Sources of corporate governance rules and practices

Primary sources of law, regulation and practice

What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?

The guidelines on corporate governance practices by public listed companies in Kenya is statutorily provided for in the Companies Act 2015 and enforced by Capital Markets Authority through the Capital Markets Authority Act, Cap 485A Laws of Kenya.

For public listed companies, the point of reference on statutory law, governing corporate governance is embodied in the two acts as well as other regulations.

These include Kenya’s Guidelines on Corporate Governance Practices by Public Listed Companies in Kenya 2012 (the Guidelines), which are the result of a combination of ideas from corporate governance codes from different jurisdictions.

These guidelines were heavily borrowed and developed from works done in several jurisdictions through many task forces and committees including but not limited to the United Kingdom, Malaysia, South Africa, the Organisation for Economic Co-operation and Development and the Commonwealth Association for Corporate Governance. Other regulations aimed at ensuring disclosure of listed companies are Nairobi Securities Exchange Listing Manual, Capital Markets (Licensing Requirements) (General) Regulations 2002, Capital Markets (Securities) and the (Public Offers, Listing and Disclosures)Regulations 2002.

The Capital Markets Authority Guidelines adopt the comply or explain principle, which is based on the assumption that the market will monitor compliance with the code and either penalise non-compliance by lowering share prices or observe that non-compliance is justified in the circumstances of the particular company (MacNeil, I and Li, X, 2006).

Responsible entities

What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder groups or proxy advisory firms whose views are often considered?

As indicated in question 1, the primary government agency tasked with the responsibility of making the rules and enforcing them is the Capital Markets Authority. This is a statutory body formed in 1989, which was legally created under the Capital Markets Act, Cap 485A.

It is also important to note that the Nairobi Stock Exchange (NSE) is further responsible for the regulation of listed members and the conduct of listed companies through its various rules and regulations.

However, for the period between 2007 and 2008, the NSE powers of enforcement were a fallacy and this led to massive scandals and non-compliance with the code by several listed companies. This situation has currently been gratefully remedied.

Rights and equitable treatment of shareholders

Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

Section 3.3 (iv) of the Guidelines provides for the best practices relating to the rights of shareholders and more so, with regard to election of the directors once nomination and appointment of the directors has been done by the Nominations Committee of said listed company as per the provisions of section 3.1.3 of the Guidelines.

According to section 132(1) as read together with section 256(3) of the Companies Act 2015, a single resolution for nomination and election of directors ought to be made by simple majority of shareholders (ie, more than two-thirds of the shareholders for ordinary resolutions and at least 75 per cent for passing special resolutions).

Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

Division 5 of the Companies Act, 2015 outlines the following trans­actions that require shareholder approval:

  • credit transactions (section 155);
  • directors’ long-term service contracts (section 157);
  • substantial property transactions (section 158); and
  • loans to directors (section 164).

Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

Disproportionate voting rights are allowed in the case of class rights.

Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

The only requirement for shareholders to participate in general share- holders’ meetings or to vote is to have at least one vote per share or 100 shillings of stock.

Body corporate memberships may appoint representatives who are authorised to vote on their behalf.

Only private companies are allowed to act by written consent with- out a meeting so long as 95 per cent of the quorum is present to pass said resolution.

Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

Shareholders have a right to convene general meetings by their own motion or through court order and said request must be put to the directors if the said members constitute at least 10 per cent of total shareholders having voting rights or owning share capital. The share- holders are further required to put a written statement of the resolution where assenting or dissenting to the board of directors who then must convene the meeting within 21 days.

Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

Yes, controlling shareholders owe fiduciary duty to non-controlling shareholders; however, the law has placed no enforcement mechanism should the same be breached.

Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

The management of the company is responsible for the acts or omissions of the company. Shareholders’ responsibility is therefore limited.

Corporate control

Anti-takeover devices

Are anti-takeover devices permitted?

Yes, anti-takeover devices are permitted. These are in the form of white knights, killer bees and shark repellents.

