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25 June, 2017

Corporate governance constitutes the mechanisms, processes and relations through which companies are controlled and governed. Corporate governance is founded on the pillars that, businesses have to practice accountability to stakeholders, fairness, have transparency in business activities and exhibit independence in decision making. Corporate governance has become even more crucial given the recent global financial crisis in the West, and close to home given the recent bank failures and operational crisis in firms such as:

  1. Imperial Bank, which was placed under receivership by the CBK following unsound business conditions in the bank,
  2. Chase Bank, which was also placed under receivership following cases of unsound banking practices such as large unsecured loans to directors,
  3. Uchumi and Nakumatt which have experienced cash-flow problems due to mismanagement of the retailers,
  4. Kenya Airways, whose issues around governance came into light following four consecutive years of massive losses resulting from high debt levels after a botched expansion plan, and reduction in passenger numbers.

Investors have lost over Kshs. 270 bn in situations that are closely linked to failure of corporate governance and ethics.

The benefits of good corporate governance include (i) protecting the interest of the investing public, (ii) reducing risks of corporate crisis, (iii) ensuring the firms have the right processes in place, with all decision making done in a transparent manner as per policy, (iv) improving access to funding at better costs, (v) improving firm valuation and share price performance, and (vi) generally improving the performance of the entire firm as it has a focus on ensuring corporate decisions result in the application of the highest standards of governance which enhances sustainability in the firm’s growth.

Last year, we released the first Cytonn Corporate Governance Index Report in which we highlighted key issues facing corporate governance in Kenya. The report themed “What is the role of corporate governance in the recent investor losses?”, painted a gloomy picture of the Kenyan corporates as one where investors had amassed substantial losses amounting to Kshs 257 bn as at May 2016, due to increased cases of corporate governance malpractices. With such a worrying statistic, it called on regulators to heighten their oversight stance on governance aided by increased scrutiny from professional bodies, non-governmental organizations and the general public.

Cytonn’s Corporate Governance Index ranks 50 listed companies, each with a market cap of above Kshs 1.0 bn, using 24 metrics on their corporate governance structure. The companies are ranked on 24 metrics to arrive at a composite score that provides a deeper understanding of the level of corporate governance in each firm. The main areas of analysis are in the (i) board composition, (ii) audit functions, (iii) CEO tenure and evaluation, (iv) remuneration, and (v) transparency. The score is a diffusion index with 50.0% as the base meaning that any score below 50.0% is flagged as having serious corporate governance issues while any score above 50.0% is skewed towards proper governance. However, the variance from 100% gives the risk associated with corporate governance.

We are glad to note that 2016/17 has witnessed a notable improvement and focus on corporate governance, leading to reduction in the number of corporate governance issues; this is evidenced by the few number of poor governance cases as well as measures taken to redress the companies that were drowning owing to poor governance such as boardroom changes especially among government owned entities, which we believe have been as a result of regulations aimed at restoring governance order in the market in pursuit of regaining investor confidence. Some of the key regulations include (i) the publishing of the CMA Code of Corporate Governance Practices for public companies, which is based on “apply or explain” approach that requires companies to actually follow the set out corporate governance codes, and (ii) the constitution of a board by the CBK which is tasked with ensuring the regulator performs its role in the banking sector. This increased level of regulation and signs of stability informs the theme of our report this year, “Corporate governance key to regaining confidence and protecting shareholder value in Kenyan listed companies”. Key highlights include:

  1. Regulation: Last year, the CMA published the “Code of Corporate Governance Practices” for public companies in Kenya, which is based on “apply or explain” approach that requires companies to actually follow the set out corporate governance codes, a shift from the previously applied “comply or explain” approach that lets individual companies to decide whether to follow set codes or not. The code, which came into effect this year in March is likely to lead to increased accountability by the board even as it guides in identifying potential gaps in the boardroom. In addition to this code, the Cabinet approved the State-sponsored Financial Bill 2017, which seeks to create the Financial Services Authority, a body that will consolidate and take over the functions of the Capital Markets Authority (CMA), Insurance Regulatory Authority (IRA), Retirement Benefits Authority (RBA) and Sacco Societies Regulatory Authority (SASRA). This body will be beneficial to the corporates as it is expected to lead to increased transparency in the non-bank financial services industry by eliminating regulatory gaps as well as providing a standard approach to corporate governance. With the banking sector having witnessed many cases of poor corporate governance, the CBK constituted a board tasked with ensuring the regulator performs its role in the banking sector, which we believe is a step towards the right direction in ensuring better oversight in the banking sector while ensuring that the regulator is also not exempted from having the proper corporate governance structure.
  2. Changes towards Stability: There has been a lot of changes in the companies that had potential governance issues including;
    • Recently the CBK invited potential investors to take an equity stake in Chase Bank Limited as part of restructuring plan meant to speed up recovery of the lender, having been under the receivership of KCB Group and the Kenya Deposit Insurance Corporation (KDIC) as the official receiver. Chase Bank Limited was placed under receivership following cases of unsound banking practices, which includes large unsecured loans to directors. This being the first time that a Kenyan bank in receivership has been reopened, the reopening will go a long way in restoring investor confidence especially in the banking sector.
    • The CBK and KDIC have also issued tentative timelines for the resolution of Imperial Bank Limited’s receivership which will see investors and shareholders express their interest in the ownership of the bank, which has been in receivership since October 2015. If the process is successful, Imperial Bank Limited will become the second Bank to be reopened after being put in receivership after Chase Bank Limited.
    • Mumias board hired 8 new managers as part of conditions given by the government and shareholders before bailing out the miller,
    • Uchumi hired a new CEO and senior managers to drive its turnaround strategy following the sacking of the former CEO for gross misconduct and negligence,
    • National Bank’s board appointed a new CEO following the sacking of the previous head and 5 other senior managers due to mismanagement and a loose credit policy, and,
    • Kenya Airways’ board hired a new chair to the board to oversee implementation of its turn-around strategy after an audit report revealed massive malpractices in the firm.

