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Limit directorship for listed firms

By Ndirangu Ngunjiri | March 18th 2016

In order to protect the rights of shareholders, Capital Market Authority (CMA) has to improve on its corporate governance code and mechanisms.

The board of directors is one of the corporate governance mechanisms, which has received increasing attention in recent years. In fact, the effectiveness of the board of directors reflects its ability to perform its role in the firm accurately, especially the primarily oversight role. Within this role, the board of directors does the monitoring of management and the oversight of the quality of financial disclosure.

In recent years, public attention was provoked following high-profile corporate scandals and collapses that have wiped out the wealth of shareholders in one fell swoop. These failures resulted in intense pressure to re-examine the governance of listed corporations.

In most listed firms, we have issues of multiple directorships highlighted and the benefits of increasing the number of directorships held by directors.

CMA should impose restrictions on the number of directorships held by a director to make listed firms more effective.

A possibility of fraud rises when outside directors serve on more than external boards. The accumulation of directorships can be detrimental for boards of directors when their members hold many external board seats at the same time.

The law should limit the number of directorships that can be held by directors at the same time, so that they can be more effective by spending more effort and time on their duties.

Investors and shareholders should be aware of their managers’ capacity to manipulate accounting earnings for their own benefit. In general, CMA and other regulatory authorities should put in place laws that require companies to limit the number of directorships.

There is need for regulators to constantly review the efficacy of corporate governance guidelines and regulations and allow for more flexibility in the governance system.

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