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Elephants At Your Fence

Last week, I engaged in an animated conversation with a Kenyan biodiversity expert who has specialized in researching elephants. In her years of working with these amazing pachyderms, she has observed their remarkable intelligence, profound wisdom and deep familial ties. “I have never seen an electric fence that elephants cannot destroy,” she chuckled. She then proceeded to tell us about a time they watched a herd of elephants approach an electric fence. The animals stood stock still, feeling the current deep in the earth vibrating through their feet. They had figured that their tusks do not conduct electricity and somehow knew which were the live wires and which was the earth wire in the researcher’s observations. Within minutes the elephants had brought down the entire fence and daintily stepped over the fallen wires into the hitherto forbidden land. Elephants 10, humans nil.

This story resonated with a recent corporate governance training I was involved in. A discussion emerged around the role of the board in recruitment of senior management. The question was this: Should the board be involved in the shortlisting and interviewing of candidates for senior management roles reporting into the chief executive officer (CEO)? On the right side of the boxing ring were those who felt that the board had no business interfering in what was, in their view, the exclusive right of the CEO to build his own team that he could work with to deliver the organization’s objectives.

On the left side of the ring, were those who felt that senior management recruitment was the board’s God given turf. The role of the board could not be ring fenced, which role included telling the CEO who should sit in his c-suite. One CEO gave a supportive example of what happened in his own organization, where the cultural norm was that a peer could not be involved in the interviewing of another potential peer. So when the CEO was recruiting someone to join his senior management team, another senior manager could not sit in that panel. Only board members were considered to have the requisite seniority to provide the bench strength on the interview panel.

A seasoned human resource professional who was in the class weighed into the discussion. In his educated view, in addition to the head of HR for the organization at the time, a CEO could have anyone on his panel, including an external resource of the right professional pedigree to help him undertake an interview. This HR professional went on to add that if the organization was in a group structure, the CEO could get a senior resource from the group head office to sit in on the interviews. Keep your board out of your recruitment, was the strong advice of the HR professional.

The interesting observation I made during this debate was that the CEO, who gave the initial example of what happens in his organization, found the board involvement to be quite normal. That’s the way things were done around there and he had no reason to think it odd. In fact, in his view, it made perfect hierarchical sense. Peers could not recruit peers. Board members could and should provide the guidance on who his senior management team should be.

Having served on and consulted with numerous boards over the last two decades, the culture of board involvement in executive recruitment is one that I see largely in the Kenyan public sector space particularly parastatals. Is this a good use of the board’s time? Well, aside from sitting allowances for the interview panels the boards get a front row view on the quality of the organization’s senior management. They also get an opportunity to influence who sits there. That influence can be used to bear fruit in the longer term.

In the private sector, this culture is not as common. The board recruits a chief executive officer who is deemed to have a resoundingly good head on her shoulders. That head should have both the technical and emotional competence to lead an organization to sustainable success. That head should also have the free will to determine who it wants to lead the vital organs that make up the complex body of the organization’s leadership.

A board that has tasted the fruit of executive recruitment often finds it sweet. Intense. Intoxicating almost. The opportunity to have such power creates a thirst for more and attempts may be made to breach other operational fences. Just like the elephants, who as time has shown, eventually figure out how to.

 

[email protected]

Twitter/X: @carolmusyoka

 

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Stay In Your Lane

If you have ever been on the Nairobi Expressway you will understand what I mean when I say it is equal parts amazing and annoying. Amazing in that it takes less than 20 minutes to traverse the 27 kilometres from the start at Westlands to the end at Mlolongo, a journey that ordinarily requires a resilience flavored porridge breakfast to start. Annoying that it can take more than 20 minutes to evacuate the expressway at the Museum Hill exit because cash users have blocked all the exit lanes including those for the prepaid electronic tag holders. Part of the problem is the fact that the management of the expressway have chosen to put signs in Acronymese to guide users. The lanes are brightly and very clearly marked MTC and ETC to guide drivers on where they should go to pay for the use. This crystal clear language is supposed to help the averagely intelligent driver to know exactly where they should be because everyone and their frustrated brother were taught the meaning of MTC and ETC at driving school. If you’re hoping I am going to help you understand, I won’t. After all, I don’t speak Acronymese. But I do wish you the very best trying to exit the Expressway at the Museum Hill chokepoint after 4:00 p.m. on a weekday afternoon.

 

Labels are an important, if not critical, aspect of communication. If you don’t believe me, ask the accountants and the company secretaries in Kenya who over the last decade have taken to placing their professional initials before their names. CPA John Doe and CPS Mary Dee have now joined the professional branding fray that Engineer Tom Day and his professional engineering colleagues subscribed to. After all, it was not enough for medical doctors to have a title next to their name, before the other professions felt honor bound to join the titular race. As we wait for the lawyers, human resource managers, architects, economists and zoologists to wake up from their nomenclature slumber, a more disturbing trend is pervading regional board rooms.

 

I recently spoke to a Ugandan board member (let’s call him Stephen for now) who was getting fed up with management referring to him and his board colleagues as “Director X” during board meetings. “I don’t like it when management members call me Director Stephen as we engage in meetings. It immediately draws an invisible line in the board room. Us directors against them, management.” I agreed with him wholeheartedly as I had witnessed the same some years ago on a board I sat on. In an attempt to be deferential to board members, the management of the institution started to preface a response to a board member by referring to the board member as Director so-and-so. The chair of the board nipped that developing practice in the bud as he could see the direction it was heading towards: a yawning formality chasm that would be difficult to bridge and that would create communication barriers in future.

 

Management are an emotionally intelligent and very socially aware bunch. They are keen observers of board members and watch many directors fall into the ego trap that sitting on that organizational pinnacle can produce. They will stroke the ego of the director who needs to be buttered, the supercilious board member who feels her role is more superior to the CEO. If it means that management stays in their junior lane, then so be it. Director Stephen it shall be, oh ye of such wondrous and sagacious insights. Thy will be done on management earth and in director heaven.

The board role is tripartite. To offer oversight on the immediate past, insight on the present and foresight as to what may be ahead. Underpinning all of this is a partnership approach where the board collaborates with management to lead and deliver sustainable growth and survival of the institution. For that partnership to succeed, management need to feel that directors are approachable and easy to engage. Setting up a titling culture in order to be addressed is a rapid way of creating lanes in the board room. And just like the accountants, company secretaries and engineers are doing in this part of the world, it is a very public announcement that you’d better recognize who it is you are addressing: A learned person. A professional. An academic deity. As I prepare for the attacks that are bound to come, let me go and seek the protection of  my legal fraternity, my former banking and my current consultant colleagues.

Yours truly,

Adv, Bkr, Cslt Carol Musyoka.

 

[email protected]

Twitter/X: @Carolmusyoka

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56 Billion Reasons to Show Independence Part 2

Last week I commented on the eye-watering compensation package that the board of electronic vehicle (EV) manufacturing company Tesla had given its former chairman and current CEO Elon Musk. At $55.8 billion, the stock options had been agreed upon by the Tesla board and accepted by the shareholders back in 2018. Last month, the Chancellor of the Chancery Court in Delaware Judge Kathaleen McCormick put electronic brakes on the deal terming it “an unfathomable sum” that was unfair to shareholders.

The complainant in this landmark case was Richard Tornetta, a shareholder who held the princely amount of 9 Tesla shares and who, media reports, was a former heavy metal rock band drummer. Whether the case was filed off his own rocky motion or whether he was a proxy for another investor, the case enabled the Chancery Court to send a strong signal to Delaware incorporated company boards that they were willing to lift the veil on intertwined board relationships that compromised the directors’ fiduciary responsibilities and undermined minority shareholder interests.

A visit to the corporate governance section of the Tesla website is quite illuminating. The board consists of eight members including Elon Musk who, until 2018, was the board chair. Other than Elon, his brother Kimbal and JB Straubel, a Tesla co-founder, the other five directors are marked as independent directors on the website.  A tweet by Musk in August 2018 on the platform formerly known as Twitter, claiming that he had secured funding to take Tesla private was found to be false and aimed at defrauding the investing public. Consequently, US capital markets regulator the Securities and Exchange Commission (SEC) entered into a decree settlement where Musk and Tesla would each pay $20 million to 3,350 eligible shareholders who had lost value in their Tesla shareholding due to the volatility caused by Musk’s tweet. Furthermore, Musk was required to step down as board chairman and would let a Tesla lawyer approve some of his Twitter posts.

Robyn Denholm, an Australian chartered accountant and finance career professional who had joined the board in 2014, stepped up as Tesla board chairperson in November 2018. A Financial Review article by John Smith published in January 2024 cites the Judge Kathaleen’s withering criticism  of the chairperson’s leadership. “Denholm does not appear to have had any personal relationship with Musk outside of her service on the board. [She] derived the vast majority of her wealth from her compensation as a Tesla director,” the judge wrote.

The judge said Ms Denholm’s compensation from Tesla between 2014 and 2017 was about $US17 million when it was issued, and that she ultimately received $US280 million ($426 million) through sales of options in 2021 and 2022, noting that Ms Denholm has described this transaction as “life-changing”. Both she and fellow board member Brad Buss were over-reliant on their Tesla earnings while director James Murdoch was not independent due to his long-standing personal friendship with Mr Musk, including taking family holidays together.”

This would be a good point to mention that the other “independent” board member is James Murdoch, son of media mogul Rupert Murdoch. Elon and James took family holidays together to Israel, Mexico and the Bahamas according to the Financial Review article. James was  invited to join Tesla’s board after a Bahamas holiday with two other board members. The other “independent” director is Ira Ehrenpreis, a Silicon Valley venture capitalist who, according to  CNN Business journalist Allison Morrow in an article published on February 5th 2024,  has invested millions of dollars personally, and through his venture capital firm, into companies related to both Elon and his brother Kimbal.

Finally, Todd Maron, the Tesla general counsel during the compensation package negotiations, was Elon Musk’s personal divorce lawyer.  Judge McCormick trained her scathing gun sights on this personal relationship saying she could not distinguish whose interests the company lawyer had been representing. She found that Todd Maron was totally beholden to Musk and that Todd’s admiration for Musk “moved him to tears” during both his deposition and in trial testimony.

The Tesla board has been under great scrutiny by institutional shareholders. According to the same Financial Review article cited above, last year Tesla agreed to settle with a Detroit pension fund that complained about excessive board pay. As part of the settlement, board members repaid $735 million in stock and cash back to shareholders from their own compensation packages and were also required to take no fees for the 2023 financial year.

It bears noting that this company gave a return of over 1000% percent to its shareholders in terms of value grown between 2018 and January 2024. Which begs the academic question: where poor governance is coupled with astronomical returns for all shareholders, is this really a bad thing?

[email protected]

Twitter/X: @carolmusyoka

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56 Billion Reasons to Show Independence

Someone recently shared with me a breaking story coming out of the company incorporation heaven of Delaware in the United States. Delaware is reputed to have a business-friendly legal and tax framework which has made it attractive for many companies to incorporate themselves there. One such company is the electronic vehicle (EV) manufacturing company Tesla, associated with the legendary South African billionaire Elon Musk.

