Ideas & Debate

How shareholders can use Githu rules to rein in directors’ pay

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Kenya Airways shareholders at last year’s AGM. PHOTO | SALATON NJAU

Last year, the Unga Group #ticker:UNGA chief executive was reported to have got a 54 per cent pay rise despite the company suffering a Sh32 million loss.

National carrier Kenya Airways’ #ticker:KQ top executives enjoyed similar pay increments (33 per cent) in 2014 despite reporting multi-billion shilling losses.

These are not isolated cases but a near regular occurrence in corporate Kenya that has in recent months caught the attention of regulators.

Attorney-General Githu Muigai has responded to this entrenched corporate governance practice with an amendment to the companies’ law — the Companies General (Amendment) Regulations No. 2 of 2017 — aiming to place Kenya in line with emerging global corporate practice.  

Under the new regulations, all quoted companies are required to disclose each director’s pay perks and explain the reasons behind them, specifically the link between performance and pay.

The law requires that this disclosure be done annually in the financial statements within the newly introduced directors’ remuneration segment of the report.  

The report should in turn contain specific information and documents as outlined in the regulations. Most important, the regulations demand that two categories be captured in the remuneration report — information that is not subject to audit and information that is subject to audit.  

The annual statement, the remuneration policy, information on directors’ terms of service and the report of shareholder voting at past general meetings fall under the information not subject to audit.  

Information subject to audit captures details on directors’ salaries, fees, bonuses, expense allowances, non-cash benefits, payments to third parties in respect of a director’s services and compensation payable for loss of office paid to current and past directors in the relevant year.

Also included in the latter category are share options, long-term incentive schemes and pension schemes that each director enjoys. 

The intention is to better equip stakeholders with information on company assets that goes towards remunerating each director, and whether it is justified by commensurate excellence in performance.

Though aiming to protect the public interest, the regulations have nevertheless come under heavy criticism for shortcomings related to similar ones in other countries.

One such criticism is that the regulations may become an ineffective decision-making tool for stakeholders. The remuneration report requires a great amount of detail with the potential of producing a lengthy document containing both essential and non-essential information.

This may make it difficult for shareholders and prospective shareholders to identify and extract information on each director’s remuneration and whether it is based on sound principles.

To achieve the purpose of the regulations, mitigation measures against this danger should be sought and applied as soon as possible.

For example, regulators could issue practice guidelines to ensure that the essential information, the total amount that each director takes home, sufficiently stands out and is easily identifiable.

READ: NSE company directors face deeper pay scrutiny

Another criticism is that shareholder voting on directors’ remuneration (say on pay) may not be the best tool for addressing issues of the size and structure of directors’ pay.

In the USA, for instance, executive compensation has on average risen since 2010 despite shareholders having a say on the pay.

This criticism overlooks the fact that there is now a channel for shareholder feedback on directors’ pay where there was none.

Moreover, even though some directors may be unfazed in their determination to pay themselves more or without reference to company performance, they will be kept on their toes by the disclosure requirement and be brought to the court of public opinion, which can be unforgiving.  

It is, however, important to emphasise that the regulations remain an eminently positive development for corporate governance in Kenya — bringing to light as it were the question of directors’ pay.

Exorbitant pay, in total disregard to the principles of governance, be it to Members of Parliament or to company directors raises eyebrows, especially where 42 per cent of the population lives on less than $1.90 a day.

The development has also shown that Kenyan regulators are ready to crack the whip on bad corporate governance.

They will thus act as a deterrent to some directors, who were thinking of compromising stakeholder value by paying themselves better with no performance to show for it.

Additionally, shareholders and directors have a chance to ride on the wave of these regulations to develop and entrench better practices in directors’ pay.

While voter say on pay under the regulations is non-binding, they do provide a window for shareholders to influence decisions on pay.

Led by institutional investors, shareholders can organise themselves to take a firm stand on directors’ pay to benefit the company. They can also oblige directors to engage them more in decision making regarding pay and other issues prior to general meetings.

Using the regulations as a guide, directors can also query their approach to remuneration disclosure. Instead of taking a defensive stand, they can be proactive and position themselves as leaders in governance.

This would resonate with global trends in corporate governance where the threshold is constantly being raised. 

Oyoo is Deputy Company Secretary and Head of Legal Affairs at the Jomo Kenyatta Foundation