Licensed capital markets firms in Kenya must keep a share of their board independent. A director can lose that status without anyone noticing, simply because of the contract the company gave them. This article explains how the Capital Markets (Corporate Governance) (Market Intermediaries) Regulations, 2011 define independence, why an employment contract is the clearest way to lose it, and how to document an independent seat safely.
Who the rule applies to
The Regulations apply to market intermediaries licensed by the Capital Markets Authority. Under regulation 3(1), the board must have at least three directors, of whom at least two are natural persons, with at least one-third being independent non-executive directors. Not more than one-third of the directors may be close relations of any director. A firm that falls short of the independent share is out of compliance, whatever the individual directors think of their own independence.
The CMA published draft replacement regulations for consultation in 2025. Check which version is in force before relying on the numbers below.
What “independent” means
Regulation 2 defines an independent non-executive director as a director who:
- has not been employed by the intermediary in an executive capacity within the last five years;
- is not associated with an adviser or consultant to the intermediary, a member of its senior management, or a significant client or supplier, and has had no business relationship with the intermediary in the last five years, other than service as a director, for which the intermediary has been required to make disclosure;
- does not have a contract of service with the intermediary or a member of its senior management;
- is not a close relation of any of those persons; and
- has not had any of those relationships with an affiliate of the intermediary.
Why a contract of service defeats independence
The third limb is the problem. A director who has a contract of service with the intermediary is not independent under the Regulations. The Employment Act defines a contract of service as an agreement to employ or to serve as an employee for a period of time (section 2), and treats its statutory terms as minimum terms that cannot be waived (section 3(6)).
The consequence is practical. If a firm appoints a person as its “independent” director and then puts that person on a payroll contract with a salary, leave and notice, the person cannot count towards the one-third requirement. The label in the board minutes does not help. This is easy to miss when a firm wants to retain the director on a stable, familiar footing and reaches for its standard employment template.
It also affects the director’s own position. An employee director who is removed from the board still holds the employment, with the notice and termination rights that go with it. Our article on whether a director is an employee sets out that distinction.
The second trap: other business with the firm
Dropping the employment contract is not enough. The business-relationship limb looks at any dealings with the intermediary in the last five years, other than service as a director, for which disclosure has been required. A services agreement limited to the director’s board duties and fees sits comfortably within the carve-out for service as a director. An agreement that adds consulting, advisory or operational work for the firm does not obviously do so, and it can also make the director look associated with a consultant to the firm. Keep the paper confined to the board role.
Documenting an independent seat
- Use a letter of appointment or director services agreement, not an employment contract. Describe the role as a non-executive board seat.
- Pay fees, not salary. Avoid bonuses linked to firm performance, pensions and benefits that mimic employment. Have remuneration approved as the company’s Articles require.
- Confine the duties to board and committee work. Put any other work in a separate engagement with another person.
- Record the independence assessment. Ask the director to confirm the facts behind each limb and to notify the firm promptly of any change.
- Plan the exit. Provide a notice period long enough for the firm to find a replacement and complete regulatory steps, and require the director to stay in office until a successor is cleared.
Keep the evidence
Independence is a continuing condition, not a one-off label. File the signed confirmation with the register of directors, repeat the assessment when the director takes on a new role or the firm signs a new service provider, and minute the board’s conclusion. If the director later takes up paid work for the firm or a related business, treat that as a trigger to reassess before the next filing or inspection.
Regulatory steps around any change
Regulation 3(3) provides that a market intermediary shall not change the composition of its board without the prior written consent of the Authority. Regulation 4 requires that a person appointed as director is fit and proper and has undergone relevant corporate governance training, with the training completed within six months of appointment. Build both into the timetable for any appointment or replacement, and allow for the company’s own filings after approval.
How We Can Help
Clay & Associates Advocates advises licensed intermediaries and other regulated firms on board composition, director appointments and CMA approvals. Our article on the comply or explain approach to governance is also relevant. Contact our financial services team to review your board.
Sources: Capital Markets (Corporate Governance) (Market Intermediaries) Regulations, 2011, regulations 2, 3 and 4; Employment Act, 2007 (Cap. 226), sections 2 and 3(6).
Frequently asked questions
Can an employee of the firm be its independent director?
Not under the 2011 Regulations if the person has a contract of service with the intermediary. A person employed in an executive capacity within the last five years is also excluded.
Can an independent director be paid?
Yes. The definition carves out service as a director, so fees for the board role are consistent with independence. Keep payments tied to that role.
Does the one-third rule apply to unlisted private companies?
Not under these Regulations. They apply to CMA-licensed market intermediaries. Other companies are governed by their own constitution and the Companies Act.
Do we need CMA consent to replace a director?
Regulation 3(3) requires the Authority’s prior written consent to a change in the board composition of a market intermediary. Confirm any additional notification requirements in the firm’s licence conditions.
Need advice on your own matter?
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This article is general information on Kenyan law as at its publication date, not legal advice. Reading it does not create an advocate and client relationship.
