Capital Markets Authority overhaul of board rules and a sweeping new ESG code signal that governance failures will now be treated as balance sheet risk, not reputational noise.
Kenya's capital markets are worth about Sh3.88 trillion ($29.9 billion), having grown more than 26 percent since January.
Behind the rally is a quieter but more significant development: the CMA has overhauled the rules governing corporate boards and introduced a sweeping Environmental, Social and Governance (ESG) code, redefining governance as a financial risk rather than a reputational concern.
The CMA has approved new corporate governance regulations for market intermediaries, replacing a framework that has guided brokers, fund managers and investment banks since 2011. The reforms are aimed at preventing boards from losing institutional memory through mass retirements.
Under the new rules, no more than one-third of directors may leave at the same time, ensuring staggered transitions and greater continuity.
Boards must also maintain documented succession plans for chairpersons, committee heads and chief executives, with nomination committees reviewing them regularly before board approval.
Alongside these regulations is a draft ESG Code, currently under public consultation, which updates the 2015 Code of Corporate Governance for listed companies. Rather than treating sustainability as a standalone topic, the draft integrates ESG responsibilities into board oversight, risk management and disclosure requirements, making sustainability a core governance obligation.
The draft introduces stricter governance standards. Independent non-executive directors must comprise at least one-third of every board, with best practice recommending half. Directors of listed firms will be limited to three concurrent board positions, while chairpersons may serve on only two boards.
External auditors must rotate every six to nine years, and governance audits conducted by accredited professionals will become mandatory every two years, with findings published in annual reports.
Perhaps the most significant change is the treatment of climate risk. Boards will be required to review climate-related scenario analyses at least once every two years and assess whether business models remain resilient under different transition pathways. Climate risks must be incorporated into enterprise risk registers alongside financial and operational risks.
Executive remuneration will also face closer scrutiny, with variable pay linked to both financial and sustainability performance, supported by clawback provisions where governance failures occur.
The code assigns boards explicit responsibility for sustainability oversight and encourages recruitment of directors with ESG expertise.
Companies will have one year after the code is gazetted to comply with mandatory provisions or publicly explain delays and provide corrective timelines.
The reforms come as Kenya's capital markets gather momentum, with stronger equity performance and renewed investor confidence.
For regulators and investors alike, the message is clear: credible markets depend not only on valuations, but also on resilient, accountable boardrooms.
The writer is an engineer and member of the Engineers Board of Kenya.