According to Reuters news agency, last Tuesday, January 30th 2024, a Delaware judge threw out Elon Musk’s record-breaking $56 billion Tesla pay package. She called the compensation granted by the EV maker’s board “an unfathomable sum” that was unfair to shareholders. I would have converted the dollar equivalent into Kenya shillings for ease of reader reference, but in light of the ever-shifting daily exchange rate, it might be easier for a camel to enter through the eye of a needle than for me to try and pin down a rate for you. As the person who shared the news article with me pointed out somewhat amused, with Kenya’s gross domestic product in 2022 estimated at $113 billion, Musk’s package is politely about half of this blessed country’s GDP.

Back to Musk’s eye-watering compensation. Let me first start by giving Google search-driven context. Born in 1971, Musk and his brother Kimbal co-founded a software company in 1995 which was bought by the computer company Compaq for $307 million four years later in 1999. He then co-founded another company which eventually became PayPal in the year 2000 and was acquired by eBay two years later for $1.5billion.

In his early thirties, with dollars burning a hole in his clean energy pockets, Musk became an early investor in Tesla Motors in 2004 eventually becoming its chairman, product architect and eventually CEO in 2008. Fast forward to ten years later. Tesla had launched a series of mass-market electronic vehicles that were becoming wildly popular. In 2018, he negotiated a compensation package with his board which, according to a Reuters article published last week on February 1st, created 12 tranches of options. Each tranche was equivalent at the time to 1% of Tesla’s outstanding shares thereby potentially giving him a 12% stake. Musk was not going to receive a salary. The article explains further that under the 10-year deal, Musk was eligible to win an options tranche every time Tesla hit a series of up to 12 targets. Those targets were tied to increases in Tesla’s market capitalization in $50 billion increments, and to aggressive hurdles for revenue and EBITDA growth. Musk went on to hit all 12 targets and the options are now worth $51 billion which is the cost to Musk to exercise them.

Now this is where it gets interesting. Even though the judge described the pay package as “unfathomable”, Tesla shareholders had approved the amount in 2018 with 73% of the votes cast, excluding votes by both Musk and his brother Kimbal. For context purposes, and perhaps the reason why shareholders thought the targets were a total stretch was because Tesla, at the time, was struggling to manufacture its Model 3 sedan and it was widely believed that competition from larger manufacturers would wipe Tesla off the EV universe.

When the package was approved, Tesla’s stock market value was $53 billion. 3 years later in 2021 the value of the company had blown into the stratosphere, growing by more than 2,000% to $1.2 trillion. More recently it has settled at $605 billion. The Reuters article goes ahead to posit that an investor who held shares when Musk’s package was approved in 2018 would currently be up by 1000%. So why should any judge be alarmed when the shareholder, who is the company’s ultimate stakeholder, is sitting pretty?

Remember, Musk has not exercised the option, meaning he hasn’t purchased the shares. The shares subject of the option, are priced at a discount to current market value, which value he has grown during his CEO tenure with products that have been profitable to the company. Unwinding the package therefore would not be difficult since the options remain unexercised, but ideally the compensation will have to be replaced with something else. In calling the package an “unfathomable sum”, Judge Kathaleen McCormick claimed that it was unfair to shareholders and brought to question the independence of Tesla’s board.

Did someone say board independence? Next week we will delve into the composition of the Tesla board and why this motley group of individuals have been the unrelenting focus of activist investors.

[email protected]

Twitter/ X: @carolmusyoka

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Independent Directors under Attack

2024 has started with a governance bang! This is led by the change in governance rules gazetted by the Capital Markets Authority (CMA) in October 2023 and awaiting approval by Parliament. The Capital Markets (Public Offers, Listings And Disclosures) Regulations 2023 is an updated governance guide that has redefined the tenure of an independent director from nine years to six years. With no statement issued following the gazettement we, the hoi polloi, are only left with an ignorance vacuum within which to interpret the thinking of the regulators. Under the previous CMA regulations, an independent director was defined as a director who does not have a material or pecuniary relationship with the company, one who is compensated through sitting fees or allowances and one who does not own shares in the company. Furthermore, if nine years had passed since date of first appointment, that independence was deemed to have ended. This definition to begin with already had some questionable rationale as the ownership of shares should have been refined to provide for materiality.

If one owns a hundred shares in a company whose total listed shares is a ten million, is this really an ownership that sways one’s independence? At less than 0.01% how can such a drop in the ocean affect one’s judgement especially since such ownership cannot materially affect the decision making at the board? But I digress. The proposed regulations awaiting parliamentary ratification now define an independent director in pretty much the same terms as above described, except that now an executive director is expressly stated as not being independent and a time frame of six years now encapsulates the independence.

So I went hunting around other jurisdictions to see whether this was a global trend or whether Kenyans have decided to forge their own path. The South Africans, who in 1994 established the private sector led but widely respected King Code of Corporate Governance, are now utilizing version 4 of the same issued in 2016. They have taken a ‘substance over form’ approach to corporate governance, asking organizations to apply and explain by stating their intentions as they apply the rule. King IV provides that a non-executive director may continue to serve in an independent capacity for longer than nine years if, upon an annual board assessment, it is concluded that the director continues to exercise objective judgement, has no interests, relationships or associations which a reasonable third party observer considers as capable of causing bias or influence. The South Africans are saying “Hey, self-regulate as a board and every year use the standard of a reasonable third party to determine the long-in-the-tooth director’s objectiveness.”

The Australian Stock Exchange Corporate Governance Principles issued in February 2019 provide that “A listed entity and its security holders are likely to be well served by having a mix of directors, some with a longer tenure with a deep understanding of the entity and its business and some with a shorter tenure with fresh ideas and perspective. It also recognizes that the chair of the board will frequently fall into the former category.” The authors of this document are clearly board room practitioners rather than theorists. They go ahead to add, “The mere fact that a director has served on a board for a substantial period does not mean that the director has become too close to management  or a substantial holder to be considered independent. However, the board should regularly assess whether that might be the case for any director who has served in that position for more than 10 years.”

So just like the South Africans, our Australian Commonwealth brothers see the need for the board to undertake the self-assessment on independence. Finally, the United Kingdom has issued a new Corporate Governance Code 2024 which will come into effect in January 2025. Section 2, Provision 10 basically says that the board should clearly explain why a director who has been in role for more than 9 years should continue to be considered independent. Just like the South Africans and our Australian Commonwealth brothers, the United Kingdom views boards as mature enough to decide if those that walk amongst them can be viewed as independent. Further, they are required to explain why.

This is a fairly modern approach to corporate regulation. Substance over form. Explain your intentions and hope that they stand up to public scrutiny. The historical approach to regulation is paternalistic: “Daddy said do this and don’t question Daddy because he said so!” So the corporate children of Kenya await further direction on this, while facing the grave danger that valuable institutional knowledge is being given short shrift.

[email protected]

Twitter/X: @carolmusyoka

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Apocalypse Governance

“A society grows great when old men plant trees in whose shade they shall never sit.” — Greek Proverb

A few weeks ago, my 11 year old daughter walked into my bedroom in a. distressed state, with tears streaming down her face and totally incoherent. After about ten minutes I had managed to calm her down to the point where between deep sucks of breath and long nose blowing episodes she was able to unpack her issue. It was a very simple issue. The world was coming to an end in 2050. The End.

She had been watching some climate change video on YouTube probably produced and directed by descendants of the authors of the apocalyptic, biblical book of Revelation. According to my own descendant, the rate at which global warming was occurring meant that Mother Earth would eventually be worn down by flooding, drought and every imaginable climatic disaster. She would be 39 years old by then and in her prime. Hopefully with a family that she hoped they would be standing together when the big wipe out came rather than her being at the mall sipping on an iced cappuccino while her kids were frolicking at some birthday party. Good people, this girl wept copious tears of sheer angst.

The Greta Thunberg penny finally dropped for me. In case you’ve been living under a rock for the last five or so years, Swedish born Greta was born in January 2003 and shot to global fame as a youthful climate activist. At the age of fifteen she started spending her Friday afternoons outside the Swedish Parliament protesting about climate change. Her efforts didn’t go without notice and she was invited to speak at the 2018 and 2019 UN Climate Action Conferences, the latter to which she travelled to the United States by yacht rather than leave a carbon footprint using air travel. Greta, who is now nineteen years old, has been nominated for the Nobel Peace Prize three times in the last four years and has won numerous global awards and recognition.

If you watch Greta talking she’s vocal about one thing: all the people in decision making power today, at government level globally, do not give darned care about what the world will look like in the next fifty years as they will be long dead. Together with millions of youth around the world, a “woke generation” has emerged. My daughter at eleven had the temerity to tell me that there were companies in the world and in Kenya that were adding to the global warming phenomena and she wanted nothing to do with them. Well that got me thinking. Fast. In the last few years, the new buzz theme in corporate governance has turned to an Environmental, Social and Governance focus (ESG).

Board directors are being forced to tackle these issues at a board level with an objective to create companies that operate responsibly with regards to environmental, social and governance issues. Prior to my daughter’s meltdown, I had regarded ESG issues as just another major parameter that I had to keep sight of in my governance journey. But when she said she’s now becoming conscious, “woke” actually, about what products we were using in the house and whether they were being manufactured in an environmentally responsible way I now became aware of what our emerging duties as directors is.

Our duty is to ensure that if the companies we oversee do not start paying attention to issues around climate change, their current youthful and future consumers will make that decision for them by simply walking away.

In a report published by UNICEF on 9th November 2022 in preparation for the Global COP 27 summit, almost half of young people in Africa said that they have reconsidered having children due to climate change. This was a result of a UNICEF U-Report poll of 243,512 worldwide respondents where 43% of the Sub-Saharan Africa poll participants said a range of climate shocks had impacted their access to food and water as well as their family’s income therefore making them reconsider their desire to start a family.

Whether you are a climate change believer or denier, the facts is this: every single business has a responsibility to the community in which it operates. If you don’t start doing something about it, your future consumers will make that decision for you. Stay woke!

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Twitter: @carolmusyoka
www.carolmusyoka.com

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Building Blocks of a Multi Generation Business

Many years ago I was going through a board evaluation assessment with a CEO and she shook her head in amazement. “I didn’t know that the outsourced company secretary was supposed to be doing all these things! I’ve clearly not been getting a good return on the monthly retainer I pay him.” Not wanting the company secretary to get unnecessarily blamed, I gently told the CEO that perhaps she didn’t know what she didn’t know and had not structured some of the duties that the assessment was reviewing into the company secretary’s contract. “Well now I know and I’m going to extract my pound of flesh. We’ve been doing too much ourselves,” was her pithy response.

