Kenya trails neighbours in protection of shareholders
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Nairobi Securities Exchange. Job Kihumba, chair of the Centre for Corporate Governance says any law that is heavily skewed towards the protection of minority investors will scare away companies from the capital markets.
Weak protection of minority shareholders has diluted Kenya’s recent efforts to clean up its business environment, pushing the country down the global list of investment destinations.
East Africa’s largest economy dropped four places in the list of economies with the best investor protection rules, finishing in the 97th position out of the 183 countries that the World Bank surveyed for its Doing Business 2012 report.
Kenya’s worsening ranking comes in the wake of recent revelations of suspected involvement of listed companies’ directors in fraudulent activities that cost shareholders millions of shillings.
The World Bank report, which ranks countries based on multiple parameters measuring the ease of doing business, indicates that the slow pace of reforms in Kenya has left the country among East Africa’s worst performers in terms of investor protection.
Among the five countries in the trading bloc, Kenya only finished ahead of Uganda.
Burundi, which finished in position 154 last year, made the most improvement, moving more than 100 places to finish at position 46 this year.
The ranking means recent reform measures have left the tiny country that is emerging from decades of civil war and military coups second to Rwanda when it comes protection of investors.
Its improved ranking is linked to the recent enactment of a new law that governs transactions between related parties and demands deeper disclosures of such transactions with a clear regime for the liability of directors.
Rwanda, which remains East Africa’s best economy in terms of investor protection, slipped one place to position 29 as Tanzania tied with Kenya at number 97 and Uganda finished last in the region having slipped to number 133 from 132 last year.
“The rest of the EAC economies — Kenya, Tanzania and Uganda — can find good sources of inspiration and lessons from Burundi and Rwanda’s reform experiences,” said the report, which also added that the Kenya and Uganda company laws were under review. Kenya has 58 companies listed at the Nairobi Securities Exchange.
Strong investor protection is key to helping companies in frontier markets such as Kenya to raise the capital they need to diversify their operations, innovate and compete better in a globalised market.
Weak protection of investors slows down the development of equity markets leaving commercial banks as the only source of financing for business.
Rwanda, which has the smallest stock exchange in the region with only four listed firms and one corporate bond, enacted a new company law in April 2009 that requires board of directors’ approval of transactions between interested parties representing less than five per cent of a company’s assets.
Any transaction that involves parties with more than five per cent of a company’s assets must get shareholders’ approval at an annual or special general meeting in which the interested parties are not allowed to participate.
The World Bank says the legislation has made it easier for minority shareholders to sue interested directors whose transactions turn out to be injurious in the long term.
“Empirical research shows that companies that disclose related-party transactions have higher stock exchange valuations than those that do not,” says the World Bank report.
The law clearly spells out the duties of directors and allows minority investors access to all internal corporate documents, either directly or through a government inspector.
Burundi — which is in the process of setting up a capital market — enacted a similar law in May last year.
The Burundian laws requires an external review of any transactions involving directors before they are put before shareholders for approval and establishes a clear regime of liability for directors if transactions with interested parties cause damages to the company.
“It is, therefore, the right moment to make sure that the amended legislations (in Kenya and Uganda) incorporate global good practices for the protection of minority investors,” says the report adding that the absence of such protection makes investors reluctant to invest unless they become controlling shareholders.
Job Kihumba, who chairs the Centre for Corporate Governance, however cautioned against hurried enactment of stringent rules that are not well thought out to govern Kenya’s capital market, which is the largest in the region.
Mr Kihumba said that Kenya’s company law has clear mechanisms for the safety and protection of minority shareholders even as it recognises that those who have invested most come first in the pecking order.
“Any law that is heavily skewed towards the protection of minority investors will scare away companies from the capital markets,” he said.
“What we need are strong corporate governance rules that require directors to behave ethically.”
Kenya, which is among the 15 economies out of the 183 surveyed globally that permit full access to documentary evidence before and during trial, has however, scored high marks in its facilitation of access to corporate documents.
Rwanda only allows such access before a trial while Tanzania’s access is restricted to the trial period.
Most listed companies at the Nairobi Securities Exchange (NSE) including Uchumi Supermarkets, Safaricom, KenolKobil, Kenya Power, KenGen, Equity, Kenya Airways, Barclays, KCB and Cooperative Bank have a large number of investors with small stakes co-owning the companies with a small number of investors with majority stakes.
“While regulation is good it must not be allowed to kill entrepreneurship,” Mr Kihumba said adding that Rwanda and Burundi’s reforms appear to be driven by external forces, who do not care much about their impact on growth of local capital markets.
Bob Karina, the vice chairman NSE and managing director of Faida Investment Bank Limited and Faida Securities Rwanda, said that the disclosure requirements for Kenya’s listed companies are based on international best practice that allows any investor to extract adequate information on a company and that minority shareholders only need stronger protection from the Capital Markets Authority (CMA).
The rankings by the World Bank come at a time when Kenya’s capital markets have been shaken by boardroom wrangles at two listed firms involving suspected fraudulent activities and self-dealing by company insiders for personal gain.
