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PAN AFRICAN CONSULTATIVE FORUMPAN AFRICAN CONSULTATIVE FORUM

DAKAR, SENEGAL.DAKAR, SENEGAL.

Status of Corporate Governance Status of Corporate Governance

in Kenya –Lessons from the APRM in Kenya –Lessons from the APRM exerciseexercise

Presented by: Centre for Corporate Governance Presented by: Centre for Corporate Governance

Nairobi, Kenya.Nairobi, Kenya.

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1.Methodological Approach1.Methodological ApproachThe methodological edifice was designed as a bottom-up The methodological edifice was designed as a bottom-up process with the aim of hinging the APRM on the process with the aim of hinging the APRM on the participation of Kenyans in an open, all-inclusive and participation of Kenyans in an open, all-inclusive and transparent manner. transparent manner. The pre-field methodology comprised: education, The pre-field methodology comprised: education, sensitization, awareness creation and creation of sensitization, awareness creation and creation of ownership among the mass of Kenyans; realigning, ownership among the mass of Kenyans; realigning, harmonizing and coordinating methodological approaches harmonizing and coordinating methodological approaches among technical review teams; identification of among technical review teams; identification of stakeholders; recasting the questionnaire into a survey stakeholders; recasting the questionnaire into a survey instrument; and gathering information and data.instrument; and gathering information and data. 1.1 Instruments1.1 InstrumentsFour principal research instruments were developed and Four principal research instruments were developed and used, namely: a Desk Research Instrument, an Expert used, namely: a Desk Research Instrument, an Expert Panel Instrument, a National Sample Survey Instrument, Panel Instrument, a National Sample Survey Instrument, Focus Group Discussions with enhanced validation of the Focus Group Discussions with enhanced validation of the findings through Provincial rollout discussion, meetings & findings through Provincial rollout discussion, meetings & workshops with separate syndicate groups to cater for workshops with separate syndicate groups to cater for young women, young men, women and men.young women, young men, women and men.

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1.1.11.1.1 Desk Research InstrumentDesk Research Instrument The desk research contained structured questions The desk research contained structured questions

focusing on issues relevant to good corporate focusing on issues relevant to good corporate governance and aimed at facilitating the collection governance and aimed at facilitating the collection and extraction of factual and reliable information. It and extraction of factual and reliable information. It was designed to collect secondary data and information was designed to collect secondary data and information and to undertake qualitative analysis of those issues.and to undertake qualitative analysis of those issues.

1.1.21.1.2 Expert Panel InstrumentExpert Panel Instrument The expert panel instrument was designed to capture The expert panel instrument was designed to capture

information from a cross-section of leading experts in information from a cross-section of leading experts in the thematic area. Questions were formulated in a the thematic area. Questions were formulated in a manner to elicit opinions and perceptions. Most manner to elicit opinions and perceptions. Most qualitative responses took the form of yes/no, scoring qualitative responses took the form of yes/no, scoring or ranking on a scale of 1 to 5. or ranking on a scale of 1 to 5.

Expert respondents were carefully identified by the Expert respondents were carefully identified by the Lead Technical Agency, the thematic Convener and Lead Technical Agency, the thematic Convener and members of the Thematic Groups drawn from members of the Thematic Groups drawn from academia, faith led organisations and civil society, the academia, faith led organisations and civil society, the media, the government, the private sector and the media, the government, the private sector and the business community, and the politicians, among others.business community, and the politicians, among others.

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1.3.3 Focus Group Discussions Instrument1.3.3 Focus Group Discussions Instrument Based on the preliminary desk research reports Based on the preliminary desk research reports

, the Thematic Group identified the set of core , the Thematic Group identified the set of core issues to be discussed with respect to corporate issues to be discussed with respect to corporate governance in the Focus Group Discussions. governance in the Focus Group Discussions.

The Lead Technical Agency and the Convener The Lead Technical Agency and the Convener developed guidelines and check lists for the developed guidelines and check lists for the discussions. Selection of participants to the discussions. Selection of participants to the FGDs took into account inclusiveness and ease FGDs took into account inclusiveness and ease of implementation. Participants were identified of implementation. Participants were identified from all sectors using selection criteria of age, from all sectors using selection criteria of age, gender, level of education, being active in gender, level of education, being active in public affairs, regional representation, socio-public affairs, regional representation, socio-economic groups, civil society, politicians, economic groups, civil society, politicians, development partners, private business, development partners, private business, religious faiths, different sectors, rural versus religious faiths, different sectors, rural versus urban, areas and so on.urban, areas and so on.