Issuance of new shares

May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

The board is not permitted to issue new shares without shareholder approval. Pre-emptive rights to acquire newly issued shares are only limited for the rights-based issuance of shares.

Restrictions on the transfer of fully paid shares

Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?

Restrictions on transfer of fully paid shares are permitted for private companies as compared to publicly listed companies. They may vary in each company. The most common restriction is that shareholders’ approval or directors’ approval must be sought prior to the transfer of said shares.

Compulsory repurchase rules

Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?

Yes, compulsory share repurchases are allowed where the articles of association stipulate for the same. This is especially the case in situations where a parent company wants to maintain control over its subsidiary and wants to restrict transfer to outsiders.

Further, compulsory repurchase is allowed where the seller who wants to dispose of his or her shares cannot find a member or shareholder within the company to purchase them. The shares cannot be converted into unpaid shares, hence the need for them to be compulsorily repurchased.

Dissenters’ rights

Do shareholders have appraisal rights?

Yes, shareholders have to appraisal rights.

Responsibilities of the board (supervisory)

Board structure

Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

The predominant board structure for listed companies is the one-tier board, which has both managerial and supervisory responsibilities in one unified board of directors.

Board’s legal responsibilities

What are the board’s primary legal responsibilities?

The Companies Act defines the limit of authority by the chief executive and other top executives. It further outlines the structure and organisation of the company.

The board primarily ensures that the company complies with the with all relevant laws, regulations and codes of best business practice.

Board obligees

Whom does the board represent and to whom does it owe legal duties?

As the chief runners of the company, the board serves as a representative of the shareholders and effects decisions to serve their best interests.

Enforcement action against directors

Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

As they are officers of the company, they are liable and can therefore be prosecuted by those to whom they owe duties.

Care and prudence

Do the board’s duties include a care or prudence element?

Yes. They are bound to act with the care and diligence based on the experience, skill and general knowledge that a director has.

Board member duties

To what extent do the duties of individual members of the board differ?

The board is required to have members who fully participate in matters and policies concerned with the company while the independent directors are provisioned to be neutral voices in the board and are not to be involved in matters concerned with the day-to-day running of the company.

Delegation of board responsibilities

To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?

The delegation of responsibilities to management, board committee or board members or other persons is governed by the company’s articles of association. The scope of what can be delegated is further limited to the specialisation or expertise needed in the area.

Non-executive and independent directors

Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?

There is no minimum number as the board is constituted of a perfect balance of executive and non-executive members. Independent directors are members who have no direct duties in the company and are therefore supposed to bring in independent and judgement of issues under discussion in the board. At least one-third of the members should be independent directors.

Board size and composition

How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

As stipulated by the Companies Act, a public company can only have a minimum of two directors, while a limited liability can have a mini- mum of one. They are both, however, required to have one neutral member. Appointments are made during general meetings through which shareholders make appointments to the board.

Board leadership

Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chair and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

The Act stipulates that there should be a clear separation of the role and responsibilities of the chair and chief executive to ensure a balance of power of authority and provide for checks and balances such that no one individual has unfettered powers of decision-making.

Where such roles are combined a rationale for the same should be disclosed to the shareholders in the annual report of the company.

Every person who is a chair of a public listed company shall not hold such position in more than two public listed companies at any one time.

Board committees

What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?

There are three main mandatory committees, that is:

  • a nominating committee, which proposes and assesses the persons suitable to be appointed to the board as executive and non-executive directors before the shareholders vote their appointment;
  • a remuneration committee, which serves to independently remunerate directors of the company depending on their corporate performance; and
  • audit committees that act to ensure accountability of the company. At least three independent directors will constitute the committee, with one independent director serving as chair and who is answerable to the board.

Board meetings

Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

The board is mandated to meet as frequently as possible. The board of directors must hold at least one board meeting per year. It ensures that the board monitor and evaluate the implementation of strategies, policies and management performance criteria and the plans of the corporation.

