 10 stock brokers, 14 fund managers, one credit rating agency, two capital venture funds, five collective investment schemes, and five authorized depositories. At the end of 2006, market capitalization was KSh 726.8 billion up from KSh481.2 billion at the beginning of 2006 (U.S. DoC 2007).

The Investor Protection Index is a subcomponent of the World Bank's 2008 Doing Business Indicators. The Investment Protection Index consists of three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index) and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indexes range between 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. Kenya scores 3 in the Disclosure Index, against a regional average of 4.7 and an Organization for Economic Cooperation and Development (OECD) average of 6.3. It scores 2 in the Director Liability Index, against a regional average of 3.1 and an OECD average of 5.0 and 10 in the Shareholder Suits Index against regional average of 5 and an OECD average of 6.6.

The Principles

Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

II

According to the 2003 report by Nganga et al., the governance and efficacy of listed companies had improved in the years prior to the report, making it comparable to "any other market in the world" (p. 20). By introducing and enforcing the necessary regulations, the CMA and NSE have improved governance. However, legal processes are lengthy, and the legal system's ability to resolve complex commercial disputes is questionable. Also, when government is the majority shareholder in a company, the corporate governance practices of a company may be compromised, due to poor public governance. Such is the case in the situation of questionable accounting practices in the Kenya Power & Lighting Company and the National Bank of Kenya. The report states that there is optimism that the commitment of the government to adopting the PSCGT's corporate governance code will improve the situation. However, the publicly available information does not directly address Nigeria's compliance with this principle.

In addition, Nganga et al. indicate that the listed companies are governed by the Companies Act, CMA regulations, and the NSE listing rules. The CMA released its guidelines on corporate governance practices by public companies in 2002. . They were given legal status in the Capital Markets Act 485A. According to Kibuthu's 2005 report, the intention of the guidelines is to improve corporate governance practices, encourage self-regulation, and align Kenya's governance practices with international standards. The CMA requires that companies adopt minimum standards with regard to the chairman and chief executive officer, board of directors, shareholders, chief financial officers, and disclosure. The Nganga et al. report adds that companies are required to either comply with the PSCGT's corporate governance code, which was first issued in 1999 and updated in 2002, or provide reason for noncompliance in the statement of the director in the annual report. In addition, they must disclose the steps being taken to achieve compliance. Grace Kibuthu's 2005 report notes that it is difficult to judge the impact of the guidelines, because they are not obligatory. However, listed companies have made an effort to disclose information on quarterly and annual performance, principal shareholders, and the level of compliance with the corporate governance principles.

Also according to Kibuthu's 2005 report, the CMA has an enforcement program to ensure compliance with regulatory rules and requirements. The program utilizes a surveillance program and annual market license reviews. The NSE also monitors the compliance of listed companies through its compliance department. When it detects a problem, the NSE forwards the complaint to the CMA for investigation and action. Ngangaet al. report that the PSCGT, a private organization backed by international donor agencies and business leaders, has played a major role in inciting changes in the corporate governance practices in Kenya and the rest of East Africa since 1999.

Principle II: The Rights of Shareholders and Key Ownership Function

II

The 2003 report by Nganga et al. indicates that share ownership is freely transferable, the one-share/one-vote principle is applied, signifying that a shareholders' voting power is directly proportional to the number of shares owned, and shareholders may vote by proxy, including by mail. Minority shareholders are not entitled to proportional representation on boards or any specific oppressed-minorities mechanisms. Minority shareholders with a collective 10 percent of share capital may call for an extraordinary meeting and choose to bring the issue to commercial court. The corporate governance code includes a provision for shareholder approval for major company decisions, such as major asset disposals, restructurings, mergers, acquisitions, and reorganizations. Shareholders must approve director remuneration. Shareholders are also entitled to complete and timely information about annual general meetings. The PSCGT's 2002 Principles of Good Corporate Governance state that the code of best practices asserts shareholder entitlement to any information that significantly concerns their membership, their rights to participate in meetings of members, elect directors, and their rights to participate in pertinent resolutions. The report cites shareholder apathy and ignorance as a problem in Kenya, but notes that the PSCGT is taking measures to train shareholders and establish a shareholders association to heighten shareholder involvement. However, the publicly available information does not directly address Nigeria's compliance with this principle.

Principle III: The Equitable Treatment of Shareholders

II

Minority shareholders rights are lacking in some respects, according to the 2003 report on corporate governance in Africa by Nganga et al. A large number of companies have majority shareholders, and these are, oftentimes, multinationals. In cases where the majority shareholder is not the government, unsatisfied minority shareholders only have two options: sell their shares or sue the company. The report judges that while this may be a problem, minority shareholders in Kenya nonetheless receive better treatment than in most other emerging markets. On the other hand, the report cites shareholder apathy and ignorance as a problem in Kenya, but notes that the PSCGT is taking measures to train shareholders and establish a shareholders association to heighten shareholder involvement. Minority shareholders are not entitled to proportional representation on boards or any specific oppressed-minorities mechanisms. Minority shareholders with a collective 10 percent of share capital may call for an extraordinary meeting and choose to bring the issue to commercial court. However, the publicly available information does not directly address Kenya's compliance with this principle.

Principle IV: The Role of Stakeholders in Corporate Governance

II

There is insufficient publicly available information to fully address this principle.

Principle V: Disclosure and Transparency

II

The corporate governance code mandates the disclosure of director and senior executive remuneration. In addition, the board must present the annual accounts to ensure that they follow the International Accounting Standards. According to the 2003 report by Nganga et al., the introduction of International Accounting Standards and the corporate governance code has led to a significant improvement in companies' disclosure. Not only is more information being disclosed, but the information is provoking media scrutiny. However, the publicly available information does not directly address Kenya's compliance with this principle.

Principle VI: The Responsibilities of the Board

II

The 2003 report by Nganga et al. asserts that the structure of boards in listed companies has changed in line with the requirements of the corporate governance code. Committees, such as the auditing committee, have been appointed, the roles of Chairman and Chief Executive Officer have been separated, and there has been an increase in the number of independent board members. Provisions of the corporate governance code include requirements that one-third of the board is comprised of non-executive directors. Directors are limited to five directorships and must volunteer themselves for re-election at annual general meetings and the director's remuneration must be approved by shareholders. A director may not chair more than two listed companies. Executive compensation must be disclosed in the annual report. In addition, the board is obliged to present the annual accounts to ensure that they follow the International Accounting Standards. The Chief Finance Officers and auditors are required to be members of the Institute of Certified Public Accountants, while secretaries are required to belong to the Institute of Certified Public Secretaries. With respect to directors, there is concern that directors are unaware of their roles and responsibilities "and that many are members of an old boys' club." The directors of multinational firms are perceived to be 'rubber stamps for the parent company' (p.19). To address this issue, an Institute of Directors was established in April 2003, the PSCGT trains directors, and the CMA "has recommended minimum qualifications for directors" (p. 19). However, the publicly available information does not directly address Kenya's compliance with this principle.