NAIROBI, KENYA, OCTOBER 16 — Nairobi Security Exchange (NSE) listed firms with higher levels of corporate governance outperformed those with lower levels of corporate governance in share price over the last five-years.
This is according to a market survey by investment firm-Cytonn which has released its annual Cytonn Corporate Governance Report – 2018.
The “Cytonn CGR”, demonstrates that firms with higher levels of corporate governance, the top 50 per cent in Cytonn CGR, outperformed those with lower levels of corporate governance, the bottom 50 per cent in Cytonn CGR, by 15 per cent.
KCB Group, Nairobi Securities Exchange (NSE) and Safaricom tied as the top three companies with best corporate governance practices among listed companies in Kenya.
The ranking is based on 24 metrics that consider different aspects of governance, including board composition, ethnic and gender diversity, board meeting attendance, board independence, remuneration, and overall transparency.
The survey was conducted on 47 companies listed on the Nairobi Securities Exchange with a market capitalization in excess of Ksh1.0 billion.
Kakuzi, Limuru Tea and Kenya Orchards came at the bottom of the list.
“We continue to see a direct and strong correlation between corporate governance and share price performance. Of the 47 companies we analyzed, the top 24 firms have delivered an average return of 2.1 per cent over the last five-years while the bottom 23 companies have had a negative return of 13.0 per cent over the same period, which means that the top 24 firms delivered 15 per cent better return,” said John Ndua, Investment Associate at Cytonn Investments.
“This indicates the importance of strong corporate governance in delivering sustainable and attractive returns to investors,” he added,”compared to last year’s ranking, there was an overall improvement in the comprehensive score, board attendance, proportion of non-executive directors as well as ethnic diversity in the 47 listed companies in our report.”
He also pointed out the outstanding improvement in gender diversity to an average of 21.7 per cent from 17.1 per cent in 2017.
Corporate governance reporting standards have also continued to improve in the country.
Earlier in the year, the Capital Markets Authority’s Code of Corporate Governance practices came into full effect , a move that has led to compliance as companies adopted the provisions of the code in their annual reports for the financial year 2017.
The report, themed ‘Improved Corporate Governance Key to Investor Protection’, analyzed the information the companies made available to Cytonn.
The firm also employed other metrics to rank the listed companies’ corporate governance structure.
“We also acknowledge the integral role that oversight bodies like the Capital Markets Authority and the Central Bank of Kenya have played in ensuring that good corporate governance principles are upheld,” said Derrick Kieya, Investment Analyst at Cytonn Investments.
KCB Group, NSE and Safaricom all tied at the 1st rank, each having attained a comprehensive score of 85.4 per cent.
This was supported by, among others; gender and ethnic diversity in the board composition, a good proportion of independent directors, defined tenures to accommodate rotation, and high level of exposure to of board members to global markets.
The most improved firm in the ranking was Limuru Tea, with a comprehensive score of 41.7 per cent, ranking position 46, from a score of 16.7 per cent per cent and position 49 in 2017.
Cytonn has pegged the improvement to the increase of board members at the firm to an odd number, introduction of a female board member,better disclosure on board member details, work experience and remuneration.
“However, they are still below the 50.0 per cent mark, indicating that they still have governance gaps in their overall structure,” the report notes.
The biggest decliner was ARM Cement, which recorded a decline to a comprehensive score of 58.3 per cent , ranking them at position 42, from a score of 66.7 per cent and position 22 last year.
This was due to lack of correlation between remuneration and earnings, a high shareholding level at the board and evenness of the board.
Across all key metrics, the top 24 companies delivered better returns.