Corporate governance can be a pain to executives who just want to get their day jobs done and deliver value to their key stakeholder: the shareholders. For many entrepreneurs who startup businesses, a large amount of their focus and energy is on driving revenue up, ensuring salaries and rent are paid and keeping the tax man off their weary backs. Bringing in a company secretary is viewed as a complete luxury and an unnecessary cost. Under the Kenyan Companies Act 2015, company secretaries are only required for private companies who have a paid up capital of Kshs 5 million and above. However every public company must have a company secretary. Not surprisingly, even for some public companies the role of company secretary is undertaken by their law firm and limited to filing statutory company returns including updating director or shareholder details in case of any changes in the same.

Thames Ltd (not its real name) is a Kenyan company. A private equity fund approached the owners to begin talks on how they could make an investment into the fast growing agro-processing company. The objective was to initially acquire up to 40% of the shareholding, which was attractive to the three original shareholders who wished to finally get a cash return from years of investing heavily in the business. However upon undertaking legal due diligence, it emerged that there were several missing minutes from the board’s deliberations. The transaction came to a screeching halt as a result. The key reason cited for the application of brakes was that it was difficult to determine how significant decisions had been arrived at in the past. Of concern was previous expansions that required heavy capital expenditure outlay and this, according to the private equity fund’s lawyers, was indicative of decision making on the fly. While this was not actually true as there had been extensive discussions about business expansions in the past, the three shareholders were hard put to provide written evidence of the same.

Consequently, the private investor walked away into the dollar denominated sunset, much to the chagrin of Thames’ shareholders. Following this debacle, the shareholders immediately appointed a company secretary who formalized their board meetings by issuing proper notices and agendas before each meeting, ensured board packs were prepared and sent out by management and created a proper minute recording regime including an action tracking log for matters arising out of each meeting. The company secretary function allows entrepreneur led businesses to begin aligning themselves into the corporate entities that years of growth and stability create. The function helps the entrepreneur separate board oversight from management execution when the company secretary goes beyond just being a minute taker.

A good company secretary will work in tandem with the board chairperson and the CEO to create insightful board agendas that enable the board to review past company performance while keeping sight of future strategic endeavours. By keeping a record of deliverables promised at board meetings, the company secretary will also ensure that management feel the heat of external oversight which should ideally begin to provide comfort to the entrepreneur who wishes to step back from active management as she grows older and considers handing over the reins to a new crop of management. The effective company secretary will ensure that the board becomes a separate and distinct institution from management and provide appropriate counsel to the board on its statutory responsibilities. The role should therefore be part of a founder’s retirement plan while setting up structures to ensure the survival of the business is sustainable when she steps down. It is noteworthy that this role is often outsourced to external company secretarial specialist firms, of which there are many in Kenya, rather than kept inhouse as an expensive headcount. The next time your company secretary comes in for a meeting – assuming you have one- pointedly ask him what he can do for your company’s sustainability as a business.

[email protected]

Twitter: @carolmusyoka

www.carolmusyoka.com

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An Alternative View is Critical

The Queen is dead, long live the King. Since September 8th this month, the entire world has been riveted to their screens watching British international media like BBC and Sky News reporting daily about the death of Queen Elizabeth II. Okay truth be told, the rest of the world moved on as the war in Ukraine heated up while back in this neck of the woods we geared up for the presidential inauguration. The British, most understandably, did not move on and their media reported incessantly on this major news item often times running out of new things to report so multiple “royal experts” would be brought on air to opine on the Queen’s record breaking seventy year monarchy or opine on the new King’s anticipated rule.

Except that in the former colonies social media erupted with an entirely different perspective of the Queen’s legacy. In India, South Africa, Kenya, Nigeria and Jamaica to name a few, pundits weighed in with an alternative view of the Queen’s legacy, some of it too offensive to repeat here. The foundation of the rancour was Britain’s colonial legacy of violence. Apparently Her Majesty’s soldiers undertook massive atrocities in the name of maintaining the British empire together with the pillage of local resources that, according to the social media commentators, form the basis of much of the royal wealth.

The Koh-i-Noor diamond, an egg sized diamond believed to be the largest diamond in the world is 105.6 carats and sits in the crown of the late Queen Mother. It is claimed by India. According to an article in the IFL Science online magazine, the diamond was presented to Queen Victoria at Buckingham Palace in 1850 by the British East India Company following their victory in the second Anglo- Sikh war when the Kingdom of Punjab was taken under British control. The 530.2 carat Cullinam 1 diamond, also known as the Great Star of Africa, is mounted on the Queen’s sceptre and was found in 1905 in South Africa. It was handed to the royal family by South Africa’s colonial authorities in 1905. In Kenya, there was much chatter about the raping and killing of thousands of natives in the period leading up to our independence in 1963. Social media in the former colonies was not about to white wash the ugly side of British rule and the Queen’s death triggered these unfortunate memories. I met a visiting British national two weeks ago and he was asking about what the mood was locally, as he had just landed from the United Kingdom where the country was deeply immersed  in mourning. I showed him the internet chatter, including the incendiary and highly controversial post by South African’s Julius Malema on what Queen Elizabeth’s death meant to them and the visitor realized what an echo chamber currently existed in the UK regarding the royal monarchy. I ended our conversation with the Commonwealth joke: What is Britain’s greatest export? Independence Days.

Echo chambers exist everywhere. Particularly on corporate boards. An echo chamber is defined as an environment in which a person encounters only beliefs or opinions that coincide with their own, so that their existing views are reinforced and alternative ideas are not considered. Due to the limited interaction that board members have with employees and customers, an ever present danger exists of only hearing the good news according to the gospel of the chief executive officer and senior management. Under the German two tier corporate governance framework, companies are required to have supervisory and management boards.

Supervisory boards are the apex body where the shareholder interests are represented while management boards are made up of senior executives. Under German law referred to as co-determination the supervisory boards are required to have employee representatives. Depending on the size of the company, this requirement is anywhere from one third to fifty percent of board members must be employee representatives. For instance in companies with more than 2,000 employees, half the board should be made up of employee representatives but the shareholders choose the chairman who has a casting vote in the event of a stalemate.

The parity introduced by having employee representatives on the apex corporate organ is meant to elevate employees as key stakeholders thereby reducing the “driving for shareholder value” effect of typical western styled boardrooms. There is significant debate on whether the net effect of such a board system generates better performance, something I will unpack further next week. But one thing is guaranteed for sure, no echo chamber can exist in such a co-determined board environment.

[email protected]

Twitter: @carolmusyoka

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The Chair Is Not The Cop

For there is nothing hidden that will not be disclosed, and nothing concealed that will not be known or brought out into the open. Luke 8:17

Quoting from the Bible seems to be de rigueur lately and far be it for me to be left behind. In the last decade of facilitating corporate governance discussions with private, public and not-for-profit boards of directors a key question often emerges: “Should the chairperson of the board come to the institution daily?” Well the answer depends on who you ask. If you were to ask management they will probably look around the room, ensure that there’s no board member within earshot before proceeding to mumble “Heck no!” If you were to ask a board chairperson who is all of five minutes into retirement from a powerful job with absolutely nothing to do currently other than twiddle their thumbs and drive their spouse singularly nuts, they will quite likely say “Heck yeah!”

Following the global financial crisis in 2008, the then U.K. Prime Minister Gordon Brown appointed a commission to provide an independent review and examination of corporate governance in the U.K. banking industry. The commission was chaired by Sir David Walker who in July 2009  published a report recommending that a director of a financial institution should be ready to spend 30 to 36 days a year on that institutions’ business, up from the previously recommended 25 days a year. This would translate to about 3 days a month. However, a chairperson of a major financial institution was recommended to dedicate at least two thirds of their time to the business of the entity, with a clear understanding that in the event of need, that chairmanship role would have priority over any other business time commitment. In essence Walker was recommending that a chairperson of a financial institution could not possibly be envisaged to have another day job.

But you must remember that these recommendations were being made following a global banking crisis that was underpinned by management risk taking excesses in prior years. Just like constitutions are borne out of political crises, much of today’s corporate governance jurisprudence has emerged from corporate existential crises of hitherto poster child companies. Truth is, the role of the chairperson of any board is limited to the leadership of that board, rather than leadership of the organization which is the principal role of the chief executive officer. Conflating the two leadership roles is where trouble begins and a duality of power emerges that never ends well. Now it can be said that the shareholders delegate execution power to the board and therefore the board is ultimately in charge. That is correct. But, subsequently, the board either expressly via delegation of authority documents or impliedly via the CEO’s appointment letter gives execution authority to the CEO and therefore cedes that role via delegation. By having a chairperson who sits in the office permanently, two doors away from the CEO’s office, an alternate centre of power is created which more often than not is exploited by staff members out to undermine the CEO. Furthermore, it is not only staff members who may wish to exploit this delectable power gap. Politicians, suppliers and whichever external stakeholder that wishes to penetrate the inner decision sanctum of the organization now have found a worm hole into the black power space.

Sir David Walker summarizes the role of the chairperson well. The chairperson is responsible for leadership of the board, ensuring its effectiveness in all aspects of its role and setting its agenda so that fully adequate time is available for substantive discussion on strategic issues. The chairman should facilitate, encourage and expect the informed and critical contribution of the directors in particular in discussion and decision-taking on matters of risk and strategy and should promote effective communication between executive and non-executive directors. The chairman is responsible for ensuring that the directors receive all information that is relevant to discharge of their obligations in accurate, timely and clear form. In summary, the chairperson’s role is limited to the effective running of the board and not running the organization. In tandem with the CEO, the chairperson can be used to engage key stakeholders such as regulators, shareholders and the government where necessary. But always in tandem. In partnership. But never alone.

The chairperson is not supposed to sit in the office daily to police management. A properly functioning risk and control management framework should cover this. How that framework is subsequently monitored by the board in its oversight role ensures that a system, rather than an individual brings out into the open that which is concealed. Amen!

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Twitter: @carolmusyoka

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Board and CEO Separation is a Painful Divorce Part 6

The word “tenacity” is defined by the dictionary to mean one of three things: the quality or fact of being able to grip something firmly, or the quality or fact of being very determined; determination or, finally, the quality or fact of continuing to exist; persistence. The Chief Grip, Indefatigably Persistent,  Royal King of Determination Peter Moyo has lived the good litigation life and come up empty. Again. Let me remind you who this tenacious gentleman is as I wrote about it back in 2019.  

 On 24th May 2019, the board of Old Mutual Limited released a statement to the Johannesburg Stock Exchange that it was suspending the CEO, Peter Moyo. A few weeks later, another statement was released that Peter Moyo’s employment was being terminated. The reason given was concerns that had emerged relating to a conflict of interest in a company in which Peter Moyo was the chairman and in which Old Mutual was a shareholder. Moyo took the company to court suing for wrongful termination thus seeking reinstatement, damages to his reputation and asking the court to declare the Old Mutual board of directors as delinquent. In July 2019, Judge Brian Mashile ordered for his temporary reinstatement as CEO, but the company refused to let him into his former Old Mutual offices, leading Moyo to sue further for contempt of court. 

