Legal guide for company directors and CEOs in Kenya

Because environmental, social and governance (ESG) is such an increasing focal point of good corporate governance, we address ESG duties and responsibilities first. For more general duties and responsibilities of directors and CEOs, please scroll down the page or use the navigator to jump to the relevant section. 

Because environmental, social and governance (ESG) is such an increasing focal point of good corporate governance, we address ESG duties and responsibilities first. For more general duties and responsibilities of directors and CEOs, please scroll down the page or use the navigator to jump to the relevant section. 

Generally, the Companies Act requires directors of listed companies to include a business review in their directors’ reports with information about, among other things, environmental matters (including the impact of the business of the company on the environment), the employees of the company, and social and community issues, including information on any policies of the company in relation to those matters and the effectiveness of those policies. 

More specifically, the Code of Governance Practices for Issuers of Securities to the Public (the Code) issued by the Capital Markets Authority (the Authority) in 2015 contains guidance on ESG responsibilities and reporting. Under the Code, a board of directors is obligated to promote sustainability by ensuring that the board has formal strategies in place to promote the sustainability of a company. A company is required to give attention to the ESG aspects of the business which underpin sustainability. The Code applies to all companies that issue both debt and equity securities to the public regardless of whether or not they are listed. The Code requires companies to put in place environmental, social and governance (ESG) policies and proposes public disclosures of the ESG performance in annual reports and the companies’ website.

For state corporations, the Mwongozo Code of Corporate Governance requires boards of directors to align their organisation’s strategy to long term goals on sustainability so as not to compromise the ability of future generations to meet their own needs. A state corporation’s board is also obliged to monitor the organisation's performance and ensure sustainability. 

In the finance sector, the Kenya Bankers Association Sustainable Finance Initiative (SFI) 2015 outlines principles governing sustainability and sustainable finance while detailing procedures encouraged to be implemented by finance sector boards and management in order to realise these principles. 

Additionally, the regulator of banking and financial institutions, the Central Bank of Kenya (CBK) developed a Guidance in Climate Related Risk Management (GCRRM) in 2021. Under this Guidance, banking and financial institution boards of directors and senior management are required to formulate and implement climate-related financial risk management strategies, policies, procedures, guidelines and set minimum standards for their institutions. The boards have the primary responsibility to oversee effective management of climate-related risks of  institutions. The boards are also required to consider climate-related risks when developing their overall strategy, business objectives and risk management framework and to exercise effective oversight on their implementation. 

The ESG Disclosures Guidance Manual, published by the Nairobi Securities Exchange (NSE) in 2021, provides that the board, on behalf of shareholders and other stakeholders is expected to ensure that the long-term sustainability of the organisation is assured and is demonstrated through senior management’s decisions on operational aspects of the business. The board holds the CEO  and senior management to account on corporate sustainability performance as a fiduciary responsibility to shareholders. To facilitate integration of ESG into strategy, operations and performance management, the board of listed companies will form a committee of the board that oversees sustainability matters in the organisation, including the ESG reporting process. The board will also task the CEO to appoint and resource a focal point for sustainability within the organisation, otherwise referred to as the Sustainability Manager who is the focal point and primary contact for the ESG reporting exercise. 

Under the Principles for Corporate Governance in Kenya, directors are required to monitor the social responsibilities of the company and promulgate policies consistent with the company’s legitimate interests and good business practices. 

In particular, the board of directors should:

• promote fair, just and equitable employment policies;
• promote and be sensitive to the preservation and protection of the natural environment;
• be sensitive to and conscious of gender interests and concerns;
• promote and protect the rights of children and other vulnerable groups; and
• enhance and promote the rights and participation of host communities. 

Additionally, one of the principles of good corporate governance is social and environmental responsibility which provides that the board should recognize that it is in the enlightened self-interest of the corporation to operate within the mandate entrusted to it by the society and shoulder its social responsibility. The appreciation is that a corporation does not fulfil its social responsibility by short-changing beneficiaries or customers, exploiting its labour, polluting the environment, failing to conserve resources, neglecting the needs of the local community, evading taxation or engaging in other antisocial practices. 

In 2023, the Authority published on its website a specific format to be used by listed companies for integrated reporting and ESG reporting.  

