ESG (Environmental, Social and Governance) and corporate governance are becoming increasingly important considerations for investors and companies in Kenya, Africa and globally. These factors can have a significant impact on an organization’s performance and long-term sustainability, and as such, it is important for investors and companies to understand how to assess an organization’s management and board of directors in relation to ESG and corporate governance.
When assessing an organizations management and board of directors, investors should first look at the organization’s ESG policies and practices. This includes understanding the organizations’ approach to environmental issues such as climate change and resource management, as well as its approach to social issues such as labor practices, human rights, and community engagement. Investors should also look for evidence of the organizations’ commitment to transparency and reporting on its ESG performance.
In Kenya and Africa, organizations are expected to take into account the social, environmental and ethical issues that affect the communities they operate in. This is becoming increasingly important, as the local communities are becoming more aware of the negative impacts that companies can have on the environment and on the lives of the people living in the area. Therefore, investors should pay attention to the organizations’ approach in engaging with the local communities, as well as its initiatives that benefit the local communities.
In Kenya, the Capital Markets Authority (CMA) plays a key role in promoting good corporate governance. The CMA has issued a number of guidelines and regulations aimed at improving the transparency and accountability of companies listed on the Nairobi Securities Exchange (NSE). For example, the CMA requires companies to disclose information on their management and board of directors, including their qualifications, experience, and remuneration. This enables investors to assess the quality of a company’s management and board of directors and to make informed decisions about whether to invest in the company.
Composition and performance of the organizations board of directors is another important aspect of corporate governance. Investors should assess the board’s independence, diversity, and qualifications, as well as the effectiveness of its oversight of the organizations’ management. Many organizations are still struggling to have a diverse board (although we have seen a significant change in the recent years), and investors should pay attention to the organizations’ efforts to increase diversity on its board of directors, as diversity on the board can bring different perspectives and skills, which can lead to better decision making and ultimately better performance of the organization.
Investors should also pay attention to the organizations’ remuneration policies and practices, in particular, the pay ratio between the CEO and the average employee, as well as the organizations’ approach to performance-based incentives. This is important as it can give an indication of the organizations’ commitment to fairness and equity, which can be a key factor in promoting long-term sustainability.
In addition to assessing an organizations’ management and board of directors, investors should also consider the organizations’ broader corporate governance framework, including its approach to risk management, internal controls, and shareholder engagement. Investors should also pay attention to the organizations’ compliance with laws and regulations, as well as its approach to addressing any potential violations or misconduct.
I went ahead and looked at ESG Investing, Corporate Governance rankings, Board diversity, Executive pay, and shareholder activism in Kenya, Africa and globally.
ESG investing:
- In Kenya, the total value of ESG-compliant funds grew from KES 191 million in 2017 to KES 2.5 billion in 2019 (Nairobi Securities Exchange).
- In Africa, 82% of impact investors consider ESG factors in their investment decisions (Global Impact Investing Network).
- Globally, sustainable investment assets reached $35.3 trillion at the start of 2020, a 15% increase from 2018 (Global Sustainable Investment Alliance).
Corporate governance rankings:
- In the 2021 Ibrahim Index of African Governance, Kenya ranked 15th out of 54 countries in the “Business Environment” category, which includes measures of corporate governance.
- The African Corporate Governance Network’s 2020 report on corporate governance in Africa found that South Africa, Mauritius, and Kenya had the highest average scores across 14 indicators.
- In the 2021 World Bank “Ease of Doing Business” report, Kenya ranked 96th for “Protecting Minority Investors”, while New Zealand, Singapore, and Hong Kong were the top three countries.
Board diversity:
- In Kenya, women hold 21% of board positions in listed companies, up from 19% in 2019 (Kenya Institute of Management).
- In Africa, the average share of women on boards was 16.3%, ranging from 4.4% in Mali to 35.9% in South Africa (African Development Bank).
- Globally, women held 25.5% of board seats in companies in the MSCI World Index in 2020, up from 19.2% in 2015 (MSCI).
Executive pay:
- In Kenya-listed companies, the average CEO-to-worker pay ratio was 19:1 in 2020 (Kenya Institute of Management).
- In Africa, the average CEO-to-worker pay ratio was 34:1, ranging from 9:1 in Tunisia to 212:1 in South Africa (African Corporate Governance Network).
- In the US, the CEO-to-worker pay ratio was 320:1 in 2019 (Economic Policy Institute).
Shareholder activism:
- In Kenya, there were 15 shareholder resolutions related to ESG issues filed in 2020, up from 8 in 2019 (Center for Financial Accountability).
- In South Africa, shareholder activism was more prevalent than in other African countries, with 67% of companies reporting at least one shareholder proposal in the previous three years (African Corporate Governance Network).
- Globally, shareholder activism has increased in recent years, with 2020 being a record year for the number of campaigns launched (Conference Board).
ESG and corporate governance are becoming increasingly important considerations for investors and organizations in Kenya and Africa. When assessing an organization’s management and board of directors, investors should pay attention to the organization’s ESG policies and practices, its approach to engaging with the local communities, the diversity, and qualifications of its board of directors, its remuneration policies and practices, as well as its broader corporate governance framework. By taking these factors into consideration, investors can gain a better understanding of an organization’s long-term sustainability and potential performance.