 I wrote five articles about this divorce case between the board and its CEO over 2019 and 2020. In my last piece in June 2020, I wrote “On January 14th 2020, the South African High Court upheld an appeal by Old Mutual against the reinstatement of Peter Moyo as CEO and then two months later on March 17th 2020, the court dismissed Moyo’s application to prohibit the company from hiring a permanent CEO. However, Moyo’s streak of bad luck didn’t end there. A short week later, the Supreme Court of Appeal dismissed, with costs, his application for leave to appeal the January judgement that overturned the temporary reinstatement. The judges found that there had been no constitutional interference with Moyo’s right to work, dignity or self-worth and that he was not entitled, as a matter of constitutional law, to employment at a particular employer.” 

 But Moyo was determined to extract his pound of flesh from Old Mutual in court. To date, it is only Moyo’s lawyers who have extracted thousands of pounds worth of legal fees from their client in addition to Old Mutual’s legal costs. He continued his law suit for damages amounting to R250 million (Kes 1.9 billion) which is the amount he would have earned to the end of his contract and also sued the 13 member board of directors for delinquency. It is important to note that the reason he was asked to leave was due to a very untidy conflict of interest issue. A company that Moyo co-founded before joining as CEO of Old Mutual, NMT Capital, also had Old Mutual as a preference shareholder. During a board meeting which Moyo chaired, a dividend was announced that paid off the ordinary shareholders at the expense of the preference shareholder which was in breach of the preference shareholding agreement. Moyo was paid R30 million (Kes 226 million) out of that dividend while Old Mutual was paid nothing.  

 There were loud protestations of innocence from Moyo, saying that Old Mutual had its own director on the board of NMT Capital when that decision was made so “shauri yenu” (it’s their fault) and he should not be faulted for any conflict. The board in a statement following Moyo’s departure said “The Board has not been provided with an acceptable explanation why, in clear contravention of the relevant preference share agreement with Old Mutual as well as Mr Moyo’s employment obligations, ordinary dividends were declared whilst debt to Old Mutual was outstanding.” 

 So what’s the latest? In January 2022, the Johannesburg High Court dismissed Moyo’s R250 million claim for damages. The court found that Moyo had failed to produce any evidence that Old Mutual had wrongfully terminated his contract. The rain continued to beat upon Moyo when last month, on 16th May 2022, a full three judge bench of the High Court dismissed Moyo’s applications to have the Old Mutual board declared delinquent and in contempt of court. The cherry on the icing on this litigation cake: the applications were dismissed with costs to be borne by Moyo. 

  “Old Mutual is pleased to put this matter behind us after three years of contentious litigation and to focus on growing the business well into the future, with good governance at all times its shining light,” the company said in a statement. In summary: corporate governance 1 – impertinent tenacity 0. More importantly, a key lesson here is that if you’re going to sue a big company for wrongful dismissal, be sure you’re standing on the highest rung of the morality ladder. 

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Corporatize The Family Business

I’ve had a lot of discussions recently with second generation family members who wish to “corporatize” the family business founded by their parents. Having been well educated and widely read and, in some cases, having worked for corporates themselves, they see the danger of not setting up organizational structures that will ensure the business remains sustainable for future generations. In almost all the cases the ageing parents are still active in the business and naturally wary of allowing “outsiders” into key decision making positions that may affect the trajectory of the tightly run organization.

But first things first. The verb corporatize means the process of converting a state organization into an independent commercial company. In many ways, family businesses are like state organizations. Funding comes from the government [founders] and decisions on who gets to run the organization are made by the government [founders] that can control the appointments of the executives and the flow of dividends back into their own coffers, if at all a dividend is declared. Second generation family members are like a privatization commission: Look, let’s sell this company to those who can bring in efficiencies and run this place much better than we can. Why? Because we are simply not interested in running this place anymore and are happy to sit back and receive the dividends off of someone else’s sweat  in some instances, or if we are interested, then we recognize that we don’t have all the answers and perhaps an outsider can help us find the answers [in the form of an independent board of directors] or deliver the solutions [in the form of an independent chief executive officer and senior management].

Last week I wrote about the concept of an advisory board, which is a non-binding and non-legal structure that allows a family to create the semblance of a corporate governance structure, while maintaining family independence. Advisory board members would be subject matter experts and deeply experienced in their areas of expertise, giving the family non-binding but valuable insights on issues such as strategy, risk assessment, internal controls, product and route to market innovation as well as financial performance. Since the advisory board members are not registered as statutory directors in the Companies Registry, they should not bear fiduciary nor legal responsibility for the company.

But how does one deal with a cantankerous founder who would want to remain as “chairman” even on the advisory board? Borrowing from the jurisdiction of the United States corporate governance jurisprudence, it may be useful to appoint a “Lead Director”. This position emerged following the early 21st Century corporate scandals such as Enron and Worldcom in the United States and was found to be an excellent bridge for independent directors where the fairly common role of chief executive officer and chairman were combined. The lead director acts as a liaison between the independent directors and the chair and where it works well, actually takes the lead in formulating the board agenda in collaboration with the chairperson and advises the chairperson on the amount, content and timeliness of information given to the board.

By ensuring a healthy communication flow, the lead director can help the chairperson get comfortable with the concept of receiving external insights and guide advisory board members on what their responsibilities are relating to the role. The family can ensure that the lead director’s letter of appointment clearly expresses his or her role and responsibilities to avoid blurred lines and the danger of overstepping their mandate not to mention pissing off an already wary founder chairperson! It is imperative that the lead director is not an old family friend, someone who may tread gingerly around the chairperson like a cat on a hot tin roof when critical issues need to be discussed or brought to the advisory board’s agenda. However the lead director should be a person of significant gravitas, senior enough to command the chairperson’s, as well as other family members respect as well as having the commensurate business experience as well as emotional intelligence to provide effective leadership, build consensus and facilitate discussions sagaciously.

And maybe, just maybe, the advisory board can gently begin to encourage the founder to relinquish day to day management of the business and move to a more non-executive chairperson role that allows him to have his nose in, but fingers out.

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Twitter: @carolmusyoka

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When is it time to corporatize your family business

At one of my recent corporate governance classes, a participant wondered out loud why large retailers that were family owned were not regulated by the government. His question arose after we had undertaken a case study on what is now becoming an unfortunately familiar situation of mammoth retailers collapsing with significant supplier payments outstanding. The knock on effect of such a collapse is always fraught with dire economic effects on the supply chain of both processed and unprocessed goods, the manufacturers and growers of the same, their cash flows and overall financial stability thereafter especially where such a mammoth retailer has turnover in the billions of Kenya shillings.

Truth is, you can’t expect the government to register your company, give you the license to operate a business and then regulate the management of the millions of companies and sole proprietorships that fuel Kenya’s economy. It would require hundreds of thousands of civil servants to do that. Where the government does step in is when a business decides to seek capital from the public in the form of equity or debt, at which point approval of such an issue will be required from the Capital Markets Authority whose role is to ensure that the public is well informed about the issuer not only at the point of issuing the equity or debt instrument, but for the years following such issue by requiring publication of the financials of the issuer and tracking of their financial performance.

A recent report issued by the Retail Trade Association of Kenya (RETRAK), titled Kenya Retail Industry Outlook Survey 2020, was quite illuminating. RETRAK boasts of a membership of up to 600 businesses made up of supermarkets, restaurants and specialty stores such as mobile phone shops, clothes and furniture shops amongst others. The report provides the outcomes of a survey undertaken by members in June 2020 where 28% of the respondents said that the greatest barrier to trade was weak corporate governance structures especially in family owned businesses.

You know the drill: an entrepreneur starts a business with one branch, the business grows based on customer popularity, more branches are opened and family members are recruited (or forced) into the business primarily out of trust rather than professional qualifications and before you can say Bob’s your uncle, the business has multiple branches and the family owners are stretched to capacity and, in some cases, to their level of incompetence. Spouses and adult children are now running an enterprise with hundreds of employees, multiple suppliers, complex supply chains and even more complex financing structures. More often than not, the founder is unwilling to bring in outside professionals to run the business as that would entail letting out “family secrets”. The result is that family tensions spill over into the business and the rest is history.

A good start would be to design job descriptions for the various roles in the business. From the chief executive officer, chief finance officer, supply chain manager etc, which would then help the founder and the role holder to have clarity on what their specific functions are and, perhaps, allow them to see where there are individual skills gaps that need to be addressed. Doing this in tandem with a well designed organization chart allows role holders to see their reporting structure which helps avoid tensions that accrue when one family member feels undermined where decisions are made without their input. Setting up regular business meetings outside of the family’s dining table and in a more formal office set up, with an agenda and a performance dashboard on the various work functions is also a good way to infuse some professionalism into the business as well as awareness and accountability on what the various role holders are doing.

And for the love of God and country, it would be advisable to avoid the jua kali route of writing the job description yourself and bringing in a human resource professional (of which there are several available) to do this task as it allows independence and the right amount of challenge in ensuring the job description is one that is benchmarked with what is out in the market. While this is not a panacea to weak governance it is a good start to helping the business prepare for the professionalization of key organizational roles critical to the organization as it begins to scale and make an impact on the wider (and often unsuspecting) economy.

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Twitter: @carolmusyoka


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Board and CEO Separation is a Painful Divorce Part V

Last year, I spent a lot of air time on this column commenting on the South African Peter Moyo vs Old Mutual highly publicized wrangle that provided a classic corporate governance case study on director conflict of interest, management of board conflicts and the resultant crisis communication.
Just as a reminder, on 24th May 2019 the board of Old Mutual Limited released a statement to the Johannesburg Stock Exchange that it was suspending the CEO, Peter Moyo. A few weeks later, another statement was released that Peter Moyo’s employment was being terminated. The reason given was concerns that had emerged relating to a conflict of interest in a company in which Peter Moyo was the chairman and in which Old Mutual was a shareholder. Moyo took the company to court suing for wrongful termination thus seeking reinstatement, damages to his reputation and asking the court to declare the Old Mutual board of directors as delinquent. In July 2019, Judge Brian Mashile ordered for his temporary reinstatement as CEO, but the company refused to let him into his former Old Mutual offices, leading Moyo to sue further for contempt of court.

As the case dragged on through the rest of the year, I predicted in December 2019 that the case would be settled out of court due to the high octane nature of the accusations and counter accusations that were best quietly adjudicated in the leather bound armchairs of a country club confines. Well I’m here to tell you that I have had to eat my words. For now.

On January 14th 2020, the South African High Court upheld an appeal by Old Mutual against the reinstatement of Peter Moyo as CEO and then two months later on March 17th 2020, the court dismissed Moyo’s application to prohibit the company from hiring a permanent CEO. However, Moyo’s streak of bad luck didn’t end there. A short week later, the Supreme Court of Appeal dismissed, with costs, his application for leave to appeal the January judgement that overturned the temporary reinstatement. The appeal court Justices Wallis and Eksteen said that Moyo’s intended appeal had no reasonable prospects of success and that there had been no constitutional interference with Moyo’s right to work, dignity or self-worth and that he was not entitled, as a matter of constitutional law, to employment at a particular employer.