In addition, we have also witnessed significant corporate governance changes in entities such as (i) Limuru Tea that hired a new CEO as well as a new chairman to the board in fulfillment of CMA’s governance requirements, (ii) TransCentury, which made changes to its board following acquisition of 25.0% stake by Kuramo Capital that saw entry of 3 new non-executive directors representing Kuramo, and the exit of 4 former members, and (iii) Home Africa, in which 7 of the firm’s directors exited following mismanagement that led to the firm reporting a loss of Kshs 118.1 mn in H1’2016, with the board size reducing to 6 members from the previous 10 members after replacement of 3 members. Given the financial challenges that has plagued Nakumatt recently, we believe corporate governance changes are eminent to help get the retailer back to stable ground.

Compared to last year, the average performance for companies has improved by 4.1% to an average score of 65.7%, from 61.6% in 2016 mainly driven by better disclosures around governance. This is an indication that Kenyan listed companies are firming up to better governance practices, which is expected to lead to better performance of various companies. Companies also registered better performance on ethnic diversity with an average score of 62.1% compared to a score of 59.4% registered last year. A higher score on ethnic diversity indicates better assortment in board composition, which improves the quality of decision making and enhances creativity and innovation translating to better performance by the companies. The average score on gender diversity, however declined to 16.4% from 18.3% in 2016. This is an indication that there remains a lot more to be done by companies with regards to having female members on their boards, and we believe that full compliance to the CMA’s Code of Corporate Governance Practices will be key in achieving this. Below is a graph highlighting the comparison in average score under the comprehensive score, ethnic diversity and gender diversity categories.

Another key highlight from this year’s report is the strong correlation between corporate governance and returns on stocks of the listed entities. The top 25 companies in the Cytonn CGI have delivered an absolute return of approximately 37.8% over the last 5-years compared to the bottom 25 companies, which have delivered an absolute return of (5.1%) per annum over the last 5-years.

The diversity of the board by gender and ethnicity is also directly correlated to stock returns as indicated below:

Top 25 companies under the gender diversity criteria recorded a 5-year absolute return of 40.2% compared to a negative return of 8.1% recorded by bottom 25 companies.

Under ethnic diversity, Top 25 companies delivered a 5-year absolute return of 26.1% compared to a return of 10.3% recorded by bottom 25 companies. These three graphs indicate the strong correlation between the level of governance in an entity and the investor sentiments on the company as measured by the performance of its stock.

*We have excluded agricultural stocks due to their repricing as they were priced due to their real estate holdings

Below is a summary of the top 5 companies under each of the categories cited above:

Summary of the top 5 Companies under various categories


Comprehensive Score

Gender Diversity

Ethnic Diversity









KCB Group


Barclays Bank Ltd


Sanlam Kenya



DTB Bank


Mumias Sugar Co.


KCB Group



Jubilee Holdings


B.O.C Kenya


East Africa Breweries



Standard Chartered Bank


HF Group


Flame Tree Group







Safaricom Ltd


In comparison to last year, a number of companies recorded improvement in their comprehensive score due to various reasons, as outlined below:

  • Uchumi: It was the most improved company with a score of 60.4% from a score of 37.5% in our last report. This was due to (i) better disclosures on board composition and activities such as meetings and evaluation of the board, and shareholding of directors, (ii) rotation of auditor to KPMG from Ernst & Young
  • WPP Scangroup: Scangroup’s score improved to 66.7% from a score of 45.8% last year. This was due to changes in the board, increasing the board size to 9 members from 6 members, and improving female representation. There was also disclosure on rotation of auditors and evaluation of the CEO
  • Liberty Holdings: The company’s score improved to 81.3% from 66.7% also due to better disclosure on board composition, tenure and evaluation of the CEO and shareholding by directors

Key to note from all these companies is the common improvement in disclosures, which forms an integral part in corporate governance. Transparency aids in protecting stakeholders interest.

On the contrary, a number of companies also recorded declines in their comprehensive score, including:

  • EA Cables: EA Cables recorded a decline in comprehensive score of 8.3% to a score of 54.2% from 62.5% in our last report. This was due to decline in female representation in the board, decline in attendance to meetings by board members and increase in the average age of board members
  • Kakuzi Limited: The company’s score declined to 54.2% from a score of 60.4% last year mainly due to non-disclosures relating to board members and the increase in board size to an even number from a previous odd number
  • Kenya Airways: Despite the boardroom changes by the airline, its score dropped to 60.4% from a previous score of 66.7%. This is due to reduced shareholding by directors to zero as well as non-disclosures on board members’ attendance to meetings

As shown in the above graphs, sound corporate governance is essential to well-functioning and vibrant financial markets. We believe that the Kenyan listed entities are firming up to sound corporate governance practices supported by increased regulation from various bodies and organizations responsible for corporate governance oversight, which is essential for stability of the companies and the general market. We therefore hope that the regulations put in place will go a long way in instilling a proper governance culture and ultimately, deepening the capital markets.

For a comprehensive analysis on the ranking and methodology behind it, see our Cytonn Corporate Governance Index Report – 2017.