CMA to name and shame listed firms that fail to live by rules

The Capital Markets Authority (CMA) will from next year name and shame listed firms that breach set boardroom rules and corporate governance standards in a move meant to cut the risk of loss for investors.

The regulator says that exposing the errant firms will help bridge compliance gaps following revelations that nearly half of the companies listed on the Nairobi Securities Exchange (NSE) have corporate governance failures.

The list of shame of firms that fail to meet regulatory standards will be anchored on stringent governance rules that demand disclosure of directors’ pay, their term limits, adoption of a code of ethics and review of board composition. The standards also set rules on stakeholder relations, ethical and social responsibility, transparency and risk control as well as management of conflict of interest.

The CMA has in the past two years been releasing data on compliance without naming the firms, offering little deterrent to listed firms that are in breach.

“In the coming year, we are making it a report card. We didn’t want to reveal names before because it was like a learning curve. But starting next year, we will state specifically which company was good or bad,” said Hillary Biwott, CMA’s legal officer for regulatory framework.

He made the comments while representing the regulator at a two-day training on new corporate governance rules in Nairobi convened by International Finance Corporation (IFC) and Scribes Services, a corporate governance consultancy firm.

“The ranking and naming of firms will have the effect of boosting compliance because it will enable entities to compare their performance against peers,” said Bernard Kiragu, the managing partner of Scribes Services, adding that firms detest being shamed. 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

The CMA report, which covered the year ended June 2018, showed that 27 firms — an equivalent of 44 percent of the companies listed on the NSE — 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 CMA did not disclose the names of the companies and only referred to them by their core business or their sector grouping, in what was seen as a move to protect laggards from potential backlash.

The report shows that 31 firms were ranked as “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. 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.