While uncorking champagne bottles in celebration, the Old Mutual board hit the send button on the email to the “Next CEO Recruiters” while the company’s share price ticked upward on the Johannesburg Stock Exchange. As Moyo licks his wounds and seeks other creative ways to approach the constitutional court, if his feisty lawyers are to be believed, he has to be mulling to himself on whether there was some level of egotistic braggadocio that drove him to reject the settlement discussions that had initially taken place upon his termination last year.

However that is neither here nor there. It was the Moyo vs. the Board and the latter won. The window to seek a more gentlemanly out of court settlement has significantly diminished now that both a full bench of the High Court as well as the Supreme Court of Appeal have thrown out his case. It is impressive to see the wheels of justice spinning so fast and herein lies an excellent illustration of why a functioning judiciary is a critical cornerstone of an enabling business environment. But there is still the pending issue of Moyo’s suit for reputational damages amounting to R250 million (Kes 1.53 billion) and the delinquency of the 13 member board of directors. According to Rehana Cassim, a senior lecturer in company law at the University of South Africa, to be declared delinquent, a director must be guilty of serious misconduct. There must be a gross abuse of the director’s position, gross negligence, willful misconduct or a breach of trust. Cassim goes further to say that a delinquency order, under South African company law, will ban a person from being a director for at least seven years or even a lifetime in very serious cases. Such a director’s name is put on a public register of disqualified directors which carries a stigma and reputational damage.

For Moyo, the reinstatement battle has been lost but the war against Old Mutual and its board of directors is still to be won. It will be a bruising and costly fight, especially for the side that doesn’t have deep corporate pockets. I’m not placing any bets on who will win this time.

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Twitter: @carolmusyoka

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Board and CEO separation is a painful divorce Part 4

The unfolding South African Peter Moyo vs Old Mutual case is beautiful for the lessons it provides boards and executives simultaneously on various aspects including director conflict of interest, conflict management within a board and, most importantly, crisis management and communication. It is the latter aspect that I want to focus on today. By way of quick summary, on 24th May 2019 the board of Old Mutual Limited released a statement to the Johannesburg Stock Exchange that it was suspending the CEO, Peter Moyo. A few weeks later, another statement was released that Peter Moyo’s employment was being terminated. The reason given was concerns that had emerged relating to a conflict of interest in a company in which Peter Moyo was the chairman and in which Old Mutual was a shareholder. Needless to say the you-know-what hit the fan and Moyo hired a lawyer to sue the company, its board of directors and pretty much anyone who looked at him the wrong way. Both Moyo and his lawyer took to the airwaves and painted a picture of an innocent victim of board injustice, dragging the board chairman, Trevor Manuel into the fray as one already having his own conflicts.

The lesson in crisis management communication is this: take control of the narrative early and quickly. In Moyo’s case, both he and his lawyer took whatever opportunities were availed by television and radio stations to provide sound-bytes and long interviews telling his side of the story. Old Mutual limited itself to press statements with footnotes directing enquiries to the Head of Investor Relations and the Head of Communications. Curious. A bit stand offish, no? But this was likely after the advice of the 10th Battalion of Lawyer Generals who must have said that the board and its chairman cannot be seen to be engaging in the public domain, particularly since Moyo had swiftly taken them to court. When the court issued a reinstatement order on July 30th 2019, Moyo promptly went to work on 31st July, with television cameras conveniently located at the Old Mutual headquarters building entrance. The cameras recorded Moyo’s unsuccessful attempt to go to his offices and the polite rebuffing as his access cards didn’t work and he couldn’t go past the client meeting rooms. Drama fit for a Mexican telenovela.

It is however important to note that Old Mutual and the 10th Battalion were doing a phenomenal job of giving their side of the story. On their company website. If you want to learn the art of being open and transparent about a crisis of magnificent proportions, please visit that website. There is a whole section dedicated to giving a synopsis of the events from the beginning and the materials related to the court case. One colorful and artfully designed communication piece titled the “Peter Moyo Case Factsheet” provides a play by play response to every single assertion that Moyo has made against the company and its board.

Many more dry, impassive and robotic press statements later, the Old Mutual chairman finally put a human face to the board’s side of the story and speak to the public in September 2019 at a press conference and several other carefully orchestrated media interviews. Unfortunately he stepped into every executive’s nightmare: a gaffe landmine. Trevor Manuel, the board chairman said “If you take a board imbued with the responsibility and accountability and you get that overturned by a single individual who happens to wear a robe, I think you have a bit of a difficulty.” Eric Mabuza, Moyo’s lawyer took to the press with much relish at this gaffe, claiming that Manuel was essentially dismissing the entire judiciary since they all wear robes.

To his credit, Manuel owned the statement and apologized unreservedly for the comment a few days later. “It was never my intention to show disrespect to the learned judge or his judgement. I accept that my language was wholly inappropriate…..and sincerely regret the manner in which I did so. My respect for the judiciary is unshaken and rooted in our sound legal process where all voices are heard with remedies available to address differences of legal position.” Kudos to the lawyer who drafted this penitential masterpiece.

There will be no winners or losers when this case ends, is my prediction. This case will have to be settled out of court, out of the glare of the cameras and judges and the verbal fisticuffs that the protagonists have been undertaking outside of the courts. An out of court settlement that will allow both sides to save face is an imperative outcome of this convoluted discourse. It will let this matter slide into the annals of board mishaps and permit both sides to lick their wounds and move forward. After all CEOs, more often than not, never leave with empty hands.

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Twitter: @carolmusyoka

 

 

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How to Train Yourself Into Proserity

During a recent visit to a neighbouring East African country, a colleague recollected his nerve jangling experience as the company secretary for a parastatal. As with all parastatals, the board of directors is made up of appointments emanating from the line ministry. Depending on what the line minister ate for breakfast that morning, recommendations on board director appointments can be anywhere from sensibly appropriate to downright bizarre. In the case of this parastatal, which for purposes of this piece we shall call EACB, a number of the directors fell into the latter category, top of which was Director Mary.

Mary sent an email to the company secretary, attaching a brochure for a training event that was to be held in the United States. The training was on sustainable mining practices in the 21st century. The company secretary scratched his thinning hair. The parastatal was in the agricultural industry and therefore the subject matter of the proposed training was completely irrelevant. But as he scrolled down the screen, his fingers nearly slipped off the mouse in shock. The cost of the training was an eye watering US$68,000 for one participant, and this was before flights and accommodation. The entire training budget for directors that financial year was the princely amount of $32,000. He stood up and took a walk around the building, just to compose himself and the staccato fire of thoughts that were ricocheting around his mind.

When he got back to his desk, he consulted the CEO of the organization who was as dumbfounded as him when she heard not only the cost, but also the irrelevance. She supported his view that they should decline the request. The company secretary then sent a polite email to Mary telling her that it was not possible to send her for that training due to the cost being above budget, as well as irrelevance of the course to the institution. Mary fired off a series of emails back to the company secretary, using many less than flattering choice words that described him as incompetent and petty. By this time, word had reached the company secretary that Mary was angling for a position as a permanent secretary to the ministry in charge of mining. The purpose of the course was to give her a leg up in demonstrating that she had the professional qualifications to do the role. Having got support from the board chairman, the company secretary stuck to her guns. At the next board meeting, once the opening protocols had been dispensed with, Mary fired the first salvo: “The company secretary is inept and should be fired for disrespecting a director.” The chairman, who was clearly a card carrying member of the I-got-your-back club, stepped in and managed to nip that inane discussion in the bud.

A few months later, Mary was indeed appointed to the mining ministry and she stepped off the parastatal board. Within nine months of her senior ministry appointment, she was fired. For wanton, brazen corruption. The end.

We got to talking with this company secretary about his experience as he described the difference between private and public sector corporate governance. “Public sector directors have a sense of entitlement in this country,” he mused. “They view the resources of the parastatal as being theirs to use.” As he was now in the private sector, he marveled at how the directors of his current board were focused on ensuring that the organization’s mandate was delivered in as cost efficient and profitable a manner as possible. “Why do you think that is the case?” I probed. “Pedigree,” was his singular response. According to the company secretary, the pedigree of who was selecting the public sector directors as well as the pedigree of those selected determined the outcome of what would happen to the organizations on whose boards these individuals would sit. Pedigree in this case went outside of biological breeding. It was a function of education, motivation, exposure and the ubiquitous and, quite frankly, over mentioned quality of integrity. Perhaps because of the proximity of the shareholder to the board of directors, poor director selections can be dealt with swiftly and unapologetically. Let me hasten to add, in most cases. However in the public sector, the shareholder is represented by a multiplicity of interests, is amorphous, shifts and changes according to the political wind blowing on that day and, finally, can be prevailed upon to tolerate mediocrity in the boardroom by using the very same multiplicity of interests. Which then opens up an interesting subject for debate: should public sector directors be appointed or should they apply for the roles competitively? More on this next week.

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Twitter: @carolmusyoka

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German Engineering Required In The Board Room

The Germans produce excellent cars. They have also produced a very interesting corporate governance system that was the subject of great scrutiny during the Volkswagen emissions scandal of 2015. In case you mysteriously missed the “Dieselgate Scandal”, Volkswagen was accused of installing software on its US based cars to produce fake results, during environmental regulator tests, on the illegal amount of nitrous oxide being emitted by its diesel cars which could lead to premature death due to respiratory diseases occasioned by smog.

So corporate governance experts weighed in on the scandal, saying that it was a matter of when, and not if, it could happen. German company law provides for a two tier board system. First is a supervisory board whose composition is fairly regimented under a system of co-determination or “Mitbestimmung”. The co-determination system requires at least a third of the board of directors consist of employee representatives if there are less than 2,000 employees and, where employees are more than 2,000,  then half of the board is required to be made up of employee representatives. If the company has less than 500 employees, then there is no requirement for employee representation on the board. The second tier of oversight is a management board which is made up of executives. For companies that have over 2,000 employees, one of the management board members must be a staff director or “Arbeitsdirektor” who represents the employees.

In the case of VW by the time the 2015 scandal was rolling by, the unions and labor representatives occupied half of the supervisory board seats, and took up three out of five of the executive committee seats. Of the remaining seats, according to a September 24th 2015 New York Times article  by James Stewart, two seats are appointed by the German State Lower Saxony where VW is headquartered, three of the seats are held by the founding Piech and Porsche families, two other seats are held by the Qatar Sovereign Fund which owns 17% of the shareholding and one seat is held by a management representative. How in the name of bratwurst  does this affect corporate governance you might ask? A board is only as good as its directors, and if its directors are singularly there to push an agenda, then that agenda is what will prevail at the expense of everything else. Hence the need to balance out a board by having a good number of independent directors who provide the voice of “other stakeholders” including minority shareholders. In the VW case, between the union and labor representatives as well as the two state government representatives, there was always a need to ensure that employees stayed employed. Period. The company was also driven by its Chairman’s need to become the number one automobile producer in the world, which it achieved  in 2014. According to the New York Times article, Ferdinand Porsche, the chairman, directed a successful turnaround at Audi before taking over the leadership at the overall VW group in 1993. The articles continues to state that VW employed nearly 600,000 people in 2014 to produce 10 million vehicles compared to the second largest automobile producer Toyota who employed 340,000 to produce just under nine million vehicles.

