Cytonn Investments has released their annual Cytonn Corporate Governance Report – 2018, “Cytonn CGR”, which demonstrated that firms with higher levels of corporate governance, the top 50% in Cytonn CGR, outperformed those with lower levels of corporate governance, the bottom 50% in Cytonn CGR, by 15% when looking at share price performance over the last five-years.
KCB Group, Nairobi Securities Exchange (NSE), and Safaricom tied as the Top 3 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 Kshs. 1.0 billion.
“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% over the last five-years while the bottom 23 companies have had a negative return of 13.0% over the same period, which means that the top 24 firms delivered 15% better returns.,” 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,” continued John. He also pointed out the outstanding improvement in gender diversity to an average of 21.7%, from 17.1% in 2017.
“Corporate governance reporting standards continue to improve in the country. Earlier in the year, the Capital Markets Authority’s Code of Corporate Governance practices came into full effect and we have witnessed 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 these companies made available to us and employed other metrics to rank their 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%. 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%, ranking them at Position 46, from a score of 16.7% and Position 49 in the 2017 Report.
This was due to; increase of board members to an odd number, introduction of a female board member, and better disclosure on board member details, work experience, and remuneration. However, they are still below the 50.0% mark, indicating that they still have governance gaps in their overall structure.
The biggest decliner was ARM Cement, which recorded a decline to a comprehensive score of 58.3%, ranking them at Position 42, from a score of 66.7%, ranking them at Position 22, in the last report. This was due to lack 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:
The top 24 companies in the Cytonn Corporate Governance Report (CGR) have delivered an absolute return of approximately 2.1% over the last 5-years compared to the bottom 23 companies, which have delivered an absolute return of (13.0%) over the last 5-years, meaning that the advantage to better governance delivered 15.1% better returns to shareholders.
Top 24 companies under the ethnic diversity criteria recorded a 5-year absolute return of 1.8% compared to a negative return of 12.9% recorded by the bottom 23 companies. This again indicates that the advantage to better governance delivered 14.7% better returns to shareholders.
Under gender diversity, the top 24 companies delivered a 5-year absolute return of 16.7% compared to a negative return of 29.6% recorded by bottom 23 companies. This metric gave the widest margin with the top companies having outperformed the bottom half by 46.3%.