Markets & Finance

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


The Central Bank of Kenya has unveiled new rules requiring half of Kenya’s lenders to appoint independent directors within five weeks. Photo/File

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.

The list of bank boards that are chaired by big shareholders or their associates include NIC Bank’s James Ndegwa who is associated with First Chartered Securities –the single largest shareholder in the bank with 62.5 million shares or 15.8 per cent stake.

Titus Muya — the founder and a significant shareholder in Family Bank — falls in the same category as does Fina Bank whose board is chaired by Dhanu Hansraj, a founder and a key shareholder.

Another far-reaching rule in the new guidelines is the provision that bars directors from sitting in the boards of more than one institution licensed under the Banking Act “unless one is a subsidiary of the other”.

Of the banks listed at the NSE, only Equity has its directors sitting in the board of Housing Finance where it has a 24.85 per cent stake.

The four, including chairman Peter Munga, Benson Wairegi (CEO of British American Investment), David Ansel, and Shem Migot-Adholla, sit in the board of the mortgage firm, which is not a subsidiary of Equity.

Among key shareholders in Housing Finance are British America Investment Company (BAIC) which controls 20.88 per cent and is represented by its CEO, Benson Wairegi.

Others are NSSF — which owns 8.14 per cent and is represented by Arthur Papa, leaving the mortgage lender’s chairman Steve Mainda, as the only independent director among the six non-executive board members.

Co-op, Kenya’s fourth largest bank by assets, faces a similar predicament with eight of its 11 non-executive directors, including chairman Stanley Muchiri sitting in the board as representatives of Co-op Holdings Cooperative Society Limited, which owns a 64.56 per cent stake in the bank. 

This means all the eight cannot pass the independent director’s test, setting up a third for exit before August 2.

The recent decision by the National Social Security Fund (NSSF) to tighten its grip on National Bank of Kenya (NBK) board will also return to haunt it.

The fund has in the past one year successfully pushed for the appointment of four directors — including investment banker Mohamed Hassan who chairs the board — as its representatives.

NBK has a 10 member board made up of three executive directors including managing director Reuben Marambii, and his two deputies Isaiah Mworia and Ali Noor.

Of the seven non-executive directors, two (Tom Odongo and the head of financial services at the Ministry of Finance, George Omino) directly represent the major shareholders, the NSSF and the Treasury respectively.

The NSSF owns 48.05 per cent of the bank and the Treasury 22.5 per cent. That leaves NBK without an independent director, following the recent ouster of long-serving board member and chairman Michael Muhindi.

Mr Muhindi lost the vote after he failed to win the NSSF’s support. The fund instead chose to back Wangui Mwaniki, a senior executive at Kenya Railways, further cementing the public pension fund’s growing influence in NBK.

People familiar with the ongoings in the bank’s board said the fund used its muscle to influence the hiring of former Standard Chartered executive Munir Ahmed as Mr Marambii’s replacement.

The fund also replaced Jennifer Riria, Paul Ngumi and Alfred Juma--all government appointees -- with Mr Hassan, Sylvia Kitonga and Erastus Mwongera in June last year.

To reduce the influence of key shareholders in the management of banks, the CBK is also pushing for critical board committees such as the nomination, audit, compensation and credit to be headed by independent directors.

The nomination committee is charged with the hiring of board members while the audit and credit committees review each lender’s loan book besides evaluating the contents of quarterly and financial reports.

The compensation committee approves board and management pay.