CBK’s new rules set banks up for boardroom shake-up

• Central Bank of Kenya (CBK) says the new rules are aimed at reducing the influence of principal shareholders in the boardrooms as well as safeguard the interests of minority investors whose influence in the key decision-making organs has declined.

More than half of Kenya’s 44 lenders must reconstitute their boardrooms beginning August 2nd in response to new regulations that require half of non-executive board seats to be held by independent directors.

The Central Bank of Kenya (CBK) says the new rules are aimed at reducing the influence of principal shareholders in the boardrooms as well as safeguard the interests of minority investors whose influence in the key decision-making organs has declined.

Central Bank defines an independent director as a board member who is not a direct or indirect representative of the principal shareholders, has not worked in the bank as an executive for the past five years and has not had any business relationships with the institution in the same period.

Significant suppliers of the lenders or relatives of senior managers and those with a direct or indirect shareholding of more than five per cent in the appointing banks are also not considered independent.

The Central Bank says the new rules — which banks must comply with by August 2 — affects more than half of Kenya’s 44 banks, including some that are listed at the Nairobi Securities Exchange.

Co-operative Bank,Housing Finance, Equity Bank and the National Bank of Kenya top the list of banks that must reconstitute their boards. 

“It is required that independent directors become the majority of non-executive directors in every bank,” say CBK’s new guidelines on corporate governance. The independent directors are expected to provide checks and balances in the boards.

“This is to ensure that the interests of minority shareholders and the general public are given due consideration in the decision-making processes,” the CBK says in its memorandum to banks.

It is hoped that the coming into force of these rules will reduce the big role that old-boy networks currently play in the appointment of directors.

The majority of directors in Kenyan banks have secured their seats with the assistance of business associates, personal contacts or friends.

Corporate governance experts say that this mode of operation is denying companies boardroom diversity that is critical for the inflow of fresh ideas, constructive debate and improved governance standards.

“It is not a secret in Kenya that to serve on any board, you must have the right background and a powerful network of allies to help you get there,” says Ashif Kassam, a managing partner at HLB Ashvir, a consulting firm.

“It is nearly the same boardroom boys listening to their own voices in one firm after the other, limiting the inflow of fresh ideas.”

A key provision of the new rules is the requirement that banks appoint a senior independent director — known as the Lead Independent Director (LID) — whose main responsibility will be to deal with actual or perceived conflicts of interests associated with the chair of the board.

The Central Bank, unlike the Capital Markets Authority, only limits banks from appointing executives to be their chairpersons – leaving the door wide open for principal shareholders, former executives and consultants to chair the boards. This is the reason many bank boards are chaired by principal shareholders or their relatives.