THE EVOLUTION OF CORPORATE GOVERNANCE AND CONSEQUENT DOMESTICATION IN KENYA EAMARC3 CONFERENCE PAPER 17TH NOVEMBER 2016 BY DR. RITA V.

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1 THE EVOLUTION OF CORPORATE GOVERNANCE AND CONSEQUENT DOMESTICATION IN KENYA EAMARC3 CONFERENCE PAPER 17TH NOVEMBER 2016 BY DR. RITA V. RUPARELIA

2 Graduate Thesis JOURNEY Dctr in Business Administratin, Finance Awarded fr highest GPA Relatinship between Crprate Gvernance and Financial Perfrmance in the Financial Service Industry: Case f Cmpanies Listed at Nairbi Securities Exchange in Kenya Jurnal Relatinship between Bard Remuneratin and Financial Perfrmance in the Kenyan Financial Services Industry Published - Internatinal Jurnal f Financial Research - Vl 7, N. 2 (April 2016) Jurnal The Evlutin f Crprate Gvernance and Cnsequent Dmesticatin in Kenya Published - Internatinal Jurnal f Business and Scial Science - Vl. 7, N. 5; (May 2016)

3 ABSTRACT Gvernance - determines the exercise f pwer in the management f ecnmic and scial resurces fr sustainable human develpment Crprate Gvernance - the system by which cmpanies are directed, rganized and cntrlled Influences grwth in financial markets, plays central rle in perfrmance, capital frmatin, maximizatin f sharehlder value and prtectin f investrs rights The paper traces evlutin f CG principles and practices, via the cmmittees that prduced Cadbury, Greenbury, Hampel, Higgs Reprts, the Cmbined Cde f CG, and the Organisatin fr Ecnmic C-peratin and Develpment (OECD) These develpments influenced the intrductin and grwth f CG principles and best practices in Sub-Saharan Africa and Kenya Led t the prmulgatin f the guidelines n principles f crprate gvernance fr public listed cmpanies in 2002 by the Kenyan Capital Market Authrity

4 PURPOSE OF THE STUDY The purpse f the paper is t analyze histrical develpment f CG, with specific reference t the sequential develpment f CG in the United Kingdm, OECD, Sub-Saharan Africa, and Kenya The paper analyzes the nature f crprate gvernance guidelines and practices intrduced in each epch frm pre-1900s t the 21 st Century

5 EVOLUTION OF CORPORATE GOVERNANCE Pineering wrk f Berle and Means (1932) - [nce mdern crpratins have grwn t very large sizes - establish a separate system f cntrl frm that f direct wnership] CG is nt a recent histrical develpment, ften presented as new with varius mechanisms fr cntrlling executive actins Created necessity fr CG refrm t minimize ecnmic risks, fster public and investr cnfidence in the financial market, develp risk management structures t imprve financial risk management and in turn financial perfrmance One f the main drivers in the evlutin f CG ver the centuries remains crprate failures and systemic crises: 1700s - Suth Sea Bubble - mismanagement f finance led t legalizatin f new business in England Stck market crash - USA 1970s - Secndary Banking crisis - UK 1980s - Savings & Lan crisis USA 1990s - East Asian Ecnmic crisis Cmpany failures BCCI, Enrn, WrldCm, Parmalat, Lehman Brthers Hldings, Uchumi, CMC Mtrs

