27 NSE-listed firms fail transparency and risk control test

Nearly half of the firms listed on the Nairobi Securities Exchange (NSE) have corporate governance failures, an audit by the regulator has shown, exposing the risk of capital loss that investors face.

A new report by the Capital Markets Authority (CMA) shows that 27 firms — an equivalent of 44 per cent of the companies listed on the bourse — are in breach of diverse corporate governance requirements such as transparency.

For instance, 10 of the companies have failed to submit their annual reports and an internal review of their corporate governance processes.

Another 17 firms were categorised as needing improvement after scoring poorly on the set yardsticks, which included commitment to good governance, board operations and control and rights of shareholders.

The firms were also found to be in breach of standards on stakeholder relations, ethical and social responsibility, transparency and risk control.

The CMA report, which covers the year ended June 2018, is the first look at how listed firms and companies raising funds from public markets are faring in terms of compliance to good corporate governance.

Such companies are expected to demonstrate a high sense of fiduciary duty to their investors, having raised funds by issuing shares and corporate bonds to a diverse group of the investing public, including individuals, institutions and pension funds.

The CMA did not disclose the names of the companies and only referred to them by their core business or their sector grouping, in what is seen as a move to protect laggards from potential backlash.

The report shows that 31 firms were ranked “fair” while five (two banks, two in services industry and one manufacturer) were categorised as “good” in the overall weighted performance. Only three banks achieved excellence and were placed in the “leadership” category.

Dismal corporate governance has been at the core of most corporate scandals in Kenya, resulting in losses running into billions of shillings for investors and even the collapse of some companies.

This manifests itself in a variety of forms, including excessive risk-taking, corrupt insider dealings and failure to hold senior management and boards accountable for their actions.

London Stock Exchange-listed Africa Opportunity Fund Limited, for instance, is among the investors that burned their fingers following corporate malpractices at Kenya Power, which has seen its share price collapse to Sh4.

“Indeed, one of our portfolio companies – Kenya Power — suffered the dubious distinction of having two former Managing Directors charged simultaneously with procurement crimes,” the institutional investor said in a review of its results for the year ended December.

“To date, those steps and prosecutions have demonstrated that in too many countries, large infrastructure projects, like power plants and substations, blend malfeasance with inflated costs, late completion, low performance, and onerous debt burdens.”

State-controlled firms, where accountability is weakest and appointments are made based on political considerations, continue to lead in losses.

Investors have incurred a combined paper loss of more than Sh80 billion in East African Portland Cement Company (EAPCC), National Bank of Kenya (NBK), Kenya Airways (KQ), Kenya Power, Mumias Sugar Company and Uchumi Supermarkets in the past five years alone.