So if you think about it, from a basic efficiency ratio perspective, one VW employee produces 16.7 cars compared to a Toyota employee who produces 26.5 cars, almost ten more cars than his German counterpart. Do you think any push for efficiency and wide ranging automation will garner support at a union and labor representative populated board? Another curious construct of the VW board at the time, was the election of Piech’s wife Ursula to the board in 2012. Ursula, a former kindergarten teacher, had been his children’s governess before ascending to the new wife job description. But the Porsche and Piech family members who owned over half the voting shares and vote them as a bloc under a family agreement, were not going to be overruled by small voices at an AGM.

So an employee dominated board, with a strong and powerful family dynasty representation on the same board, were never going to listen to any concerns that may have filtered up about the risks that the highly touted new diesel engines were carrying. Nor was this board the one to ask “what is the legal fix?” at the board meeting where it was announced that the cars were never going to pass the American Environmental Protection Agency emission rules. Sell cars, remain number global one and keep everyone happy and employed was the mantra. Needless to say Piech was forced to step down as chairman, as was the chief executive officer Martin Winterkorn following Dieselgate and VW has been forced to pay almost $25 billion in penalties.

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Twitter: @carolmusyoka

 

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Board and CEO separation is a painful divorce

This week’s corporate governance exemplar stems from our brothers down south in Johannesburg. The insurance titan Old Mutual is in a bit of a tizzy after its board, on 24th May 2019, announced the suspension of the Old Mutual CEO, Mr. Peter Moyo. In the wintry three weeks between the suspension and the subsequent termination of employment announcement on 17th June 2019, it would appear that the Board was trying to engage in a mutually acceptable separation agreement which talks collapsed spectacularly and culminated in the CEO’s termination of employment. Folks: Good CEOs don’t get fired, their exits are negotiated in a way that ensures that face is saved by the protagonists on the table who are the Board on the one hand and the CEO on the other. By the time a CEO is getting fired,  head office is ablaze and the fire extinguishers are broken. Or communication has simply broken down. In Moyo’s case, the Board’s announcement last Tuesday and the hot-on-its-heels  ensuing response from Moyo blew the lid on the minefield that the Board had been navigating with regard to conflict of interest, a perennial corporate governance bug bear.

“Mr. Moyo’s conflicting interest in the NMT group of companies was declared upon his employment and was governed by a specific protocol to regulate the conflict of interest in addition to the general obligations flowing form his employment contract. During the latter half of 2018, the Old Mutual Related Party Transaction Committee (RPTC), a committee of independent OML Board members, requested a report on Mr Moyo’s related party transactions, and confirmation that the terms of his employment contract had been adhered to. During this process, various concerns emerged relating to Mr Moyo’s conduct in relation to his conflicting interest. One of the concerns raised involved two declarations of ordinary dividends by NMT Capital during 2018 totalling R115m. the resultant benefit to Mr. Moyo and his own personal NMT

investment company was R30.6m. These dividends were declared in breach of Old Mutual’s rights as preference shareholder since arrear preference dividends were unpaid at the time and, at the time of the second dividend declaration, the preference share capital was redeemable. The preference share capital remains unpaid. Mr Moyo chaired the board meeting of NMT Capital at which the second ordinary dividend of R105m was declared.”

So what has the Board done here? Imputed wrong doing on the part of Mr. Moyo and make it appear like he acted alone. In fact, they say as much when the statement continues; “The Board has not been provided with an acceptable explanation why, in clear contravention of the relevant preference share agreement with Old Mutual as well as Mr Moyo’s employment obligations, ordinary dividends were declared whilst debt to Old Mutual was outstanding.”

Well, Peter Moyo didn’t take this lying down. He came out fighting, setting the scene for a Mohammed Ali-esque  rumble in the jungle with his own statement on the same day. “The SENS statement released by Old Mutual today contains assertions that at best are incomplete and at worst misleading,” was his opening salvo. He then explained the context of the relationship that was now playing center stage. “Both Old Mutual and Peter Moyo are shareholders in a company called NMT Capital. The NMT/Old Mutual relationship originated in 2005 and was acknowledged when Peter Moyo joined Old Mutual. A separate protocol was signed by both parties to regulate any potential conflicts.” In simpler words, we were in bed together in one house, and got in bed together at a new house. We knew this may raise eyebrows and cause some distress so we signed a protocol to guide us, as man cannot live on bread alone. Especially not if he’s living in two houses.

Moyo continues, “It is quite correct that NMT Capital declared dividends of R115million last year. Old Mutual received R23million (20%) of these dividends, in line with their shareholding. Old Mutual was also paid an additional R20 million in preference dividends. The meeting that Peter Moyo chaired resolved to pay an ordinary dividend of R105million to the ordinary shareholders (Old Mutual 20%, Moyo 26.66 amongst others). In addition the same meeting resolved to pay an addition R37million to Old Mutual. This included the preference dividend. At all times, Old Mutual had a separate director on the NMT board. Importantly he voted for all these dividends. It is therefore difficult to understand any conflict when Old Mutual were party to these decisions through this director’s representation of Old Mutual’s interest and his voting for both sets of dividends.”

I’m not sure how said Old Mutual director who sat at said NMT meeting that declared those dividends slept that night. He was put squarely in the middle of the fight by Moyo’s statement which said: Hey, we made this decision together bro, so you can’t throw me under the bus! This case brings out, in a beautifully pedagogical nature, the interplay between human personality and the treacherous conflict of interest dynamic within a board. The situation is playing out now and we watch and wait with bated breath at what the outcome will be, particularly since Moyo concluded with the inevitable “see you in court!”

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Twitter: @carolmusyoka

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Kenya Airways Rises From The Ashes

[vc_row][vc_column width=”2/3″][vc_column_text]OTP in airline speak means on time performance. Kenya Airways (KQ) has been operating on a fairly good OTP for departures and arrivals over the last 3 months of my frequent regional usage within the East African Community circuit. I mentioned this to the flight purser on my KQ flight from Nairobi to Kigali via Bujumbura a couple of weeks ago. We were chatting while parked on the tarmac on a brief stopover at the dusty pink colored Bujumbura airport. He was amazingly sanguine about KQ’s future, something I had not seen in a long time as I often chat with the staff on the flights who have been typically morose following the poor financial fortunes of the airlines in the recent past. So Juma, as I’ve chosen to call the flight purser for now, explained that the airline has set an OTP target for departure as 15 minutes before the scheduled time so that they can make allowances for delays caused by flight engineering or operations.Out of 8 flights in 4 weeks I only suffered one delay for an Entebbe to Nairobi flight and was informed of the same via a text message as I left for the airport.

Juma mentioned that staff morale is climbing following retrenchments of about 150 last year. Why, I asked? He said that staff were getting incentives for ticket sales, and quite clearly for on board duty free sales given the renewed vigor that I have observed cabin crew flogging those overpriced items lately. “All our pilots are Kenyans,” he said chest bursting with a pride that almost made the buttons of his red blazer pop off as he pointed out another KQ plane that had just landed from Kigali en route to Nairobi via Bujumbura. “Can you see how busy we are, we have two planes on the tarmac of a foreign airport simultaneously!’’

I shared his infectious enthusiasm. KQ had finally reported an operating profit of Kshs 897 million in the financial year ending March 2017. This was compared to the operating loss of Kshs 4 billion the previous financial year. Clearly something had started to fundamentally change in KQ even before the June 2017 appointment of the new Managing Director Sebastian Mikosz, an acclaimed turnaround expert.

Unfortunately for Mr. Mikosz, disgruntled staff leaked a memo last week revealing the appointment of five senior expatriate managers. At a hastily convened press briefing following the contents of the memo’s publication in mainstream media, Mr. Mikosz seemed to be at pains to say how long the 5 managers, all from Poland and former work colleagues of his at his last employer Lot Airlines, would be staying in Kenya. While explaining what looks like an OTP (Only Through Poles) turnaround strategy he told the media that they were initially hired for 3 months. I admire the five senior managers who would quit full time paying jobs at a recently turned around airline in a fast growing European economy to take up a shortterm contract in a piddling, election bickering East African backwater.

In keeping with good corporate governance, his chairman Michael Joseph stepped in to take one for the team. “ I was involved, together with the board, the HR members of the Board, on the decision to support Sebastian in bringing this team here, I personally approved it. It was because those guys, Sebastian knows those guys expertise and that they can hit the ground running. They are not here to take anybody’s jobs; they are here to provide Sebastian with the knowledge and information he needs in order to turn around the airline.”

It’s great that the board chairman (himself a former expatriate – how’s that for visuals?) quickly stepped up to provide much needed support for the managing director on an emotive issue of staff at a national flag carrier. Mr. Mikosz will need a lot of such support especially when some disgruntled staff will continue to use inappropriate means to embarrass him such as leaked memos to the media. There will certainly be significant internal resistance to both him and his “pentagon” as they execute the painful changes that are required to turn around the company. As a rabidly proud Kenyan, I support what the board and management are doing to restore the pride in the Pride of Africa. I do however wish that they would be sensitive to the not so subtle messaging that adopting an “OTP strategy” demonstrates: ‘We couldn’t find other nationals, let alone Kenyans, to do what needs to be done.’

[email protected]: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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Governance helps you to see around corners

[vc_row][vc_column width=”2/3″][vc_column_text]The CEO asked his Chief Financial Officer whether he had tripled the training budget for the next financial year as he had requested. “What if the employees that we spend money training leave us?” asked the accountant. “And what if we don’t train them and they stay?” retorted the CEO.
The role of a company’s board is two pronged: to ensure conformance and to drive performance. Conformance is like driving while looking through the rear view mirror as the board spends time monitoring and supervising management performance. Are the operations on track? Have the financial numbers been met? Was policy followed and did management execute within the realm of their delegated authority?

Performance is quite simply looking way ahead of the road before the driver. What might lie around that corner? Will the company drop off a cliff because the road has ended? This is the strategic outlook that directors cannot shy away from as the existential basis of the company relies primarily on the strategic decisions or omissions that they make. We don’t have to go far to find local examples. On 28th August 2017, Kenya said “it’s a wrap” and plastic bags were banned in a monumental environmental win for the country.

The Kenya Association of Manufacturers (KAM) adopted a heavyweight boxing champion’s stance – it ain’t over till it’s over –and went to court to challenge the notice placed by Ms. Judi Wakhungu, Kenya’s Environment Cabinet Secretary, that gave a six month notice of a ban on plastic bags on 28th of March 2017. You must understand the thinking that they had a snowball’s chance in hell since there had been two previous unsuccessful plastic bag bans in 2007 and 2011. According to KAM, 176 companies were facing a grim future of potential closure.

So let’s assume that even 10% of those companies had a fully functional board of directors with non-executive directors of an independent extraction. Seventeen company boards that should have undoubtedly asked the CEO at the April 2017 board meeting: “What if this plastic ban is here to stay?” The fatal response that the CEO would have provided would have been “What if it’s not? We have seen this happen twice before in the past and we know it will not take effect.”

