The Capital Markets Authority (CMA) is considering relaxing rules barring non-executive directors from holding executive or employee positions in related entities on the back of compliance headaches facing many listed companies.
CMA notes that in the financial year ended June 2024, the designation of independent non-executive directors (INEDs) and the compliance with the corporate governance code “proved to be a bone of contention” with many Nairobi Securities Exchange (NSE)-listed firms.
The regulator, which in mid-December 2023 transitioned the code of corporate governance (CG) practices it had issued in 2015 from voluntary to a mandatory obligation, is now considering relaxing these rules.
“The Authority received feedback on the need to assess the ‘independence’ of the INED as provided in best practice rather than the prescriptive approach adopted in clause 2.4.1 of the CG Code on who an INED as per the list provided therein,” says CMA, which lists this as an emerging issue from the latest corporate governance audit.
“While taking into consideration the local context and cultural values, the Authority will explore such proposals.”
The proposal comes on the back of many NSE firms failing to comply with the rule barring cross-directorship to promote independence and objectivity in decision-making.
CMA says having independent non-executive directors sitting on boards of related entities impairs the ability of such directors to provide an independent view on corporate strategy, performance, resources and appointments. However, this has proved difficult for companies with subsidiaries to comply because they share a pool of directors.
CMA says in the report that many firms argued the secondment of independent non-executives directors to boards of related entities was helping them to harness synergies between the group and subsidiaries.
The regulator defines related entities in relation to a company as any entity, which is its holding company, subsidiary, subsidiary of its holding company, or any person who controls that company whether alone or with such person’s related parties.
According to the CMA, most listed banks found it difficult not to appoint independent non-executives directors to boards of their subsidiary companies.
“Most issuers in this sector (banking) are group entities and some of their independent directors and non-executive directors serve as directors within the group contrary to the requirements of independent directors and non-executive directors in the Capital Markets (Public Offers, Listings and Disclosures) Regulations, 2023,” said CMA.
The non-compliance with the cross-directorship rule saw NSE firms’ aggregate score on board operations and control drop to a six-year low of 67.93 percent in the review period from 71.64 percent in the previous period. The score was at 62.28 percent in the year ended June 2019.
CMA said the drop in rating on board operations and control ultimately pulled down the overall governance score of listed firms to 73.56 percent from 75.71 percent.
