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The Nairobi Stock Exchange trading floor. The World Bank report says East Africa’s largest economy has some of the weakest investor protection laws that earned it position 93 out of the 183 countries surveyed. Photo/FILE
Kenyans who have invested in public companies stand a higher risk of losing their wealth in fraudulent transactions initiated by directors than their counterparts in other parts of the world, a global report on the state of corporate governance has said.
The World Bank report says East Africa’s largest economy has some of the weakest investor protection laws that earned it position 93 out of the 183 countries surveyed.
In East Africa, Kenya stands with neighbouring Tanzania as countries with weak investor protection rules — a distant second to Rwanda that is ranked as the world’s 28th most secure place for investors.
Weakest protection
Uganda is ranked at position 132 while Burundi, at number 154, offers investors the weakest protection in East Africa.
Kenya’s poor ranking is mainly linked to weaknesses in disclosure and approval of transactions as well as the ability of shareholders to sue directors for damages. The country scored three out of the 10 possible points for the degree to which directors provide investors with information before seeking their approval for impending transactions.
Most companies only provide shareholders with minimum information, making their participation in approval of transactions ill-informed and ultimately merely ceremonial.
Low level of disclosure means that directors of Kenyan companies can perform a higher number of material transactions that would in other countries require shareholder approval. It also makes it difficult to hold the directors accountable for their actions in a court of law.
The World Bank says Kenya lacks clear rules on the liability of directors, especially in the case of related party transactions.
The survey found that 37 economies out of the 183 surveyed do not clearly regulate the liability of directors while “103 other economies have rules on the liability of directors, but with big loopholes”.
Kenya, however, scored top marks — 10 out of 10 — on access by shareholders to documents and other evidence for trial, meaning that shareholders are able to gather and present relevant information to the courts in the event of a trial.
In East Africa, Rwanda is ranked as the country with the most stringent requirements for disclosure and approval of transactions, which earned it a score of seven out of 10.
Shareholders’ ability to sue directors for damages is also strong, earning the country a score of nine out of 10 but is weak on access to documents and other evidence for trial with a score of three out of 10.
The Doing Business 2011 survey says the strength of investor index in East Africa is highest in Rwanda at 6.3 out of 10 compared to Kenya and Tanzania’s five. Uganda and Burundi’s have the lowest scores at four and 3.3 respectively.
The findings have bigger implications for investors because stricter corporate governance rules that favour minority shareholders and make information available affect a company’s overall performance.
“Legal provisions requiring disclosure and access to information allow minority investors to monitor the activities of companies and preserve firm value,” the World Bank says.
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