INSTITUTE OF CERTIFIED PUBLIC SECRETARIES OF KENYA 19 th Annual International Conference Venue: Sarova White Sands, Mombasa Emerging Issues in Global Corporate Governance Raphael G. Mwai, MBS, FCPS (K) PPD Consultants Ltd 3 rd floor, Bishops Garden Towers, P.O. Box , Nairobi, Kenya Tel: , Fax: Website: Date: August 19, 2 015www.ppdconsult.com Presented by:

Outline of presentation The historical context of corporate governance; The evolution of global corporate governance practices; The pillars of corporate governance; Emerging issues in global corporate governance practice; Implications of emerging corporate governance practices on Kenyan enterprises 2

1. The historical context of corporate governance The Joint Stock Company Act of 1844 (UK), allowed the pooling of resources for investment in joint ventures; The Limited Liability Act, 1855, limited the of liability of investors to the amount invested ; The limited liability Act was a reaction to the collapse of joint ventures in which investors lost their entire wealth; The notable example of this failure was the South Sea “Bubble” of 1720 in which investors lost their wealth due to the collapse of the South Sea Company. The manipulation of stock prices on unrealized wealth was the major cause of this disaster; The interface between commerce and politics, particular colonial ventures, impacted negatively on corporate governance. Examples are investments in:  British East India Company (1600);  Imperial British East Africa Company (1888);  British South Africa Company (1889) 3

2. The evolution of global corporate governance practices The “principal and agent” relationship in corporate governance was articulated in the case of Salomon Vs Salomon (1897) in which the House of Lords held that the company was a separate legal entity, apart from shareholders; Corporate governance principles are premised on the fiduciary role of directors as agents of shareholders; Corporate governance has therefore been defined as the “system by which organizations are directed and controlled” (Cadbury Report, 1992); The Cadbury Report required that every company should be headed by an effective board. The Report was incorporated in the Combined Code of Listings in London Stock Exchange; The Cadbury Report recognized the Company Secretary as the “eye and conscience of the Board”; 4

Con’t The Kings Reports, 1994, 2002 and 2009 are incorporated in the listings of Johannesburg Stock Exchange. Among the key provisions are:  Composition and mandate of directors;  Role and responsibility of directors;  Risk management;  Leadership, sustainability and corporate and corporate citizenship;  Sustainable economic, social and environment al performance. The Kings Reports are now applicable to both private and public institutions; The organization for Economic Corporation and Development (OECD) endorsed “The OECD Principles of Corporate Governance in These were revised in

Con’t In 2005 OECD developed “The OECD Guidelines on Corporate Governance of State-owned Enterprises”; In 2008, OECD published the “Guidelines on multinational enterprises”; The principles of OECD Guidelines essentially are:  effective corporate governance framework ;  rights of shareholders;  autonomy, competence and objectivity of the boards of state-owned enterprises;  timely and regular disclosure of relevant information ;  high standards of reporting in financial statements; Sarbanes – Oxley Act, 2002, was enacted in USA arising from corporate failure (Enron, Tyco and World Com); Sarbanes-Oxley Act provides enhanced standards of audit processes and reporting; and places heavy responsibility and liability on boards for corporate failure 6

Con’t The UN Global Compact, to which KEPSA and KAM are committed, is aimed at combating bribery and corruption: members commit to a Code of Ethics for Business; The Centre for Corporate Governance developed “the Principles of Corporate Governance in Kenya” which were adopted in 1999; Through Executive Order No.7 of 2015, The President has issued “The Code of Governance for State Corporations (MWONGOZO)”. The Code provides the framework for the governance of state corporations in Kenya. 7

3. The Pillars of Corporate Governance The pillars of corporate governance are: Effective leadership at Board level; Effective systems, structures and processes of management; Systems of Internal Controls and Risk Management; Transparency and accountability in operational and financial reporting; Sustainability and performance management 8

4. Emerging issues in global corporate practice The financial crisis ( ) led to widespread changes in the regulatory system of the financial service sector in USA;  The response was the Dodd-Frank Wall Street Reform and Consumer Protection Act, 2010;  The Act seeks to promote the financial stability of the United States, in particular:  enhance the integrity,efficiency, competitiveness and stability of US financial markets;  promote market discipline;  maintain investor confidence The increase in shareholder activism brings into sharp focus the fiduciary role of the board viz-a-viz the shareholders. Contentious issues are: 9

Con’t  Short-term returns and long-term investments;  Board remuneration through stock options Corporate Reputation is now considered a valuable asset (2012 World Economics); Corporate Reputational risks increase due to;  increased social media communication ;  Globalization of commerce (multi-national viz-a-viz local subsidiary companies) Diversity is now considered more effective in decision making at Board level due to different perceptives. Diversity refers to:  Gender equity;  Mix of skills and competence

Con’t The burden of regulation will impact the culture of organizations. This will entail:  More disclosure on regulatory compliance;  More engagement with regulators;  Informed advocacy on optimal regulatory frameworks 11

5. Implications of emerging corporate governance practices on Kenya enterprises Good corporate governance practices should be seen as a competitive strategy:  Effective boards are productivity oriented;  Global trade requires good governance practices (environmental conservation and climate change mitigation);  Gender equity enhances productivity. Boards should have the autonomy and competence to effectively lead their organizations. State Corporations will be challenged to exercise this autonomy, with potential adverse effect on sustainability of organizations; Diversity at board and management level will be expected in public and private sector organizations. This will, however, be balanced with skills and competence. This will be a recurring challenge. 12

Con’t 13 The regulatory framework for the private sector entities is still evolving (Telecommunication, financial sectors). This has the potential to negatively impact the competitiveness of organizations; The emerging corporate governance frameworks in Kenya provide a basis for institutionalization of good corporate governance practices. These frameworks are:  Code of Governance for State Corporations;  Code of Governance for the private sector (ICPSK)  Proposed Code of Corporate Governance Practice for Public Listed Companies in Kenya (CMA);  Stewardship Code for Institutional Investors (Exposed) - CMA.

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