In the book authored by R. Monks and N. Minow titled “Corporate Governance”, this situation is aptly summarized thus: value is created or destroyed at the point where decisions are made. These companies should have made an assumption that they needed a back up plan in the (what seemed to be unlikely) event that the ban would be effected. Hope is not a strategy. In this case, Judge Bernard Eboso of the Environmental and Land Court ruled that the juice was not worth the squeeze. “Granting the orders sought will severely undermine the protection of the environment while serving commercial interests,” he said.

Good boards are about good decisions write Monks and Minow. A good board would have asked management to start executing a plan just in case the ban took place. Actually, a good board would have started pushing management to create an alternative packaging line after the second attempt at banning plastic bags occurred in 2011.

The second illustration of the strategic role of boards is the Nakumatt supermarket chain implosion. A company does not suddenly begin to unravel one sunny East African morning. The conformance role of a non-existing Nakumatt board would have noted the spiraling supplier and landlord debt and raked management through the coals on what was the cause of the cash flow shrinkage. If a strategy had been tabled to the board years before to begin an expansion that quite clearly was going to suck valuable cash out of the business, the board would have asked management to provide a plan on how this expansion was going to be financed to avoid the current ignominy of landlord’s distressing for rent or, in the Ugandan case, the revenue authority auctioning assets to recover tax arrears.

Good boards are about good decisions. The value of a forward thinking board is infinitesimal.

[email protected]: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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Governance fights lead to ungovernable behavior

[vc_row][vc_column width=”2/3″][vc_column_text]“Cabin crew, disarm doors and cross check,”said the Captain of Kenya Airways’ flight KQ444 that had flown from Nairobi, via Bujumbura and landed at Kigali International Airport last Tuesday. The time was 18:36 precisely. Exactly ten amazingly short minutes later I boarded the hotel’s shuttle to begin my ride to Serena Kigali. It had taken about 8 minutes to deplane, walk into a gleaming airport terminal where six immigration counters were fully manned by young, blue suited officers, get mildly grilled as to the purpose of my visit and walk through with my hand luggage straight out of the terminal. To the right of the immigration counters were two E-Gates, where Rwandese nationals could pass through with just their passports and no human intervention.

We drove out of the airport with the twinkling lights of the beautiful city laid out bare in front of the airport gates and straight into the busy but moving vehicular traffic. Having just arrived from the Ghost of Kidero’s Past,the clean streets were a stark reminder of how Nairobi continues to heave under the collective weight of uncollected garbage and unbanked cash collections. There had already been indications of the Rwandese obsession with health when we departed from Bujumbura about an hour before that. The crew had walked through the cabin of the plane releasing insecticide spray that the Rwandan health authorities required for any incoming air traffic to exterminate potentially harmful insects. Not so in Kenya, we welcome you and your frequent flying vermin.

I was in Kigali to attend a training program where the attendees were citizens of the East African Community member states. Tanzanian, Ugandan and Rwandese attendees brought my unceasing wonderment to a crashing halt as they bombarded the Kenyan attendees with questions about our prevailing political situation, particularly about a bold judiciary, an electoral commission in doldrums and two perennial protagonists that were both sure of victory come October 17th 2017. It was apt that the subject matter of the training – corporate governance- was being tested on a daily, if not hourly basis at the Independent Electoral and Boundaries Commission(IEBC) later in the week. As at the time of writing this piece, 5 out of 6 commissioners had issued a press statement disowning a memo allegedly written by the Chairman Wafula Chebukati censuring the Chief Executive Officer Ezra Chiloba on the handling of the elections.

It is curious that the commissioners did not draw any attention as to the veracity of the leaked memo, which the more sober social media pundits had begun to question. In fact they inadvertently affirmed its authenticity by declaring that they had neither discussed nor sanctioned the memo’s contents, which they only learnt about through the media. What the five commissioners clearly demonstrated was that they were only standing behind their leader long enough to throw him under a bus, which is any chairman’s worst nightmare.

Add to that the fact that there is a communication leak of a confidential memo makes for the script of a Kenyan edition of The Poltergeist. It is unfortunate that a governing body like the IEBC’s commissioners has resorted to lifting up its skirts to reveal the family jewels through the media. There can be no winners with media wars.A chairman’s job is fairly difficult and requires high levels of emotional intelligence, diplomatic speak and consensus building amongst the various internal and external stakeholders that a board has to deal with including its own members.
This could only have happened if some of the Commissioners felt that their Chairman was not building consensus and getting the collective view of the Commission as the governing entity before making critical decisions, especially if he is not an Executive Chairman. I doubt that it was the intention of the drafters of the constitution to give executive powers to the IEBC chair by dint of his being the returning officer for presidential elections as provided for in Article 138 (10) of the Constitution of Kenya.

Our constitutional commissions seem to have created a mongrel of a governance framework that creates a blurred line between oversight of the administrative roles played by secretariats and the execution of the mandate for the constitutional commissions which some commissioners actually undertake. The governance incongruence that this electoral crisis has surfaced at the IEBC, which is quite likely replicated at the nine other constitutional commissions, is one that requires some reflection and urgent clarification by lawmakers of the next parliament.
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Twitter: @carolmusyoka

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Corporate governance in Constitutional commissions

[vc_row][vc_column width=”2/3″][vc_column_text]As I was glued to my television last Wednesday following the election results that were trickling in, I was distracted by a niggling thought at the back of my mind. Since the Independent Electoral and Boundaries Commission (IEBC) became centre stage in the run up to, during and post the August 8th 2017 elections, the Commission Chairman, Wafula Chebukati, has largely been the media face and the voice of the institution. From a corporate governance perspective, it is usually the chief executive of an organization who addresses the public on operational matters related to the institution, as the chief executive is the head honcho of all administrative matters and the executive buck stops with him or her. The chairpersons and their board provide monitoring and oversight over management’s activities so that the accountability buck ends up with them.

But the architects of the Constitution of Kenya 2010 had an alternative governance framework when they designed the ten constitutional commissions of which the IEBC is one. From a corporate governance perspective, it is difficult to align the IEBC with what other statutory corporate entities like parastatals have, namely a board of directors headed by a chair and a chief executive officer who is often the secretary to the board. In the IEBC case, the organization is legally designed to have a chairperson and 8 members. These 9 persons are assisted in their work by a secretariat that is supposed to perform the day-to-day administrative functions of the organization.

Using a standard corporate governance lens – which I recognize is fallacious in light of the intentions of the constitution’s architects – the chairperson and his commissioners seem to have executive roles rather than oversight roles. The assumption is that they will take on the roles on a full time basis, but the Constitution takes into account that some of its constitutional commissions may not warrant full time work as Article 250 (5) provides that a member of a commission may serve on a part time basis. Since the IEBC commissioners take on full time jobs for the six years they are in office, it bears noting then that it becomes difficult to separate the executive from the oversight and they are therefore fully answerable for the acts and commissions of the institution as executives, without a further protective layer of a “board” above them. It also provides for a unique working framework as they take on executive roles working side by side with a Chief Executive who oversees the administration as well. Section 10(7)(e) (iii) of the Independent Electoral Boundaries Commission Act, 2011 provides one of the roles of the Chief Executive as facilitating, coordinating and ensuring the execution of the Commission’s mandate.It’s therefore quite curious to see how the Chief Executive can hold a Commissioner to account for failing to execute the mandate that I am assuming they have assigned themselves as full time commissioners.

The architects of the Kenyan constitution recognized the unique position of liability that it was putting the constitutional commissioners in and provided in Article 250(9) that a member of a commission, or the holder of an independent office, is not liable for anything done in good faith in the performance of a function of office. This is further entrenched in the IEBC Act in Section 15 which provides the same protection from personal liability for commissioners and officers for acts done in good faith.

Back to last week: watching Chairman Wabukati’s performance during the media briefings at Bomas and his almost utter relief at handing over the microphone to the CEO Ezra Chiloba to answer “operational questions”, it was quite apparent that the unique governance framework that constitutional commissions exist in create a “political” face of the institution, and an “administrative” face. The Chairperson is the political face, the one who takes one or several hits for the team in the face of public scrutiny and who existentially provides cover to the administrative team to buckle down and do the work as the bullets fly above them. However, Chiloba’s calm disposition and obvious knowledge of the operational matters, which may be as a result of having been in office longer, shone a bright light on the unique governance structure of this constitutional commission.At best, the chairperson should have let the chief executive receive all the potshots during the main media slugfests, and then step in to do the clean up and bandaging once the hard questions had been parried.

[email protected]: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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Governance lessons from Kenya Pipeline

[vc_row][vc_column][vc_column_text]Being a director on a company board is not and should never be for the faint hearted. An article in last Wednesday’s edition of the Business Daily caught my corporate governance side eye. The story titled “Ochuodho, 3 others to face charges over Kshs 827m fraud” highlighted a court case that has dragged for years with the protagonists avoiding criminal conviction for what, on the face of it, appears to be an ordinary financing transaction. Kenya Pipeline Company had allegedly paid a third party company a large amount of money to enable the third party company make payments on its behalf to its international creditors. The former managing director Shem Ochuodho, and the third party company’s executive directors were in trouble for getting the Attorney General, finance and energy ministries to approve a transaction, only to execute an entirely different transaction.

Within the story is a hyperlink to an older story dated January 10th, 2010 where a magistrate’s court issued a summons to the same Shem Ochuodho and the former board chairman Maurice Dantas to come to the anti-corruption court to answer to fraud charges over the same case. There are a number of corporate governance issues that this old Kenya Pipeline Company (KPC) case bring to fore. To begin with, a transaction was approved by the KPC board (since borrowing has to be typically approved by an institution’s board) but the board chairman (who is responsible for oversight and monitoring via the board) was on the fraud hook together with the managing director (who is responsible for execution). The lesson here: a board of directors is never immune from the actions of management. Secondly, the necessary external approvals seem to have been obtained from the relevant government officials, but management went ahead to allegedly execute a completely different transaction. The lesson here: if your mother sends you to the kiosk to buy flour but you choose to buy Patco sweets instead, you’ll be in very deep trouble.

Based on the newspaper articles however, it would appear that the board chairman’s case seems to have dissolved somewhere along the way but should not distract from the fact that sitting on a board, and keeping a keen eye on what management is asking you to approve, is imperative.

But the second issue is of more relevance. What the third party was supposed to do was to pay the external creditors on behalf of KPC and sit on the debt for as long as it would contractually take for KPC to pay the third party back. Why would this deal make sense to the ordinary man sitting in the Rongai matatu? If the deal enabled KPC to postpone its payments to the external creditors past their due date, it would ease the pressure on KPC’s cashflows thereby enabling it to apply that cash to more pressing current commitments. Secondly, if the deal enabled KPC to convert a foreign currency commitment into a long-term local currency one, it would assist KPC to mitigate against future currency depreciation which would come into play if the Kenya shilling slid south against the US dollar making the foreign currency loan that much more expensive to pay off. (Assuming, of course, that KPC’s revenue model was based in shillings, because if its revenues were in US dollars then there would be a natural hedge).