In addition, the board should constantly review the viability and financial sustainability of the enterprise and must do so at least once every year.

Board practices

Is disclosure of board practices required by law, regulation or listing requirement?

Yes, disclosure of board practices is required under the Capital Markets (Securities) and the (Public Offers, Listing and Disclosures) Regulations 2002 and the Corporate Governance Code for Issuers of Securities to the Public 2015.

Remuneration of directors

How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions or compensatory arrangements between the company and any director?

Remuneration is based on their performance in corporate matters related to the policy and practice of the company. The company’s act clearly outlines these details.

Remuneration of senior management

How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions or compensatory arrangements between the company and senior managers?

Development of appropriate staffing and remuneration policy including the appointment of chief executive and the senior staff, particularly the finance director, operations director and the company secretary as may be applicable.

D&O liability insurance

Is directors’ and officers’ liability insurance permitted or common practice? Can the company pay the premiums?

Sections 194-196 of the Act provides for allowance of directors’ liability insurance. The company is allowed to pay premiums.

Indemnification of directors and officers

Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

Indemnities are usually not common in practice. Insurance is limited to cover director’s right in defending himself or herself in criminal or civil proceedings on behalf of the company with exception made to negligence, default, breach of duty or trust.

Exculpation of directors and officers

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

The Act is strict on the limitations that are attached to directors and their duties.


What role do employees have in corporate governance?

The board is tasked with putting into place whistle-blowing mechanisms for its employees with regard to good corporate governance practices. This helps streamline any discrepancies observed by employees.

Board and director evaluations

Is there any law, regulation, listing requirement or practice that requires evaluation of the board, its committees or individual directors? How regularly are such evaluations conducted and by whom? What do companies disclose in relation to such evaluations?

Evaluation of board, its committees or directors is done through corporate governance audits conducted by an appointed consultant usually a qualified company secretary practitioner. The scope of the audit is determined by the board and disclosure of the results is limited to the board.

Disclosure and transparency

Corporate charter and by-laws

Are the corporate charter and by-laws of companies publicly available? If so, where?

Yes, the corporate charter and by-laws are publicly available and are kept in a registry in the custody of the company secretary.

Company information

What information must companies publicly disclose? How often must disclosure be made?

Private companies are not entitled by law to disclose information relating to their operations. Public companies, however, are mandated to publish their annual reports and financial statements during the annual general meetings.

These reports are, however, disclosed bi-annually to the Capital Markets Authority in the case of listed companies.

Hot topics


Do shareholders have an advisory or other vote regarding remuneration of directors and senior management? How frequently may they vote?

No. An independent remuneration committee is established to determine the individual respective remuneration of executives.

Shareholder-nominated directors

Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?

Yes. Shareholders are responsible for electing directors during meetings and have the ability to change directors based on performance and in accordance with the mandate of the company.

Shareholder engagement

Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?

Companies engage with the shareholders via the chair of the board of directors. This is normally done in meetings. In the case of extra communication, the company secretary is called upon to address the shareholders to pass on the relevant information.

Sustainability disclosure

Are companies required to provide disclosure with respect to corporate social responsibility matters?

Disclosure on CSR is not a legal requirement, but despite this, it is a common trend that companies in Kenya do disclose their CSR activities in their annual reports and websites.

CEO pay ratio disclosure

Are companies required to disclose the ‘pay ratio’ between the CEO’s annual total compensation and the annual total compensation of other workers?

The NSE in late December 2017 issued a directive that directors were obliged to disclose their pay to the regulator and shareholders as at four months after the accounts period closed.

Some CEOs in Kenya have in recent years disclosed their take-home salary with a view to transparency and said information would be matched against company performance.

Gender pay gap disclosure

Are companies required to disclose ‘gender pay gap’ information? If so, how is the gender pay gap measured?

The only legal requirement is that of diversity within the board.

We however note that the World Economic Forum Report 2017 revealed that a Kenyan woman is paid 55 shillings for every 100 shillings paid to a man for doing a similar job.