CMA throws down the gauntlet
The 1969 Wild West movie Butch Cassidy and the Sundance Kid, provides classic entertainment as two endearing villains (and one inevitable female lover sidekick) perform numerous robberies, evade the rigorous arm of the law and eventually expire in an ignominious Bolivian conclusion. On Wednesday last week, the Capital Markets Authority published a press release of significant import to the East African corporate governance landscape. “The Board of the Capital Markets Authority (CMA) has taken administrative action against the NBK Board members and former senior managers who served at the bank as at December 31st 2015 for the alleged misrepresentation of financial statements and embezzlement of funds at NBK. The Authority has also recommended to the Office of the Director of Public Prosecutions, the prosecution of some of the senior managers and further criminal investigations of additional individuals.”
A number of erstwhile senior executives was named and shamed, including the former Managing Director, former Chief Finance Officer, former Chief Credit Officer, former head of Treasury, former Director of Corporate and Institutional Banking and one former Relationship Manager in Business Banking. Pretty much half of the bank’s C-Suite was fingered in the financial scandal. The CMA action came as a result of whistle blower information which led the regulator to conduct an inquiry into the affairs of the Bank that led to the commencement of the published enforcement proceedings.
The Capital Markets Authority Code of Corporate Governance Practices for Issuers of Securities to the Public 2015 is a mouthful of a name for a regulatory framework that guides listed companies and issuers of financial instruments to the public. The code mentions the word “whistleblower” three times, addressing it through guidelines and recommendations to boards to ensure that they put into place whistleblowing mechanisms and policies and disclose the same on the company website. In the course of my corporate governance work, I do note that many directors pay fleeting attention to this critical aspect of board supervision. Well the CMA cottoned onto the lackadaisical approach to whistleblowing procedures by boards of regulated companies and put its own whistleblowing mechanism in place.
Last week’s press release finished off on that very note: “Appreciating the critical role which can be played by whistleblowers in drawing attention to areas of irregular, illegal or unethical conduct, the Authority will continue to explore appropriate measures to encourage persons aware of such matters to make reports. The Authority continues to maintain an anonymous whistleblower portal, easily accessible through its website through which tip-offs and reports can be made.”
The NBK scenario is a quintessential case of multiple regulatory intervention. The bank is under the heavy regulation and supervision of the Central Bank of Kenya and was in breach of its statutory total capital to total risk weighted assets ratio by December 2015 when it posted a ratio of 14% against the statutory requirement of 14.5%. The banking supervision unit was clearly paying attention by this time as their own investigations then yielded criminal proceedings against the Chief Financial Officer, Chris Kisire and the acting Chief Financial Officer Wycliff Kivunira which were reported in the Daily Nation’s May 25th 2017 edition. The two were charged with abuse of office for fraudulent procurement practices at the bank.
By dint of this action, the CMA has provided additional support to the CBK’s banking supervision unit by investigating management’s financial malfeasance and poor board oversight over the financial statements. It also should give significant pause for reflection for directors of banks that are also listed on the Nairobi Securities Exchange (NSE) as to the multiple jurisdictional ambit that the companies they sit on endure.
The notable lesson here for directors of companies listed on the NSE, as well as those that issue financial instruments that require to be licenced by the CMA is this: If you don’t provide an independent whistle blowing system that should ideally feed into the audit committee, the regulator is already happily doing that job for you. Independent whistle blowing providers are readily available to provide this critical service. Consequently, board members have to be ready to deal with the outcomes of what might come out of this process; friendly management might end up being Butch Cassidy and the Sundance Kid(s) in disguise.
Next week I will focus on the retributions that have been made on the NBK management and directors and why this should make any sitting director of a listed company think about taking their CEO for a long, long lunch to have a courageous conversation.