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1.3.4 National Sample Survey Instrument1.3.4 National Sample Survey Instrument

The National Sample Survey instrument was designed to The National Sample Survey instrument was designed to capture perceptions of the general population on issues capture perceptions of the general population on issues of governance in the four thematic areas. The instrument of governance in the four thematic areas. The instrument sought perceptions on the state of governancesought perceptions on the state of governance. .

In addition to the Focus Group discussions deliberate In addition to the Focus Group discussions deliberate efforts were made to ensure that all the issues were efforts were made to ensure that all the issues were discussed separately with representatives from all the discussed separately with representatives from all the Provinces and districts of Kenya while taking into Provinces and districts of Kenya while taking into account gender and age concerns as follows:account gender and age concerns as follows:

Female youths aged 14 – 25 yearsFemale youths aged 14 – 25 years Female adults aged 26 – 65 yearsFemale adults aged 26 – 65 years Male youths aged 14- 25 years and Male youths aged 14- 25 years and Male adults age 26 – 65 years.Male adults age 26 – 65 years.

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What were the findings?What were the findings?

Unfortunately, until the country review Unfortunately, until the country review report is discussed and adopted by report is discussed and adopted by NEPAD Heads of State and delivered to NEPAD Heads of State and delivered to the President of Kenya, we are not at the President of Kenya, we are not at liberty to discuss or reveal the specific liberty to discuss or reveal the specific findings. We shall therefore only discuss findings. We shall therefore only discuss those generic issues that raise matters those generic issues that raise matters of interest and concern to the of interest and concern to the implementation of corporate implementation of corporate governance in Africa.governance in Africa.

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In Kenya, like in many other African states, the governance of business was an issue that occupied the minds since independence.At the time, the major issues of concern were tosee “what more needed to be done to make the modern forces of economic power accountable to mankind, facilitate effective participation by the citizens, remove foreign domination of the commanding heights of the economy and ensuresocial accountability and responsibility of the business sector.In Kenya this concern is clearly articulated in theSessional Paper No 10 of 1966 on African Socialismlaunched and the study on “Who Controls Industry in Kenya” published in 1968.

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In the 5-year National Development Plan [1993-8] the In the 5-year National Development Plan [1993-8] the government made the point that while the twin challenges government made the point that while the twin challenges of the nations development were elimination of poverty of the nations development were elimination of poverty and unemployment, it made the point that the Private and unemployment, it made the point that the Private Sector was to be the Engine of Growth and that the role of Sector was to be the Engine of Growth and that the role of Government was to create an enabling and conducive Government was to create an enabling and conducive environment in which business enterprises could grow and environment in which business enterprises could grow and thrive. This thrive. This emphasis eventually led to a number of emphasis eventually led to a number of initiatives that sought to promote the private sector initiatives that sought to promote the private sector including on aspects of good corporate governance in the including on aspects of good corporate governance in the country in both the private and public sectors. country in both the private and public sectors.

Those on corporate governance include the adoption of Those on corporate governance include the adoption of

international accounting, auditing and reporting international accounting, auditing and reporting standards, the setting up of a Centre for Corporate standards, the setting up of a Centre for Corporate Governance, the Institute of Directors, the Kenya Governance, the Institute of Directors, the Kenya Shareholders Association and the Kenya Anti-Corruption Shareholders Association and the Kenya Anti-Corruption Commission among others.Commission among others.

In addition, the establishment of schemes like the In addition, the establishment of schemes like the Company of the Year Awards (COYA) and the Financial Company of the Year Awards (COYA) and the Financial Reporting (FiRe) Awards has increased awareness and Reporting (FiRe) Awards has increased awareness and created a spirit of competitiveness among participating created a spirit of competitiveness among participating organizations. organizations.

Regular training courses and workshops on corporate Regular training courses and workshops on corporate governance have further increased the demand for good governance have further increased the demand for good corporate governance.corporate governance.

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In the last five year period, more than 1300 In the last five year period, more than 1300 directors have gone through the 5-day directors have gone through the 5-day certification training course, an additional 600 certification training course, an additional 600 through the 3-day director induction training through the 3-day director induction training programme and many others through the 2-day programme and many others through the 2-day introductory and 1-day overview training introductory and 1-day overview training courses in corporate governance. The directors courses in corporate governance. The directors have been drawn from the public, the private have been drawn from the public, the private and cooperative sectors. and cooperative sectors.

In addition the country has developed through In addition the country has developed through participative processes generic and sector participative processes generic and sector specific corporate governance codes of best specific corporate governance codes of best practice, covering all companies generally, practice, covering all companies generally, state owned enterprises, cooperatives, banks, state owned enterprises, cooperatives, banks, reporting and disclosure and on the role, duties reporting and disclosure and on the role, duties and obligations of shareholders and membersand obligations of shareholders and members

These and other activities are improving the These and other activities are improving the standards of good corporate governance in the standards of good corporate governance in the country. country.