6 Year OVERVIEW OF THE EVOLUTION OF CG Evlutin f Crprate Gvernance Crprate Gvernance Glbally Pre- The rigin f CG can be traced t the creatin f the registered cmpany under 1900 the Jint Stck Cmpanies Act f 1844 (UK). This marked the beginning f the mdern crpratin that separates cntrl frm wnership (Berle & Means, 1967) 1980s 1990s CG framewrks began develping t prtect firms frm the actins f prfessinal managers with the passage f the Limited Liability Act f 1855 (UK) t prtect sharehlders frm debt beynd their investment (Parker et al, 2002) CG gains prminence in the 1980s due t stck market crashes acrss the wrld and inability f crprate gvernance framewrks t prevent crprate failures (Francis, 2000) Different CG structures are adpted acrss the wrld. Cuntries that fllwed civil law (such as France, Germany, Italy, and Netherlands) develped framewrks that fcused n stakehlders (Slmn & Slmn, 2004) Cuntries that fllwed cmmn law (such as USA, UK, Canada, Australia and New Zealand) develped framewrks that fcused n sharehlders returns/interests (Department f Treasury) Cmmnwealth Heads f Gvernment develp the Internatinal CG Netwrk t prmte and crdinate research and develpment in crprate gvernance Cmmnwealth Heads f Gvernment establishes Cmmnwealth Assciatin fr CG (CACG), which develped CACG Guidelines - Principles fr CG in the Cmmnwealth 1999 Glbal CG Frum was develped by the Wrld Bank Grup and OECD.

7 Crprate Gvernance in Sub-Saharan Africa 1990s The King s Cmmittee Reprt and Cde f Practice fr CG in Suth Africa published in 1994 stimulate crprate gvernance in Africa. Suth Africa, Ghana, and Zimbabwe establish natinal institutinal mechanisms t prmte gd crprate gvernance. Wrld Bank Grup and Cmmnwealth Assciatin prvide training and technical supprt t Btswana, Mali, Camern, Mauritania, Senegal, Sierra Lene, Tunisia, Zambia, Gambia and Mzambique t establish natinal crprate gvernance mechanisms 1998,1999, 2000 Reginal cnferences held in Kampala, Uganda in June 1998 and September 1999 t create awareness and prmte reginal c-peratin in crprate gvernance. June 1998 cnference: there is a reslutin that each member state shuld develp a CG framewrk and cde f best practice, with particular emphasis n harmnizing framewrks under the East African regin by establishing a reginal bdy under East African Cperatin t prmte crprate gvernance. September 1999 cnference: the June 1998 reslutins are re-affirmed and the need fr gd CG strengthened. Uganda establishes the Institute f CG f Uganda t frmulate a natinal cde f best practice fr crprate gvernance. Tanzania rganizes the East African Reginal Wrkshp n crprate gvernance early in the year In Kenya, the Private Sectr Initiative fr Crprate Gvernance cntinues t liaise with Uganda and Tanzania twards the establishment f a Reginal Center f Excellence in CG.

8 Cadbury Reprt (1992) Greenbury Reprt (1995) Hampel Reprt (1998) Higgs Reprt (2003) Cmbined Cde f Crprate Gvernance (2003) ORIGIN OF CG REPORTS UNITED KINGDOM Outlined respnsibilities f executive & independent directrs, bard audit cmmittees, auditrs respnsibility t sharehlders & bard Listed Cmpanies at LSE t adpt, cmply with Cde f Best Practice Increase number f independent nn-executive directrs Separatin f CEO and Chair f the Bard Set up sub-cmmittees in the BOD - mnitr & judge activities f mgt Examined directrs remuneratin after public cmplaints and sharehlders Cde f Best Practice framewrk fr listed cmpanies - decisins n remuneratin Creatin f Remuneratin Cmmittees cnsisting f independent directrs Bard t publish and disclse remuneratin plicies guiding & serving tenure Reviewed rles f executive & nn-executive directrs, auditing cmmittees & rles in CG principles Separatin f the CEO frm the Bard Chairman Prcess f nminating directrs, remuneratin, auditing by independent directrs Assessed ppulatin & prcess f appinting nn-executive directrs, their independence, effectiveness, accuntability mechanisms & bard remuneratin Bard effectiveness - independent directrs & FP f listed firms Defined - 50% independent nn-executive directrs & their bjectivity Recmmended fair directr s remuneratin t attract qualified individuals Included principles f CG; rles f bard & chairpersn; independent directrs, frmatin, rles f audit & remuneratin cmmittees Recmmended revised Cde f Principles f Gd Gvernance & Best Practice, guidelines n the recruitment, appintment, prfessinal develpment f nnexecutive directrs, bard cmmittees & perfrmance evaluatin checklist