In November 2021, the NSE published the ESG Disclosure Guidance Manual (the Manual)l following investor demand for comprehensive ESG disclosures and reporting and to improve and standardize ESG disclosures and reporting by entities listed on the NSE. The Manual places the responsibility directly on boards of listed companies to monitor an organisation’s performance and to incorporate ESG in their operations. To this end, the Manual recommends the forming of a sustainability committee to oversee sustainability matters in an organisation including the ESG reporting process. Non-listed companies have also been using the Manual as a guide to voluntarily put in place internal ESG policies to ensure their businesses are investor ready. Several companies in Kenya are also choosing to implement global industry best practice and opting into standards and reporting indexes such as the IFC Performance Standards, Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI). 

The Guidance on Climate Related Risk Management (the Guidance) published in 2021 by the CBK stipulates that boards of regulated institutions have the primary responsibility to oversee effective management of climate-related risks. 

The Manual and the Guidance together with the obligations set out in the Companies Act place set out enhanced responsibility on the directors of companies to report on ESG matters and ensure that ESG is integrated into companies’ general operations.

Directors are required to work continually towards the introduction of integrated reporting. ‘Integrated reporting’ is defined as a process that brings together the material information about a company’s strategy, governance, performance and prospects in such a way that reflects the commercial, social and environmental context within which it operates. It provides a clear and concise representation of how a company demonstrates stewardship and how it creates value, now and in the future. Integrated reporting combines the most material elements of information currently reported in separate reporting strands (financial, management guidelines, governance and remuneration and sustainability) into a coherent whole. 

Directors are required to consider not only the financial performance but also the impact of the company’s operations on society and the environment. The board is not just responsible for the company’s financial bottom line, but for the company’s performance in respect of its triple bottom line. The ‘triple bottom line approach’ looks beyond the company’s financial performance by taking into account the social and environmental performance of the company. This requires that the board reports to its shareholders and other stakeholders on the company’s economic, social and environmental performance. 

Finally, the board is required to ensure that the company discloses its environmental, social and governance policies and implementation thereof in its annual report and website. 

ESG reporting is largely voluntary particularly for non-listed companies. There is no universal reporting standard to be used as a guide by companies when reporting on ESG matters. Consequently, the regulators in Kenya have adopted a "comply or explain" approach, particularly in areas where ESG topics lack substantive legal frameworks. This makes it challenging to enforce ESG principles, which are often labeled as "recommended" or considered best practices in Kenya. The potential drawback to this situation is that companies end up greenwashing/misrepresenting the credentials of their products, services and ESG compliance levels with a view to attract investors or boost their reputation. 

The board of directors is unitary, typically consisting of executive and non-executive directors. The Companies Act No. 17 of 2015 (the Companies Act) does not make a distinction between a management (executive) and supervisory (non-executive) board, and in practice the board acts as one.

Ordinarily, non-executive directors enhance the independence and objectivity of the board and provide the necessary checks and balances in the board by contributing independent views to matters under consideration. Board charters of several companies mandate non-executive directors to take a supervisory role by reviewing the executive directors’ and other senior management members’ performance, compensation and succession planning. 

The Companies Act imposes the following restrictions on who can be appointed as a director: 

• A person is required to be at least eighteen years of age
• A company may have natural and corporate persons as directors but must have at least one director who is a natural person

There are no restrictions as to the nationality of directors

No special qualifications or expertise are required for appointment as a director under the Companies Act. This notwithstanding, companies will typically require their boards to ensure that they comprise a diverse mix of skills and expertise critical for effective oversight of the management of the company’s affairs and that only those persons with appropriate professional skills, training and background are appointed as directors. 

The Insolvency Act No.18 of 2015 (the “Insolvency Act”) and the Companies Act prescribe instances where a person may be disqualified from being or acting as a director of a company. These             include: 

• conviction of an offence relating to the promotion, formation, management, liquidation or administration of a company
• conviction of an offence involving failure to lodge returns or other documents with the Registrar of Companies
• where a person is found to have participated in fraudulent trading by a company in liquidation
• if the person was a director of a company which became insolvent at the time he/she was a director of the company
• if the person is an undischarged bankrupt
• in the case of a foreigner, the person is disqualified under the law of a country or territory outside Kenya because of misconduct, incompetence or mental or physical incapacity. 

Generally, the first directors of the company are appointed in writing by the subscribers to the company’s memorandum of association. 

