Central Bank of Kenya has given commercial banks until June next year to meet governance rules that could lead to more than a third of the 44 lenders reconstituting their boards.
The rules reserve a third of board seats for independent directors.
The new regulations are aimed at reducing the influence of principal shareholders on the boards as well as safeguard the interests of minority investors.
The tools 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.
“Institutions will be granted 18 months from the effective date of this guideline to ensure the board is properly constituted as provided in the guideline,” said the Central Bank.
“The effective date of this guideline shall be 1st January 2013. However, the implementation date shall have a transition period.”
The regulator is keen to reduce the big role that old-boy networks currently play in the appointment of directors in the banking sector with the planned independent director’s rule whose draft CBK unveiled last June.
Majority of directors in local banks secured their seats in boardrooms with the help of business associates, personal contacts or friends.
Corporate governance experts said that the current mode of operation denies company boardrooms diversity that is critical for fresh ideas, 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,” Ashif Kassam, a managing partner at HLB Ashvir, a consulting firm said earlier.
“It is nearly the same boardroom boys listening to their own voices in one firm after the other, limiting the inflow of fresh ideas.”
NBK has a 10-member board made up of three executive directors including the managing director Munir Ahmed and his two deputies, Isaiah Mworia and Ali Noor.
Of the seven non-executive directors, two (Tom Odongo, the managing trustee of the NSSF and the head of financial services at the Ministry of Finance, George Omino) directly represent the NSSF and the Treasury respectively. That leaves NBK without an independent director, following the ouster of long-serving board member Michael Muhindi in June.
Mr Muhindi lost the vote after he failed to win the NSSF’s support.
The other four directors — Sylvia Kitonga, Erastus Mwongera, Mr Atwoli and Mohammed Hassan (now board chair — are on the board courtesy of the NSSF.
It has a board of seven members including the chairman, Mr Steve Mainda, Equity Bank representatives Mr Peter Munga, Mr David Ansel, and Mr Shem Migot-Adholla, while the NSSF is represented by its chairman Mr Adan Mohamed.
The other directors are CEO Frank Ireri, and Benson Wairegi who sits on both Equity and Britam boards.
Mr Mainda is the only one who qualifies as an independent director based on the CBK definition.