Capital Markets

CMA seeks muscle to enforce investor protection rules

The capital markets regulator has drafted amendment proposals that will make corporate governance guidelines legally enforceable .

The move will potentially transform the face of Kenyan listed companies’ boardrooms by enforcing the requirement that at least one-third of all directors must be “independent.”

The Capital Markets Authority (CMA) chairman, Mr Kungu Gatabaki, said the proposals are awaiting Finance minister Uhuru Kenyatta’s approval before they are gazetted into law.

“We want one third of the directors to be independent and we are sending a circular to all listed companies to make sure that they observe strict governance,” said Mr Gatabaki in an interview.

The CMA defines an independent director as one who has not been employed in an executive capacity in the appointing company within the last five years.

The guidelines also specify that the individual must not have had any business relationship with the company for the last five years.
An independent director does not do consulting business with the appointing company, and is not a significant customer or supplier of the firm.

CMA cannot, however, legally enforce the corporate governance guidelines currently as they are just rules that companies choose to obey at will.
Announcement of the impending changes comes a week after a feud between directors of Kenya’s third largest vehicle dealership company, CMC Motors, was thrust into the limelight amid allegations of fraud perpetuated by former directors and over-priced supplies by Andy Freight Forwarders Services (AFS) to the listed auto dealer.

Service provider

The former chairman, Peter Muthoka, is chief executive of Andy Forwarders, the largest single service provider to CMC. Mr Muthoka was ousted from his board chairmanship last week due to what CMC termed as conflict of interest.

“All listed companies should have independent directors but what has been happening is that many of them, because of their history, have nominee directors of the main shareholders,” said Mr Gatabaki.

“I guess if there were such independent directors in the CMC board over, say five years going back, some of these matters would have not arisen.”

Last month, the World Bank said Kenya had weak investor protection laws that put small and minority shareholders at risk. The country was ranked 93 out of 183, second to Rwanda that was placed at number 28 and first in East Africa in investor protection rules. Uganda was at position 132 and Burundi at number 154.

The World Bank said the country was ranked poorly because of weaknesses on disclosure and approval of related partly transactions.
Kenya scored three out of the 10 possible points for the degree to which directors provide investors with information before seeking their approval for impending transactions. meaning that directors of Kenyan companies can perform a higher number of material transactions that would in other countries require shareholder approval.

The CMA has also announced that it will be investigating alleged fraud at CMC with a view to taking legal action on any suspected corrupt practices. Such action would mirror the case brought against former directors of Uchumi Supermarket, who were accused of irregularly selling the retailer’s assets.

Mr Muthoka is also the majority shareholder of CMC, controlling 22.6 per cent of the firm. At a press conference last Thursday, Mr Gatabaki said the regulator had met with CMC’s board to help them resolve the issues as the CMA was trying to improve the environment in which listed companies in the country operate and facilitate the return of various foreign and local investors.

“These (the amendments) touch on the appointment of directors, insider transactions, doing business with companies,” said Mr Gatabaki, who added that the regulator would discourage directors from doing business with companies on whose boards they sit.

He said disclosure on related party transactions would be enhanced and that once the amendments are approved, then the Authority would have the powers to enforce them.

CMC’s group managing director, William Lay, last week claimed that an audit sanctioned by the board showed that the motor company could have overpaid Andy Forwarders for services by between Sh300 million and Sh500 million.

There should be a formal and transparent procedure in the appointment of directors to the board and all persons offering themselves for appointment, as directors should disclose any potential area of conflict that may undermine their position or service as director.

Mr Gatabaki said that related party transactions will be required to be at an “arm’s length” and have adequate disclosure, but that the authority would not encourage insiders to have such transactions in order to avoid conflicts of interest.

Some listed firms on the NSE have been run as family businesses or close friends but are now faced with transparency challenges as their owners try to accommodate new shareholders.

“Unfortunately, people who started this company many years ago were friends but over the years other shareholders have come in and have started questioning how things have been done in the past,” said Mr Gatabaki in last week’s press conference.

[email protected]