The extent of compliance with capital market authority's Guidelines on corporate governance practices among Companies listed at Nairobi stock exchange"

Abstract

"Everywhere shareholders are re-examining their relationships with company bosses what is known as their system of 'Corporate Governance. ' Every country has its own, distinct brand of Corporate Governance, reflecting its legal, regulatory and tax regimes ... The problem of how to make bosses accountable has been around ever since the public limited company was invented in the ]ljh century, for the first time separating the owners of firms from the managers who run them ,no Corporate Governance: Watching the Boss," THE ECONOMIST, 2002 Separation of ownership and control is an inevitable result of the scale modem industrial enterprises. Shareholders are still mostly weak and passive. In the conventional view shareholders passivity is inescapable. Modem firms have grown so large that they must rely on many shareholders for capital. The shareholders then face severe "collective actions" problems in monitoring the managers' actions. Each shareholder owns a small fraction of a companies stock and he receives only a fraction of the benefits of monitoring but must bear the full cost of his own monitoring efforts. Thus passivity serves each shareholder selfinterest even if monitoring promises gains to the shareholders as a group. Between the shareholders and management is the Board of directors. The directors are expected to exercise a proactive oversight on management. However directors have been accused of being passive; see no proble~s; ask no tough questions; owe their loyalty to Chief Executive Officer; have conflict of interest because of business ties with the company or simply do not work very hard. (Jensen & Meckling 19!f3, Black 1998) Directors' independence is invaluable. The share holders can increase company value by appointing a majority of independent directors, insisting that directors own significant equity stakes and installing nominating and selecting committees composed of independent directors. However, since most shareholders own a small fraction of the company's stock, their capacity to influence a decision against the wishes of the management is low. To cure this malaise corporate governance regulations have evolved principally to empower the board of directors in its supervisory role over management (Black, 1998). Capital Market Authority is the regulatory body charged with the responsibility of regulating companies listed in Nairobi Stock Exchange. In 2002, the Authority published a code of corporate governance guidelines for observance by public quoted companies. The VB code has not been enshrined into law and compliance with its key provisions is entirely voluntary. The regulator has adopted non-prescriptive mode of "comply or explain", to enforce compliance. Though the necessity of the guidelines is not in dispute, it is a moot issue whether the mode of enforcement is adequate. This study, which sought to determine the extent of compliance with the regulations among companies listed at Nairobi stock exchange, finds high extent of compliance therefore supporting the enforcement criteria. However the impact of the compliance on board oversight, company performance among others needs to be investigated.