Is My SME Legally Required to Have Formal Governance? What Changes as You Grow

No. Kenyan company law does not force a small or medium business to adopt a board with independent members, committees or a policy manual. But “no formal governance” is not the same as “no legal obligations”. Every company already has a baseline set by the Companies Act, 2015: directors, registers, annual returns, and, importantly, minutes of directors’ meetings, which section 210 makes mandatory on pain of a fine. SME governance is therefore a question of how much beyond that baseline you need, and the answer changes as the business grows, because the people who ask to see your governance change.

The legal baseline for SME governance

Section 128 requires a private company to have at least one director and section 129 requires at least one director who is a natural person. Section 93 requires every company to keep a register of its members and section 134 requires a register of directors. Section 705 requires every company to submit annual returns to the Registrar. None of this depends on size.

Directors also owe the general duties in sections 142 to 147, whether or not the company treats itself as having a formal board. They include acting within the company’s constitution, promoting the success of the company for the benefit of its members as a whole, exercising independent judgment, exercising reasonable care, skill and diligence, avoiding conflicts of interest and not accepting benefits from third parties.

The minute-keeping rule catches the most SMEs. Section 210 requires a company to ensure that minutes of all proceedings at directors’ meetings are recorded and kept for at least seven years. Failure is an offence by the company and each director in default, with a fine not exceeding KES 500,000. The higher governance codes sit elsewhere: the Capital Markets Authority’s Code of Corporate Governance Practices for Issuers of Securities to the Public, 2015 is addressed to issuers of securities to the public, not to an ordinary private SME.

Stage one and two: the founder, then your first non-owner hires

At the founder stage the legal minimum is also the practical reality. One director is enough. What matters is getting the basics right from day one: clean statutory registers, minuted decisions for anything significant, and, if there is more than one owner, a shareholders agreement. Our guide to the shareholders agreement and the articles of association explains how those two documents divide the work.

The picture shifts when you hire people who are not owners. Decisions now affect employees with no ownership stake, and informal decision-making starts to create real risk instead of just untidiness. Section 143 requires a director to have regard, among other things, to the interests of the company’s employees in promoting its success. A simple written decision process, with resolutions for significant decisions, protects the business and gives the directors evidence that they followed their duties. Section 262 allows a private company to pass written resolutions, so you do not need a physical meeting for every decision, although the Act excludes some resolutions from that route.

Stage three: a bank, lender or investor arrives

This is where informal governance starts costing time and money. Lenders and investors routinely ask for board minutes, resolutions authorising the borrowing or the raise, and evidence that decisions were properly made, not just agreed verbally. Section 211 gives properly recorded minutes real weight: minutes recorded under section 210 and authenticated by the person presiding at the meeting, or at the next directors’ meeting, are evidence of the proceedings, and the meeting is presumed to have been duly held and convened. A company with no minutes has none of that presumption to rely on.

If your company is a family business, our article on formalising a family business board sets out the next practical steps. If you are raising capital, read what founders sign in a startup term sheet before you agree on governance rights with an investor.

Stage four: preparing to sell, merge or take a serious partner

Due diligence ahead of a sale or significant partnership tests years of informal decision-making at once. Buyers and their lawyers typically look for a clean paper trail of who approved what, when and under what authority. Gaps slow a deal down, are priced into an offer as risk, or become the reason a buyer withdraws. The governance that felt unnecessary at stage one is often what is examined most closely by this point. Properly kept registers, authenticated minutes and resolutions that match the company’s articles are the practical evidence.

A practical SME governance checklist

Whatever your stage, a short routine keeps your SME governance defensible without turning the business into a bureaucracy:

• Keep the register of members and register of directors current, and update them when shares move or directors change.
• Minute every directors’ meeting, have the minutes authenticated, and store them for at least seven years.
• Record declarations of interest when a director is interested in a transaction with the company.
• Lodge the annual return on time and keep the filing receipts with the minute book.
• Review the shareholders agreement and the articles together whenever ownership changes.

None of this is expensive if it is done as decisions are taken. Reconstructing it later, under the pressure of a loan application or a sale, is where the cost sits.