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Kenya has signed, ratified, adopted and complied with a Kenya has signed, ratified, adopted and complied with a number of internationally accepted standards and number of internationally accepted standards and codes as indicated below.codes as indicated below.

As at February 2005 there were:As at February 2005 there were: - 115,544 companies registered under the Companies - 115,544 companies registered under the Companies

Act, with about 5000 of them registered as public Act, with about 5000 of them registered as public companies out of which only 48 companies are quoted companies out of which only 48 companies are quoted on the Nairobi Stock Exchange. 2760 of the registered on the Nairobi Stock Exchange. 2760 of the registered companies are foreign owned. companies are foreign owned.

- There are 120 State-Owned Enterprises estimated to - There are 120 State-Owned Enterprises estimated to have contributed about 3% of GDP in 2004.have contributed about 3% of GDP in 2004.

- There are more than 412,408 businesses registered - There are more than 412,408 businesses registered under the Registration of Business Names Act.under the Registration of Business Names Act.

- There are more 10,297 cooperative societies including - There are more 10,297 cooperative societies including over 4166 primary producer cooperatives in the over 4166 primary producer cooperatives in the agricultural sector; over 4200 Savings and Credit agricultural sector; over 4200 Savings and Credit Cooperatives and others in various sectors – housing, Cooperatives and others in various sectors – housing, handicrafts, and so on. handicrafts, and so on.

- There are more than 1.3 million Micro Small enterprises - There are more than 1.3 million Micro Small enterprises employing over 5.1 million people. employing over 5.1 million people.

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Kenya has put in place a number of measures Kenya has put in place a number of measures aimed at encouraging commercial enterprise in aimed at encouraging commercial enterprise in the country. The country could still do more to the country. The country could still do more to improve infrastructure , provide more financial improve infrastructure , provide more financial services ,make rules more flexible and ensure services ,make rules more flexible and ensure the fair , equitable and uniform application of the fair , equitable and uniform application of the law fairly (79%) as a means of improving the law fairly (79%) as a means of improving the investment climate.the investment climate.

In public and private companies in Kenya, the In public and private companies in Kenya, the unitary board is predominant. In the co-unitary board is predominant. In the co-operative movement, the management operative movement, the management committees are being transformed into Boards committees are being transformed into Boards of directors by statute. The only two clear cases of directors by statute. The only two clear cases where the role of the Chairman of the Board where the role of the Chairman of the Board and the CEO are combined are in Electricity and the CEO are combined are in Electricity Regulatory Board and the Central Bank of Regulatory Board and the Central Bank of KenyaKenya

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A number of challenges still exist and have to be A number of challenges still exist and have to be addressed if the country is to ensure the application addressed if the country is to ensure the application and implementation of the highest standards of and implementation of the highest standards of corporate governance. Among these are, the corporate governance. Among these are, the acceptance by society of the role of the private sector acceptance by society of the role of the private sector as the engine of growth and consequently the re-as the engine of growth and consequently the re-orientation of societal values which would result in orientation of societal values which would result in popular participation and engagement of society in popular participation and engagement of society in holding business enterprises accountable for efficiency holding business enterprises accountable for efficiency and effectiveness, competitiveness and and effectiveness, competitiveness and innovativeness and shifting away from believing that innovativeness and shifting away from believing that the government will provide everything. There is need the government will provide everything. There is need to excite and incite all business enterprises and their to excite and incite all business enterprises and their leaders to understand, apply and implement the leaders to understand, apply and implement the principles and practices of good governance. There is principles and practices of good governance. There is also need to ensure that regulatory supervisory also need to ensure that regulatory supervisory authorities have the capacity to police and enforce authorities have the capacity to police and enforce strict adherence to the principles. strict adherence to the principles.

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What are the primary or critical issues that Kenyans felt What are the primary or critical issues that Kenyans felt should be addressed in corporate governance?should be addressed in corporate governance?- - Alleviation of Poverty and unemployment?Alleviation of Poverty and unemployment?- Corruption ? Corruption ? - Continued Rape and plunder of national resources Continued Rape and plunder of national resources

for the benefit of others?for the benefit of others?- Dominance of the economic resources by the few whoDominance of the economic resources by the few who enjoy support from the political elite? enjoy support from the political elite? - Small and non-viable indigenous enterprises that lackSmall and non-viable indigenous enterprises that lack competitiveness access to capital and technology?competitiveness access to capital and technology?- Dominance by State Owned enterprises?- Dominance by State Owned enterprises?- Institutional capacity to promote, supervise an Institutional capacity to promote, supervise an

