Why directorship ceased to be a token job in Kenya

You have just been appointed as a director of a listed company. You came well recommended as a seasoned director having served other high profile boards. However, how is your new role in a listed company different from the other director roles you have previously held?

The enactment of the Companies Act 2015 in June 2016 and the Code of Corporate Governance for Issuers of Securities to the Public, 2015 (CMA Code) gazette into law on March 4, 2016, witnessed significant corporate governance reforms in Kenya.

The law as it existed imposed the duties on company directors broadly under the fiduciary duty, the duty of skill and care and statutory duty. However, the new Companies Act 2015 has now codified the duties of directors.

Why ‘codify’ the principles of directors’ duties under the common law?

The breakdown and setting out of established law concerning directors’ duties now makes it easier to follow by non-specialists and reduces unnecessary legal costs incurred in seeking an interpretation.

Accordingly, the Act sets out the following seven general statutory duties of a director.

To act within powers, meaning that directors are required to comply with the powers provided within the company’s memorandum and articles of association and to exercise the powers only for the reasons for which they were given.

To act in a way the director considers (in good faith) is most likely to promote the success of the company.

The law has identified relevant matters to consider which include: the likely consequences of any decision in the long term, the interests of the company’s employees, the need to foster the company’s business relationships with suppliers, customers and others, the impact of the company’s operations on the community and the environment, the desirability of the company maintaining a reputation for high standard business conduct and the need to act fairly as between members of the company.

To exercise independent judgment, that is, not to subordinate the director’s power to the will of others. This does not prevent directors from relying on advice, so long as they exercise their own judgement on whether or not to follow it.

To exercise reasonable care, skill and diligence. This requires a director to be diligent, careful and well informed about the company’s affairs. If a director has particular knowledge, skill or experience relevant to one’s function, for instance, is a qualified accountant and acting as a finance director, expectations regarding what is ‘reasonable’ will be judged accordingly.

To avoid conflicts (or possible conflicts) between the interests of the director and those of the company. The prohibition will not apply if the company consents (and consent meets the necessary formal requirements).

Not to accept benefits from third parties by reason of being a director or doing anything as a director. The company may authorise acceptance (subject to its constitution), for instance, to enable a director to benefit from reasonable corporate hospitality; and

To declare any interest in a proposed transaction or arrangement. The declaration must be made before the transaction is entered into and the prohibition applies to indirect interests as well as direct interests.

The Companies Act and the CMA Code have also provided additional requirements for directors of listed companies.

The laws are now prescriptive on the expected compliance environment for a listed entity.

There are requirements to put in mandatory policy documents and roll out governance documents, such as Board Charter. The laws have gone further to provide that the documents should be publicly accessible on a website and/or publishing.

The Act has recognised the Capital Markets Authority (CMA) and by extension given impetus to issues of material information and market abuse.

The directors of the listed company are expected to be cognisance of matters that would be deemed to have an impact on the stakeholders and make appropriate disclosure. This would cover events such as a merger, acquisition or joint venture, a share split or dividend earnings and dividends of an unusual nature, the acquisition or loss of a significant contract, a significant new product or discovery and so on.

Directors should also be familiar with the restrictions and rules on securities transactions as certain actions would be deemed to be offences by the CMA.

Directors are potentially personally liable under the law if any prospectus or financial promotion produced in connection with an issue of securities is inaccurate or misleading or otherwise fails to meet prescribed requirements.

The burden or reporting is also more onerous for a listed company. In addition to the standard reports in the annual financial statements, the laws have now introduced additional reports for listed companies. These are directors’ remuneration report and an enhanced business review.

The purpose of the enhanced business review will be to capture main trends and factors likely to affect the future development, performance and position of the company, information on environmental factors, employees, social and community issues and information about parties the company has arrangements that are essential to the business.

These reforms signify the direction the law is taking to align with the global reporting standards and trends.

The laws have gone a step further to support a mechanism to implement a comprehensive governance culture for listed companies.

Public companies are now required to submit an internal governance self-assessment report and further undertake an independent governance audit on an annual basis.

The objective is to establish the level of adherence to applicable laws, regulations and standards and confirm internal governance practices. Further activities to strengthen board governance have been identified by the laws such as well documented board induction programmes, provision for mandatory annual training hours, annual board evaluation.

The role of a director of a listed company has increasingly become sophisticated. It is imperative that you equip yourself adequately knowing that you will be held to a higher standard of corporate governance.