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Firms in breach of governance code face probe

Martin Mwita @MwitaMartin

The Capital Markets Authority (CMA) is probing 10 listed companies trading at the Nairobi Securities Exchange (NSE) for breaching the Code of Corporate Governance Practices on disclosure and adherence to good corporate governance practices.

The latest assessment by the regulator revealed that at least 17 companies are yet to fully commit to good corporate governance, with CMA saying those who breach reporting standards will not be spared.

CMA is keen to tighten the noose on corporate governance, where poor corporate practices and management has been linked to the winding up of some companies, with a sizable number posting dismal performance.

The CMA- Corporate Governance Report of issuers of securities to the public in Kenya shows 17 companies need improvement on commitment to good governance.

Only 56 issuers of securities to the public in 2017/18 complied, with the 10 companies failing to provide properly compiled reports.

“The authority is considering taking appropriate enforcement action against the aforementioned issuers for violating continuous reporting,” the regulator warned.

“This is a mandatory regulatory requirement. Appropriate action will be taken against those who did not file or compile reports,” CMA chief executive Paul Muthaura told People Daily on telephone, though he declined to reveal the action the regulator will be taking, saying the matter was still under investigation.

According to Muthaura, transparency and disclosure are crucial for market-based monitoring of companies and are central to a shareholder’s ability to exercise his or her ownership rights.

Maintaining confidence

Disclosure is also a powerful tool for influencing companies and protecting investors, the regulator notes saying it can help to attract capital and maintain confidence in the markets.

Weak disclosure can contribute to unethical behaviour, weakening of market integrity and loss of investor confidence, according to the regulator.

“Insufficient or unclear information may hamper ability of markets to function, increase cost of capital and result in poor resource allocation,” CMA says in its code. There are 62 listed companies and five corporate bonds issuers.

Of the companies that complied, 10 are the best performers, eight received a ‘good’ rating while 21 fell under the fair category. The assessment was majorly based on the availability of company information to the public.

Based on previous action, managers of companies who breach the code of conduct, which include transparency and disclosure, face stiff penalties including prosecution.

Previous cases

An example is last year’s move by CMA to take administrative action against the National Bank of Kenya Board members and former senior managers who served at the bank as at December 31, 2015, for alleged misrepresentation of financial statements and embezzlement of funds.

CMA also recommended to the Office of the Director of Public Prosecutions, the prosecution of some of the senior managers and further criminal investigations of additional individuals.

The latest developments come at the back of last year’s depressed performance where at least 12 listed firms issued profit warnings, six companies posted huge profit drops while a number sunk into losses.

ARM Cement and Deacons East Africa were those placed under administration as a majority of companies complained of a “tough business environment.” CMA says that good corporate governance highly contributes to an organisation’s good performance.

“Research and practice have undoubtedly confirmed the importance, value, and contribution of good corporate governance to an organisation’s continued existence (sustainability), profitability, growth and business prospects,” the regulator says in its report.

The report by CMA comes after it conducted the evaluation of the first set of regulatory reports submitted in accordance with the Code of Corporate Governance Practices for Issuers of Securities to the Public, 2015 (the Code), which became effective in March 2017.

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