9 Organisatin fr Ecnmic C-peratin and Develpment OECD (1999) Sub-Saharan Africa (1988) Prvide a framewrk that gvernments adpt t imprve the legal, institutinal, and regulatry framewrk fr CG. Als be adpted by stck exchanges, cmpanies, and investrs The OECD principles nt legally binding, vluntary - act as a brad-based framewrk used by cuntries develp wn CG cdes Principles revised in emphasis n sharehlder rights, value maximizatin strengthening sharehlder rights, rles, ensuring disclsures are dne in an accuntable and transparent manner Gvernance in Africa raised in Wrld Bank reprt termed as a crisis f gvernance 1990s-multilateral bilateral dnrs factred gvernance agendas int their financial assistance t develping cuntries CG cdes f SSA cuntries - Nigeria, Kenya, Ghana recmmend nn-executive directrs, frm audit cmmittees with independent members, separate psitins f chairpersn & CEO as gd practices f CG Kenya (2002) Desire t institutinalize the principles f CG led t prmulgatin f the guidelines n principles f CG fr public listed cmpanies in 2002 by CMA Primary bjective - t strengthen CG practices by public listed cmpanies t prmte the standards f self-regulatin Bth prescriptive and nn-prescriptive guidelines t prmte creativity and innvative dynamism t CG in listed cmpanies CMA expects cmpanies t adpt, nurture, encurage these CG best practices with minimum requirements

10 PRINCIPLES OF GOOD CORPORATE GOVERNANCE PRACTICES Guidelines gverning directrs, chairman and CEO (separate), sharehlders, audit, accuntability & general practices Establishment f the bard, its cmmittees, directr s remuneratin, supply, disclsure f infrmatin, bard balance, appintments, reelectin, resignatin and multiple directrships Directr remuneratin - sufficient t attract and retain directrs. Executive directr s cmpensatin cmpetitively structured and linked t perfrmance, nn-executive directr s in line with remuneratin in cmpeting sectrs Directrs f listed cmpanies cannt hld mre than five directrships in public listed cmpanies. A chairpersn psitin cannt be held in mre than tw listed cmpanies at the same time Sharehlders must participate in making majr decisins in the cmpany. Bard t prvide infrmatin n all relevant matters, perating psitin, prspects nt limited t majr dispsal f the cmpany s assets, restructuring, takevers, mergers, acquisitins There shuld be public disclsure in respect f any management r business agreements entered int by the Cmpany

11 RECOMMENDED BEST PRACTICES IN CG BY PUBLIC LISTED COMPANIES Revlves - bard f directrs, chairman, chief executive, sharehlders, general meetings, accuntability and rle f audit cmmittees BOD respnsible -fstering lng-term business, maximize sharehlder value, define missin, gals, risk plicy Objectives - peratins, mgt accunts, majr capital expenditures, perfrmance, identify pprtunities, evaluate business risks, strategize; develp staffing, remuneratin plicy; review cmpany s internal cntrl mechanisms and mnitr gvernance practices Bard balance independent, nn-executive (1/3) & executive directrs - f high calibre, expertise, credibility, gender representatin Audit cmmittees - 3 independent nn-executive directrs t versee financial reprting prcess, ensure apprpriate internal cntrls Equitable terms f sharehlders, access t relevant infrmatin abut crprate perfrmance, security in transfer and registratin f wnership, vte & seek clarificatins n annual reprts, distribute prfits: dividend, bnus shares, script dividend r rights issue - in prprtin f its sharehlding All sharehlders encuraged t participate in the annual general meetings and exercise their vtes

12 CONCLUSION Crprate gvernance is cncerned with the prcesses, systems, practices and prcedures that gvern institutins in via: strng cmmitment frm bard and senir mgt effective risk cntrl high level f transparency well defined sharehlders rights disclsure f financial and nn-financial infrmatin effective mnitring f CG practices lng term cmmitment t gd CG practices This generates psitive returns fr a cmpany, bst investr cnfidence and maximize sharehlder returns Understanding the evlutin f crprate gvernance is therefre an imprtant step in strengthening cmpliance with crprate gvernance principles and best practices

13 THANK YOU