otherwise police compliance.otherwise police compliance.- Review of the policy, legal and regulatory frameworkReview of the policy, legal and regulatory framework- Fair, efficient and speedy mechanisms for the Fair, efficient and speedy mechanisms for the

resolution of commercial disputesresolution of commercial disputes

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Key questions were asked as follows:Key questions were asked as follows:1.Whose voice are we hearing through the codes of

best practice? Is it the voice of the people of Is it the voice of the people of Kenya indicating how they want businesses to be Kenya indicating how they want businesses to be run and governed, or is it the voice of the run and governed, or is it the voice of the foreign businesses or governments seeking to foreign businesses or governments seeking to protect and entrench foreign domination of the protect and entrench foreign domination of the economy or to justify it retention of ill gotten economy or to justify it retention of ill gotten wealth?wealth?

2. Are we hearing the voice of the emerging 2. Are we hearing the voice of the emerging indigenous business people of Kenya or is it the indigenous business people of Kenya or is it the voice of foreign investors voice of foreign investors and those who have and those who have benefited from abuse of power suggesting that benefited from abuse of power suggesting that with packaging & minimum change, things can with packaging & minimum change, things can stay as they were and the majority of the stay as they were and the majority of the

people deceived to accept to stay just as they people deceived to accept to stay just as they have always been - poor? have always been - poor?

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3. 3. Does the good corporate governance promote Does the good corporate governance promote the concept of African Social Accountability? the concept of African Social Accountability? This This implies that those who are entrusted and who implies that those who are entrusted and who control economic resources & policies must be control economic resources & policies must be answerable and responsible to society, and that answerable and responsible to society, and that they must give a full account of power and the they must give a full account of power and the extent of the level extent of the level efficiency and effectiveness efficiency and effectiveness of of their activities to the community as a whole, and their activities to the community as a whole, and not only to a section of interests?not only to a section of interests?4. Does the Corporate Governance promote 4. Does the Corporate Governance promote meaningful participation and engagement for the meaningful participation and engagement for the majority of the people in the development process? majority of the people in the development process? Do workers, producers, consumers feel ownership Do workers, producers, consumers feel ownership of the economy, or that those who own and control of the economy, or that those who own and control the economic power are doing their best for them the economic power are doing their best for them and that they, the people, are involved in the and that they, the people, are involved in the decision making process and not only at the decision making process and not only at the receiving end of other people’s decisions over receiving end of other people’s decisions over which they can exercise no influence or control?which they can exercise no influence or control?

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5.Can the codes of best practice be applied generally to the majority of business enterprises in Kenya? or are they an attempt to reproduce the

capital market led Anglo-American module that primarily just address the interests of limited

shareholders? In other words, does corporate governance

strengthen the engagement and participation of the majority of the people of in the development process, or does merely promote a “feeling of participation” while maximizing on the manipulative elements and dominance of the few that is prevalent in the modern capitalistic economy?

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6.Is corporate governance as currently 6.Is corporate governance as currently promoted seeking to create a promoted seeking to create a privileged class of business privileged class of business investments, or does will it facilitate investments, or does will it facilitate the development and sustainability of the development and sustainability of the vast majority of business the vast majority of business enterprises in Kenya?.enterprises in Kenya?. 7. Do the principles have meaning or 7. Do the principles have meaning or relevance in the context of Kenya?relevance in the context of Kenya?8. Has 8. Has adoption and implementation adoption and implementation of the practices and principles had an of the practices and principles had an impact on corporate and economic impact on corporate and economic performance in any other African performance in any other African countries? countries? Can this be demonstrated Can this be demonstrated quantatively?quantatively?

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Given the fragmentation of the Given the fragmentation of the African economic market, by African economic market, by language, legal regimes, history and language, legal regimes, history and culture, would adoption of corporate culture, would adoption of corporate governance guidelines founded in governance guidelines founded in our legal and colonial background our legal and colonial background create disadvantages for Kenya create disadvantages for Kenya businesses?businesses?

Is it possible to have harmonised Is it possible to have harmonised standards of Corporate Governance standards of Corporate Governance in Africa or de we expect in Africa or de we expect uniformity?uniformity?

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In light of the colonial history of the In light of the colonial history of the country, it emerged that the people of country, it emerged that the people of Kenya feel that they must implement Kenya feel that they must implement corporate governance principles and corporate governance principles and practices which they have developed, practices which they have developed, accepted and owned and not impositions accepted and owned and not impositions from outside . from outside .

“In the past, decisions were taken about us, without us, against us and in the interests of others. We are asking that decisions about us should be taken together with us, in our interest and for our benefit. [President Olusegun Obasanjo, Kampala Forum 1991]