Companies

CBK cuts independent directors’ quota in banks

NBK pix

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. Photo/FILE

The Central Bank of Kenya has reduced the quota of seats held by independent directors on bank boards to a third from the previous half, offering relief to more than half of Kenya’s lenders who were preparing to reconstitute their boardrooms.

Also read: New CBK rules seek to cap salaries of bank executives
The regulator had in June asked banks to reserve half of non-executive board seats to independent directors under corporate guidelines which were to take effect from July 2 before they were frozen.
CBK said the new rules were aimed at reducing the influence of principal shareholders in the boardrooms as well as safeguarding interests of minority investors whose influence in the key decision-making organs has declined.

On Monday, CBK lowered the threshold to a third in new corporate governance guidelines that take effect on January 1.
“It is therefore required that independent directors should constitute not less than a third (1/3) of the total members of the board,” the CBK says in its memorandum to banks.

This clause is different from the one issued in the frozen June guidelines, which read: “It is required that independent directors become the majority of non-executive directors in every bank.”

The independent directors are expected to provide checks and balances in the boards.

CBK 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 new rules offer some relief to banks, but the majority of them including some that are listed at the Nairobi Securities Exchange will still be expected to replace some of its board members or recruit more independent directors.

Co-operative Bank, Housing Finance, and the National Bank of Kenya top the list of banks that must reconstitute their boards.

In the Housing Finance case, the principal shareholders are Equity Bank, British America Investment Company (BAIC), which controls 20.88 per cent of the mortgage firm, and National Social Security Fund (NSSF) with an 8.14 per cent ownership.

The home loans lender has a board of seven members who includes 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 BAIC boards.  Mr Steve Mainda is the only one who qualifies as an independent director based on the CBK definition.

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 on the board as representatives of Co-op Holdings Cooperative Society Limited, which owns a 64.56 per cent stake in the bank.

Initially, the bank had been set up to replace a third of Coop Holdings representative or increases its board by seven directors.

Now, its share of independent directors stands at about 17 per cent—which is short of the 33 per cent that CBK requires.

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 Munir Ahmed, 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.

Governance

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 fund instead chose to back Wangui Mwaniki, a senior executive at Kenya Railways, further cementing the public pension fund’s growing influence in NBK.

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.

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