Big shift as law requires firms to publish details of CEOs pay

Kenya’s corporate executives are headed for a tough period in which their pay, including salaries, stock options and bonuses, will be made public in line with a new law.

The law, which President Uhuru Kenyatta assented to on September 11 but whose implementation is spread over nine months, requires public listed companies to publish an exhaustive account of directors’ benefits, including that of chief executive officers.

Financial reports for the years falling under the new Companies Act will be subject to the requirements, which are expected to offer deeper insights into executive pay and improve accountability as investors get a better feel of how directors are rewarded against their performance.

The previous Act limited directors’ benefits disclosures to salaries, pensions, fees for serving on the boards of directors and retrenchment compensation.

This allowed companies to aggregate directors’ compensation under the reporting lines, offering little insight into how the top executives are remunerated.

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The new law is silent on whether the detailed reporting will be done for individual directors or aggregated as has been the case. But Attorney-General Githu Muigai said upcoming regulations will require the reporting companies to reveal the compensation of individual directors.

“A director or former director of a company shall give notice to the company of such matters relating to himself or herself as are prescribed by regulations made for the purposes of this section,” says the Companies Act.

Prof Muigai said the intention of the law was to enable greater disclosure and transparency that enables investors to know how much their CEO is paid.

New era

Such a move will herald a new era of financial reporting, putting Kenya at par with Western economies where disclosing details of executive compensation is an entrenched practice.

London-based Barclays Plc, for instance, recently disclosed that it will pay its new CEO James Staley up to £8.24 million (Sh1.2 billion) annually, including salary, bonus, pension and allowances.

Introducing a similar level of transparency in Kenya is expected to reveal how various firms reward their top executives in a market where salaries are the dominant form of compensation.

It will give investors an opportunity to compare executive compensation in the same or different sectors, taking into account the size and profitability, among other performance measures.

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The move is, however, expected to deepen talent wars in a market where demand for top executives has been intensifying as more multinational companies set up local operations and existing firms expand.

Directors flouting the disclosures requirement shall be guilty of an offence punishable by a fine not exceeding Sh500,000.
The law does not apply to small companies, which are defined as having a maximum of 50 employees, net assets of Sh20 million and/or annual turnover of Sh50 million.

The Capital Markets Authority (CMA) had previously proposed detailed pay disclosures but the idea was immediately dropped, presumably after intense lobbying from corporate executives.

Publicise incentive schemes, credit lines

Companies will soon start publishing directors’ gains from stock options and their long-term incentive schemes such as bonuses.

There has been a particular lack of disclosure around these two compensation items, whose value runs into billions of shillings, among publicly traded firms.

Market data shows that Nairobi Securities Exchange (NSE)-listed firms are running share option schemes worth over Sh8 billion and most of the stocks are held by senior executives led by CEOs.

None of the companies with the stock options publish comprehensive details of the schemes such as what individual directors hold, the price at which they may be exercised and whether they were grants or bought at a discount.

A significant number of companies also have annual bonuses but the amount paid to individual directors is never made public.
Other compensation items whose disclosure will now be mandatory under the new law are fees paid for management services to parties from which these may have been outsourced.

These  disclosures will add to the current standard reporting on directors’ salaries, payment for termination for employment and pension for current and former directors.

Besides revealing compensation of directors, the new law requires companies to disclose risks of other benefits provided to the administrators such as loans and guarantees.

Most companies lend millions of shillings to their directors or their companies as part of their benefit packages. The law will now require companies to reveal their exposure to such credit lines, giving a breakdown of the amounts borrowed, the interest rate, the amounts repaid and whether or not it is being serviced.

For guarantees to directors, companies will have to indicate the maximum liability they may incur in respect of the undertaking by itself or its subsidiary.

It is expected that the more rigorous record of directors’ compensation and their dealings with a company will shed more light on how they are rewarded against performance, besides indicating any exposures a firm may have to the top managers.

The law provides that failure to prepare financial statements according to the stipulated manner will result in each director being fined a maximum of Sh1 million.