Thereafter, a person willing to act as a director (upon signing a consent form) may be appointed to be a director by ordinary resolution or by a decision of the directors as provided by the company’s articles of association. A private company is required to have at least 1 director or such higher number as may be prescribed in the articles of association of the company. Where there is more than 1 director appointed, at least one of them must be a natural person. There is no maximum number of directors unless a maximum is prescribed by the articles of association. The Companies Act does not prescribe a term of office; if desired, the company may prescribe the term of office for its directors in its articles of association. 

A parent undertaking has the right to appoint or remove a majority of the board of directors holding a majority of the voting rights at meetings of the board on all or substantially all matters in a subsidiary undertaking. 

An administrator may also appoint and remove a director from office where the company is under administration. 

The company must notify the Registrar of Companies of the appointment of a director within 14 days after the appointment. 

Section 139 of the Companies Act provides that a director may be removed from office by ordinary resolution of the company at a meeting before the end of the director’s period of office, subject to the director’s right to protest against removal. A special notice of the resolution must be sent to the members of the company and the delinquent director. Within twenty-one days after the notice is given, the director may make representations in writing to the company with respect to the motion and request that the members of the company be notified of the representations. A copy of the representations is sent to every member of the company to whom notice of the meeting is sent. If there is not sufficient time to make written representations, the director may orally require the representations to be read out at the meeting. A resolution to remove the director is then passed and a new director may be appointed at the meeting to fill the vacant position. 

A company’s articles may also provide that a director may be removed from office on the occurrence of certain events, such as bankruptcy, prohibition under the Companies Act or any other law, a mental disorder, resignation or failure to attend three consecutive meetings of the board without reasonable cause and consent of the board. 

The company must notify the Registrar of Companies of the cessation of a director to hold appointment as a director within 14 days after cessation to hold appointment. 

The Companies Act provides that the power of a director to bind the company is free of any limitation and a person dealing with the company in good faith is not bound to enquire into any limitation on the power of the director to bind the company. As such, a director will be regarded by third parties as having apparent authority to represent the company. The company will therefore be bound by contracts and agreements entered into by the directors on its behalf even though the director in question may be acting beyond the scope of his/her authority.

However, freedom from limitation of the directors’ powers does not affect the right of a member of the company to bring proceedings to restrain the doing of an act that is beyond the powers of the directors unless such an act is done in fulfilment of a legal obligation arising from a previous act of the company. A derivative claim by a member may also be brought against a director in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company. 

A company has wide discretion to determine the operation of the board. This may be contained in the company’s articles of association or in a board charter. The Companies Act requires a notice of a meeting to be issued to all directors of a company. Generally, the articles of companies may provide for at least 7 days’ notice (inclusive of the date of service and the date of the meeting) of all board meetings be given to all directors. A company may conduct its meetings by conference, telephone facilities or any other telecommunications systems provided that any resolutions passed will only be valid if documented in writing and signed. 

A director is also allowed to appoint an alternate to act in his/her place during meetings of the board in his/her absence. An alternate is in all respects regarded as a director and is entitled to exercise all the rights and powers of the director and to attend and vote at meetings of the board at which the alternate’s appointer is not personally present and would have been entitled to vote if the appointer was present. 

The board may also discharge any of its responsibilities through board committees appointed from amongst its members subject to the applicable laws and may delegate any of its powers to the committees. Any committee formed must conform to any regulations that may be imposed on it by the board while exercising the powers so delegated. 

A director is not considered an employee of the company by virtue of his/her appointment as a director. The company’s articles ordinarily entitle a director to remuneration for his/her services as the company may determine and to reimbursement by the company in respect of travel, hotel and incidental expenses reasonably incurred while engaged in the business of the company. Any director who performs special or extraordinary services on behalf of the company may be paid such extra remuneration, whether by way of lump sum, salary, commission or percentage of profits, as the board may determine. 

A director acting as a managing director has a contractual relationship with the company and is entitled to receive remuneration, whether by way of salary, commission, participation in profits or otherwise, as the board may determine and either in addition to or in lieu of the director’s remuneration as a director as the company’s articles may provide. 

A director may also hold any other office or position of profit under the company (other than the office of auditor and, if the company has only one director, the office of company secretary) in conjunction with the office of director provided that the director has declared the nature and extent of his/her interest (as discussed below). 

The Companies Act imposes a duty to avoid a direct or indirect interest that conflicts or may conflict with the interests of the company, particularly with regard to exploitation of any property; confidential information of the company; the director’s position in the company; or opportunities in or for the company that the director becomes aware of while a director. 

