By Elsie Oyoo
Last year, the Unga Group Chief Executive Officer enjoyed a 54 per cent pay rise despite the company suffering a Sh32 million loss. Also, in 2014, remuneration rose by 33 per cent for Kenya Airways directors despite reporting losses in the billions. These quoted companies are not isolated cases, and they have caught the attention of regulators. In response to the harm done to the public through bad governance and in line with global emerging practice, the Attorney General has taken a tough stance on directors’ remuneration by making into law the Companies General (Amendment) Regulations No. 2, 2017 (the “Regulations).
Under the Regulations, all quoted companies are required to disclose each director’s pay pack. These companies should also explain the reasons behind the way their directors are remunerated, specifically showing the link between performance and pay. This disclosure should be done annually in the financial statements within the newly introduced directors’ remuneration report.
The remuneration report in turn should contain specific information and documents as outlined in the Regulations. There are two categories of information to be captured in the remuneration report: information not subject to audit and information subject to audit.
The annual statement, the remuneration policy, information on directors’ terms of service and the report of shareholder voting at past general meetings fall under the information not subject to audit.
The information subject to audit is the details on directors’ salaries, fees, bonuses, expense allowances, non-cash benefits, payments to third parties in respect of a director’s services and compensation payable for loss of office paid to current and past directors in the relevant year. Also included in the latter category are share options, long term incentive schemes and pension schemes which each director enjoys.
The intention behind the Regulations is noble: to better equip stakeholders to get to know the amount of company assets channelled towards remunerating each director, and whether it is justified by commensurate excellence in performance. Nevertheless, the Amendment Regulations will have their gainsayers who will point out shortcomings which have been experienced where similar laws have been enacted in other countries.
One such criticism is the danger that the Regulations may become an ineffective decision-making tool for stakeholders. The remuneration report requires a great amount of detail giving rise to a lengthy document containing both essential and non-essential information. This may make it difficult for shareholders and prospective shareholders to identify and extract the information that will tell them the amount of each director’s remuneration and whether it is based on sound principles.
To achieve the purpose of the Regulations, mitigation measures against this danger should be sought and applied as soon as possible. For example, regulators could issue practice guidelines to ensure that the essential information, the total amount that each director takes home, sufficiently stands out and is easily identifiable.
Another possible criticism is that shareholder voting on directors’ remuneration (say-on-pay) may not be the best tool for addressing issues of the size and structure of directors’ pay. In the US, for instance, executive compensation has on average risen since 2010 despite the enactment of say-on-pay legislation.
This criticism overlooks the fact that there is now a channel for shareholder feedback on directors’ pay where there was none. Moreover, even though some directors may be unfazed in their determination to pay themselves more or without reference to company performance, they will be kept on their toes by the disclosure requirement and be brought to the court of public opinion, which can be unforgiving.
The Regulations remain an eminently positive development in corporate governance in Kenya. They have brought the question on directors’ pay to the fore. Exorbitant pay, in disregard for principles of governance, be it to members of Parliament or to company directors, raises eyebrows where 42 per cent of the population lives on less than $1.90 (Sh200) a day. The Regulations have also shown that regulators are ready to crack the whip on bad corporate governance. They will thus act as a deterrent to some directors who were thinking of compromising stakeholder value by paying themselves better with no sterling performance to show for it.
Additionally, shareholders and directors have a chance to ride on the wave of these Regulations to take steps in achieving better practices in directors’ pay. While voter say-on-pay under the Regulations is non-binding, the Regulations do give a window for shareholders to influence decisions on pay. Led by institutional investors, shareholders can organise themselves to take a firm stand on directors’ pay to benefit the company. They can also oblige directors to engage them more in decision making regarding pay and other issues prior to general meetings.
Using the Regulations as a guide, directors can also query their approach to remuneration disclosure. Instead of a defensive stand, they can take a proactive stand and position themselves as leaders in governance. This would resonate with global trends in corporate governance where the threshold is constantly being raised. Directors can use the Regulations to propel their companies to the next level.^