Corporate governance in Kenya is improving due to enhanced corporate disclosure and improved regulation according to this year's corporate governance index from Cyton Investments.

Cyton noted that its first index, and accompanying corporate governance analysis, published last year had painted a gloomy picture of Kenyan companies as one where investors had amassed substantial losses amounting to Kshs 257 bn as at May 2016, due to increased cases of corporate governance malpractices. However, this year its analysis is more upbeat following a number of regulatory developments.

The index ranks 50 listed companies, each with a market cap of above Kshs 1.0 bn, using 24 metrics on their corporate governance structure. The average overall score this year rose this year to 65.7%, compared with 61.6% in 2016. The score relating to ethnic diversity rose to 62.1% compared to a score of 59.4% in 2016.

However, the average score on gender diversity declined to 16.4% from 18.3% in 2016. Cyton Investments said this indicated that there remained a lot more to be done in respect of having more female members of Kenyan boards and it believes that full compliance with the Capital Market Authority’s (CMA's) Code of Corporate Governance Practices, which came into effect in March this year, will be key in achieving this.

Cyton said the main areas of analysis for the index are in the (i) board composition, (ii) audit functions, (iii) CEO tenure and evaluation, (iv) remuneration, and (v) transparency. The score is a diffusion index with 50.0% as the base meaning that any score below 50.0% is flagged as having serious corporate governance issues while any score above 50.0% is skewed towards proper governance. However, the variance from 100% gives the risk associated with corporate governance.

As well as the introduction of Kenya's corporate governance code Cyton highlighted that the Kenyan government approved the Financial Bill 2017, which seeks to create the Financial Services Authority, a body that will consolidate and take over the functions of the CMA, Insurance Regulatory Authority (IRA), Retirement Benefits Authority (RBA) and Sacco Societies Regulatory Authority (SASRA). The report said this body will be beneficial to companies as it is expected to lead to increased transparency in the non-bank financial services industry by eliminating regulatory gaps as well as providing a standard approach to corporate governance.

Cyton cited a number of business failures in the past year that it believes have been caused by poor corporate governance and ethics and which it suggested had meant investors had lost over Kshs. 270 bn. Two of these - Chase Bank and Imperial Bank - involved the banking sector. Both of these were put under receivership by the Central Bank of Kenya (CBK).  The CBK has now constituted a board tasked with ensuring the regulator performs a better oversight role of the sector which was welcomed by Cyton.

Cyton also praised the work of the CBK in dealing with Imperial and Chase. CBK had recently invited potential investors to take an equity stake in Chase Bank as part of restructuring plan meant to speed up the recovery of the lender. Cyton said this was the first time that a Kenyan bank in receivership had been reopened, and this would go a long way in restoring investor confidence. It also looks possible that Imperial Bank could also be reopened in the future.

Looking outside the banking sector Cyton said Kenya Airways’ board had hired a new chair to the board to oversee implementation of its turn-around strategy after an audit report revealed massive malpractices in the firm.

Last week Manifest reported that Kenya had adopted a stewardship code for investors in its bid to become a more attractive place for investors to put their money.