The Companies Act further provides that the duty applies regardless of whether the company could take advantage of the property, confidential information or opportunity. The duty is not infringed if the matter has been authorised by the directors, so long as nothing in the company’s constitution invalidates the giving of such an authorisation. 

The equity-derived “no conflict” rule precludes a director, in his/her fiduciary capacity, from entering into engagements in which s/he has, or might have personal interest which conflicts with the interests of those whom s/he is bound to protect, without their consent. 

The duty to avoid conflicts of interest extends to the duty not to accept benefits from third parties and the duty to declare an interest in a proposed or existing transaction or arrangement entered into by the company. However, a director is not obliged to communicate every opportunity which s/he becomes aware of to the company, rather, he or she is obliged to disclose to the company where s/he wishes to exploit an opportunity that would conflict with the interests of the company and obtain consent from the company. 

Ordinarily, a director with a material interest is restricted from voting in respect of the transaction, arrangement or contract in which he/she is so interested or being counted for quorum purposes in respect of the transaction, arrangement or contract unless such restriction is relaxed or suspended by the members of the company. 

Section 146 (9) of the Companies Act provides that an arrangement entered into by a company in contravention of this duty and any transaction entered into in accordance with the arrangement, whether by the company or any other person, is voidable at the instance of the company, unless:

1. restitution of any money or other asset that was the subject matter of the arrangement or transaction is no longer possible;
2. the company has been indemnified by other persons for the loss or damage suffered by it; or
3. rights acquired in good faith, for value and without actual notice of the contravention by a person who is not a party to the arrangement or transaction would be affected by the avoidance. 

Whether or not the arrangement or any such transaction has been avoided, a director or any person connected with a director of the company is liable:

1. to account to the company for any gain that the director or person has made (directly or indirectly) as a result of the arrangement or transaction; and
2. jointly and severally with any other person so liable, to indemnify the company for any loss or damage resulting from the arrangement or transaction. 

A director is subject to the duty to avoid a conflict of interest even after the cessation of their directorship.

Other general duties imposed by the Companies Act include: 

• duty to act within powers, requiring a director to act in accordance with the constitution of the 
• duty to promote the success of the company by having regard to:
  • the long-term consequences of any decision of the directors
  • the interests of the employees of the company
  • the need to foster the company’s business relationships with suppliers, customers and others
  • the impact of the operations of the company on the community and the environment the desirability of the company maintaining a reputation for high standards of business conduct, and
  • the need to act fairly as between the directors and the members of the company duty to exercise independent judgment
• duty to exercise reasonable care, skill and diligence exercisable by a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions performed by the director in relation to the company and the general knowledge, skill and experience that the director has
• duty not to accept benefits from third parties, and
• duty to declare any interest in proposed or existing transactions or arrangements. 

The general duties specified under the Companies Act are owed by a director of a company to the company itself. 

When a company is trading solvent, director’s duties are owed solely to the company. However, under common law, when the directors know or ought to know that the company is insolvent or likely to become insolvent, the directors’ duties are extended significantly towards the creditors and as such, they must take into account the interests of all the creditors. The directors must do all that is legally possible to prevent the company from being placed in insolvent liquidation. The directors are required under the Insolvency Act to avoid wrongful and fraudulent trading and to ensure that the creditors are adequately informed of the true financial position of the company. 

In the event of liquidation of a company, all the powers of the directors cease on the appointment of a liquidator, except so far as the liquidation committee, or if there is no such committee, the creditors, sanction their continuance (Section 411 of the Insolvency Act). However, the directors are expected to co-operate with the liquidators i.e. by providing a statement of the company affairs to ensure that the liquidation proceedings are managed smoothly. 

Generally,  since a company and its director(s) are separate entities, a director has no personal liability on behalf of the company. However, a breach of directors’ duties can lead to personal liability in certain circumstances. 

Liability in insolvency

Under Section 386 of the Insolvency Act, a director or former director who allows a company to trade while insolvent is personally liable to contribute to the company’s assets to the extent necessary to satisfy the company’s insufficiency to pay its debts. 

Liability for fraudulent conduct of business

A director may also be held personally liable, without any limitation of liability, for all or any of the debts or other liabilities of the company if he or she was knowingly a party to  wrongful and fraudulent trading, in which case they would be  compelled to contribute to the company’s assets upon liquidation. 

