Capital Markets

NSE company directors face deeper pay scrutiny

Attorney General Githu Muigai at a past event. PHOTO | NMG
Attorney General Githu Muigai. PHOTO | NMG 

Details of what Kenyan companies pay their executives are expected to become clearer following the gazettement of new regulations requiring public listed firms to disclose directors’ remuneration and the basis of such payments in annual financial reports.

Attorney-General Githu Muigai has published the long-awaited regulations aimed at increasing transparency in one of the most guarded corners of corporate Kenya.

The regulations are effective from August 28.

“Every company shall prepare an annual statement, which shall be included in the directors’ remuneration report for the relevant financial year summarising the major decisions on directors’ remuneration…,” the AG says in the notice.

Any substantial changes relating to directors’ remuneration made during the year and the context in which the changes occurred must also be disclosed, according to the ‘Companies (General) (Amendment) Regulations, 2017.

Quoted companies will also have to prepare a detailed account of how directors have performed in order to qualify for share options or other long-term investment schemes.

Besides, companies must explain any “significant” changes to shares or long-term investment schemes awarded to directors, as well as offer detailed accounts as to why directors have been granted remuneration options that are not tied to performance.

End questionable practices

The new rules are, among other things, expected to end the common but ethically questionable practice where companies increase executive pay even when the firms they lead are reporting heavy losses. This happened during the tenure of Titus Naikuni at Kenya Airways #ticker:KQ, for example.

The national carrier increased the pay of Mr Naikuni and then finance director Alex Mbugua’s 33.7 per cent to Sh103 million in 2013 even as the airline stayed deep in the red with a Sh3.3 billion net loss.

The new regulations are also expected to bring to an end the current reporting practice where listed firms only provide an aggregate amount of total director emoluments, leaving shareholders to guess what each executive or director takes home.

Shareholders will have the power to approve directors’ pay, a move that may see boards of loss-making companies take a pay cut to match the dwindling fortunes of the firms they lead.

Bonuses, share options

One remuneration category that has been subject of intense public debate in Kenya, resulting in a push for deeper disclosures, is performance bonuses and share options.

The new rules require companies to disclose the number of shares accruing to each director, when they were awarded, as well as those exercised and those that have since expired before being exercised.

Listed firms will also have to show how much directors paid for the shares, their exercise price, the waiting period as well as how the stock was priced during purchase or exercise.

Reporting companies have, however, been allowed to aggregate the disclosures for brevity, including weighted average prices instead of the price for each share option.

The rules further require directors to publish in the financial report the justification for their remuneration, detailing the salaries and fees earned during the year as well as other benefits such as bonuses, pension and gratuity.

The remuneration report will also include all allowances and sitting perks for every board meeting or board committee meeting attended as well as travel allowances and per diem paid to directors away on official duties.

Upon coming into force, publicly traded firms will have to disclose details of payments to executive and non-executive directors for the past five years – a requirement that is expected to lift the lid on how loss-making firms such as Kenya Airways, Uchumi #ticker:UCHM and Mumias #ticker:MSC paid their executives while they stayed in the red.

This is the second time that Kenya is seeking to put the spotlight on executive pay after the Capital Markets Authority (CMA) in 2014 attempted to publish regulations demanding similar disclosures but bowed to corporate pressure and discarded them.

Sanlam Kenya #ticker:PAFR, the Nairobi Securities Exchange #ticker:NSE (NSE), Deacons East Africa #ticker:DCON, KenolKobil #ticker:KENO, KenGen #ticker:KEGN, Sameer #ticker:FIRE and Kenya Re #ticker:KENRE make the list of companies that have moved to disclose details of their executive pay for last year.

Personal disclosure

Safaricom’s Bob Collymore and KCB’s Joshua Oigara in December 2015 made personal decisions to publish their remuneration but their companies have not adopted the proposed pay disclosure structures.

KenolKobil’s David Ohana was the best paid CEO among the seven firms, having earned Sh6.6 million per month in the year ended December 2016, representing a 6.8 per cent increase from Sh6.1 per month a year earlier.

Sanlam’s Mugo Kibati was second with a package of Sh3.3 million per month, having risen 18.1 per cent from Sh2.8 million in 2015 when he replaced Tom Gitogo.

Sanlam’s net profit jumped 2.5 times to Sh70.6 million, helped by a change in valuation guidelines that depressed some of its liabilities.

Allan Walmsley of Sameer, whose pay stayed stable at Sh2.1 million per month, was the third highest-paid in a year the company’s net loss widened to Sh652.1 million.

Deacons’ Muchiri Wahome was paid Sh1.8 million in the year ended December, having received a 12.1 per cent pay rise from Sh1.6 million the year before.

Higher expenses saw the fashion retailer slip into a Sh276.3 million net loss in the period from a net profit of Sh113.7 million the year before.

NSE’s Geoffrey Odundo was also awarded a pay increase (to Sh1.5 million a month) in the same period, even as the company’s net earnings dropped 40 per cent to Sh184 million.