Liability upon disqualification

Section 224 of the Companies Act provides that a person who serves whilst disqualified to act as a director becomes personally liable for the debts or other liabilities of the company as are incurred at a time when that person was involved in the management of the company. 

Liability in relation to the various records to be maintained by the company

Every company is required to maintain certain records including without limitation, a register of members and a register of directors. Failure to comply with this requirement is an offence and attracts liability for the company, and each officer of the company who is in default. 

Liability in relation to Directors Reports

A director of a company is liable to compensate the company for any loss suffered by the company as a result of: any untrue or misleading statement in the company’s financial statements and reports (the Documents); or the omission from the Documents of anything required to be included in them only if the director knew (or ought reasonably to have known) the statement to be untrue or misleading (or was reckless as to whether it was untrue or misleading); or the omission to be dishonest concealment of a material fact. 

Liability for breach of fiduciary duties

Directors of a company may be held jointly and severally liable for any loss, damage or costs suffered by the company as a result of a breach of such director’s fiduciary duty including failure to disclose (i) any secret profits made or (ii) misappropriation of company funds. The directors may be required to restore the value of the misapplied property to the company. 

Under Section 504 of the Insolvency Act, if a director is found to have misapplied or retained, or become accountable for, money or property of the company or committed misfeasance or a breach of any fiduciary or other duty in relation to the company, such a director may be compelled by the High Court of Kenya to repay, restore or account for the money or property or any part of it, with interest at such rate as the Court considers appropriate or to contribute such amount to the company’s assets as compensation for the misfeasance, breach of fiduciary or other duty as the Court considers fair and reasonable.

Liability for company's Contracts

Where a contract entered into by a director on behalf of a company is voided, such director would be liable: to account to the company for any gain s/he may have made from the transaction (whether directly or indirectly); to indemnify the company for any loss or damage resulting from the transaction and a restitution of any money or other asset which was the subject matter of the transaction. A contract entered into by acompany may be voided: where the director(s) executing the contract exceed their authority; where fraud on the part of the director can be established; or where such a contract was not entered into in the company’s interest. 

Liability for Tax

Where an offence under the Income Tax Act (Chapter 470, Laws of Kenya)s has been committed by a body corporate, every person who at the time of the commission of the offence was a director of the body corporate, or was acting or purporting to act in that capacity, shall also be guilty of the offence unless s/he proves to the satisfaction of the court that the offence was committed without his/her consent or knowledge and that s/he exercised all the diligence to prevent the commission of the offence that he ought to have exercised having regard to the nature of his/her functions in that capacity and in all the circumstances. 

Consequences of breach of duties 

The consequences of breach (or threatened breach) of the general duties of directors set out in the Companies Act are the same as would apply if the corresponding common law rule or equitable principle applied. 

A director may be disqualified from being or acting as a director in the promotion, formation or management of the company or any other company for a prescribed period of time. The Companies Act and the Insolvency Act prescribe a disqualification period not exceeding 5 years. 

Directors also risk civil liability and/or criminal prosecution for breach of their duties as directors. 

There is also a possibility of demands being made under guarantees and loss of assets where the directors have issued guarantees or offered personal assets as collateral in relation to the debts of the company. 

Indemnity: The Companies Act generally prohibits any provision (either in a company’s constitution, contract, scheme or arrangement or any other document to which the company is a party) by which a company indemnifies a director of the company or of an associated company against liability attaching to the director in connection with any negligence, default, breach of duty or trust in relation to the company. However, under Section 196 of the Companies Act, a company may indemnify a director of a company out of the company’s assets against liability incurred by the director to a person other than the company or an associated company in connection with any negligence, default, breach of duty or breach of trust in relation to the company or associated company. This exemption does not cover any liability incurred by the director in defending civil or criminal proceedings against the director. 

Insurance: In practice, the directors of a company may decide to purchase and maintain insurance at the expense of the company for a director of a company against any liability attaching to the director in connection with any negligence, default, breach of duty or breach of trust (except for fraud) in relation to the company or any liability incurred by the director in defending any proceedings taken against the director for any negligence, default, breach of duty or breach of trust (including fraud) in relation to the company. 

Mitigation of risk: To mitigate against risk of liability, it is advisable for directors to seek appropriate professional advice on the risks and options available to the company. Directors should also ensure that they are well informed of the affairs of the company at all times.