The story begs the question about what transpired at the KPC board meeting that approved the transaction back in the early years of this century. Did they ask the following questions: Does this third party have the capacity to undertake this transaction on its own balance sheet? No? Then where is it getting the money to fund the transaction? From a bank, you say? So why don’t we just go to that bank directly ourselves? At this point a fairly flushed managing director would be waxing lyrical about how the third party company has a better relationship with the bank and can negotiate a far better deal. Director X, who’s known not to suffer fools gladly, should have raised an eyebrow and asked: “But isn’t the bank that is financing this third-party-knight-in-shining-armour…..our very own bank?”Clearly this didn’t happen, leading to the current court cases. Directors on company boards, kaa chonjo (stay alert)!

[email protected]
Twitter:Twitter: @carolmusyoka[/vc_column_text][/vc_column][/vc_row]

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Low Corporate Governance for Controlled Companies Part II

[vc_row][vc_column width=”2/3″][vc_column_text]Last week I demonstrated the interesting phenomenon of stock market investors who were willing to buy shares, and, in some cases, at a high price to earnings ratio, of companies that had openly stated that they were not interested in having independent directors, having a committee to nominate directors or a committee to review compensation terms for management. One more thing, these companies had little to no shareholder rights. Amongst the egregious governance dodgers are the little known Google (or rather, Alphabet, its parent), Berkshire Hathaway and Facebook.

ISS Governance, an independent corporate governance rating agency, gives NYSE and NASDAQ traded companies a quality governance score based on four pillars: audit and risk oversight, board structure, shareholder rights and Compensation. On a graduating scale of 1 to 10 with the latter being the lowest score and therefore demonstrating higher governance risk, Facebook’s governance score is a resounding 10! It gets a good score of 2 for audit but everything else slides into governance oblivion when board structure rated a 10, shareholder rights rated a 9 and compensation rated a 10.

How do these companies do this? Their capital structure typically has two classes of shares: Class A and Class B. So the owners of a private company who wish to go public to raise present or future capital, or help establish price discovery for the value of their shares, can still maintain tight control over decisions, while diluting their ownership using a dual class share structure. In a case like Facebook, Mark Zuckerberg owns only 18% of the common stock but has over of the 50% voting power, largely by structuring the class B shares that he owns to have ten times more voting power than the regular class A shares. According to a Forbes magazine May 2012 article titled “ Facebook Ownership Structure Should Scare Investors More Than Botched IPO”, these kinds of structures are fairly commonplace in Silicon Valley with the likes of Google, LinkedIn and Zynga. It is also noteworthy that other big brand names like Nike, Ralph Lauren and Estee Lauder have similar structures.
According to Investopedia, the common practice is to assign more voting rights to one class of shares than the other to give key company insiders greater control over the board and corporate actions. These super voting share structures are also good defenses against hostile takeovers where a party can purchase a significant quantity of shares on the open market as to demand a seat at the board table.

Controlled companies are able to do this because NYSE and NASDAQ rules permit these structures for as long as there is full disclosure at the Initial Public Offering stage, and further ongoing filing disclosures. These disclosures should state exactly what corporate governance standards the company is failing to comply with. Thus the American stock investor has to be savvy enough to research the share structures of the companies they wish to purchase before rocking up at the Annual General Meeting and making a fool of themselves demanding to see compensation policies for senior management and all that independent director nonsense that good corporate governance dictates.
But why should the ordinary Kenyan business owner care about all of this? Were such structures permissible on this side of the pond, then it’s fairly safe to assume that we would see more family owned businesses view the Nairobi Stock Exchange as a viable option for capital raising and price discovery without the requisite nuisance value that external shareholders are viewed to bring. A good example would be the supermarket chains such as Nakumatt, Tuskys and Naivas. Or the big local manufacturers like Bidco and Menengai Oil. The flip side of the argument is that without good corporate governance, the current cash flow issues clearly facing Nakumatt’s management would severely infect investor perceptions of other family owned businesses with opaque board structures and have a knock on effect on their market valuation. Controlled company structures require tightly run management practices that stand the test of economic vagaries. With only about 6% of American companies having these kinds of structures it demonstrates that it takes a special kind of owner to convince external shareholders to just forget about governance and put your money where our mouth is!
[email protected]
Twitter @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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Low Corporate Governance for Controlled Companies

Western Refining is an American company that operates as an independent crude oil refiner and marketer of refined products. The New York Stock Exchange (NYSE) traded company commands a price/earning ratio of 33.3, a dividend yield of 4.23% and a market capitalization of almost US$4 billion. In November last year its share price rose by 28% on the back of news that it was being acquired by another company Tesoro, its attractiveness being an efficiently run set of refining and distribution assets that were well distributed between wholesale and retail segments. But here is the interesting bit: Western Refining is a controlled company.

The NYSE defines a controlled company as a company of which more than 50% of the voting power for the election of its directors is held by a single person, entity or group and has rules for controlled companies.
So in one of their regulatory filings, this is what Western Refinery disclosed:
“Under these (NYSE) rules, a company of which more than 50% of the voting power is held by an individual, a group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements of the NYSE, including:

• the requirement that a majority of our board of directors consist of independent directors;
• the requirement that we have a nominating/corporate governance committee that is composed entirely of independent directors
• the requirement that we have a compensation committee that is composed entirely of independent directors

We presently do not have a majority of independent directors on our board and are relying on the exemptions from the NYSE corporate governance requirements set forth in the first bullet point above. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.

Mr. Paul Foster [and others] own approximately 55% of our common stock. As a result, Mr. Foster and the other members of this group will be able to control the election of our directors, determine our corporate and management policies and determine, without the consent of our other stockholders, the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales, and other significant corporate transactions. ….The interests of Mr. Foster and the other members of this group may not coincide with the interests of other holders of our common stock.”

As of the time of writing this, Western Refining’s share was trading at $35.94 with an annual average daily volume of shares traded slightly above 1 million. The point is that there is a certain investor who cares less about how management is being compensated or monitored by an independent board and more about what their return on investment is, via capital gain on the share or dividend yields. I know you’re probably thinking who the black Jack is Western Refining anyway? It’s a random company I picked because it plays by the same rules as Warren Buffet’s Berkshire Hathaway, Facebook and Google. All these companies, and many more, are controlled companies trading on the NYSE. ISS Governance, an independent corporate governance rating agency, gives NYSE and NASDAQ traded companies a quality governance score based on four pillars: audit and risk oversight, board structure, shareholder rights and Compensation. On a graduating scale of 1 to 10 with the latter being the lowest score and evidence of higher corporate governance risk, Western Refining fares pretty well as it gets an overall score of 3, and pillar scores of 2 for audit, 7 for board structure, 2 for shareholder rights and 5 for compensation. Meanwhile, the Sage of Omaha Mr. Warren Buffet’s Berkshire Hathaway has an overall governance score of 8, with pillar scores of 1 for audit, 9 for board, 9 for shareholder rights and 4 for compensation. Alphabet, which is Google’s parent company has an overall governance score of 10, yes you read that right, 10 which is the lowest score, with pillar scores of 2 for audit, 10 for board, 10 for shareholder rights and 10 for compensation! Next week I’ll delve deeper into why this information should interest the ordinary Kenyan business.

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The Life and Times of Whistle Blowers

Do you remember that annoying classmate in primary school who always provided to the teacher unsolicited reports of those who were “making noise” when the teacher had stepped out of class? Or the one in boarding school who reported to the dorm master when colleagues had scaled the fence using military grade subterfuge and sneaked out of school to have a good time? In school we referred to these dystopian citizens as “snitches” or “tattle tales” but this was largely informed by the folly of youth where everyone was supposed to be bound by the Mafian oath of omerta or silence when such indiscretions were being perpetuated. However in adulthood, the role of these informers in an organization is absolutely critical in providing information about criminal activities that are being perpetuated by staff, management or, in extreme cases, the board of the organization itself.

Such an informer is called a whistle blower and is defined as a person who informs on a person or organization that is engaged in an illicit activity. A bank I know had a whistle blower call in to say that the branch manager was stealing from the branch. An auditor was sent over to the branch but he couldn’t find any evidence of the stealing. The whistle blower was tenacious and called again, this time saying “tell the auditor to put a camera in the backroom where the ATM is loaded with cash. He will see.” Sure enough a hidden camera was placed and the branch manager was busted in all his glory skimming money from the ATM cassettes as he ostensibly loaded them with cash.
The Capital Markets Authority (CMA) code of corporate governance practices for issuers of securities to the public 2015(we should probably reduce that mouthful to two words: “The Code”) specifically mentions whistle blowers three times. Some context around its genesis would be useful here. The Kenyan private and public sector space has a litany of cases of gross malfeasance perpetuated by senior management, very often leading to the eventual collapse of institutions for lack of cash flow. More often than not, staff knew what was going on but did not have the avenue to report such activities, as it would lead to instant dismissal, or in some extreme cases, grave personal injury. Imperial and Chase Banks are classic cases of organizations that could have done with a whistle blower policy, but they also beg the question: who do you whistle blow to, when it’s the owners or key officers of the institution perpetuating the fraud? The CMA Code tries to address this, on the premise that companies issuing securities to the public – such as shares via the Nairobi Securities Exchange (NSE) or bonds – have the basic corporate governance framework of a board of directors where the buck should stop. Section 4.2.1 provides that the board shall establish whistle-blowing mechanisms that encourage stakeholders to bring out information helpful in enforcing good corporate governance practices. Sounds a bit la-di-da right? Like some flowery language meant to incorporate current buzzwords such as “good corporate governance” and “stakeholders”.
But a second and far more robust attempt is made further down the Code under Section 5.2.5 which states that the board shall establish and put into effect a Whistleblowing Policy for the company whose aim shall be:
a) To ensure all employees feel supported in speaking up in confidence and reporting matters they suspect may involve anything improper, unethical or inappropriate; b) To encourage all improper, unethical or inappropriate behavior to be identified and challenged at all levels in the company; c) To provide clear procedures for reporting of such matters; d) To manage all disclosures in a timely, consistent and professional manner; and e) To provide assurance that all disclosures shall be taken seriously, treated as confidential and managed without fear of retaliation.

Why should you wake up and take notice if your company is not listed on the NSE? The CMA Code covers any company that has issued securities to the public. Therefore an Imperial Bank, which had issued a CMA approved bond to the public not too long before it crashed and burned, would have been expected to be applying the code within its own corporate governance framework had it lasted long enough. Section 7.1.1 (w) of the Code gets even more prescriptive by declaring that the board shall disclose the company’s Whistleblowing Policy on its annual report and website.

The CMA Code is a fairly modern and well thought out regulatory framework that encourages issuers of securities to “apply or explain” the guidelines provided therein. It will therefore require an inordinate amount of CMA supervision to ensure that issuers of securities are religiously submitting annual returns where they undertake the self-evaluation mechanism that an “apply or explain” framework presumes. If the CMA does this well, it then provides a second level of scrutiny to banks that may have inadvertently escaped the Central Bank of Kenya’s statutory hawk eyes and wish to take money from the public in a different form.

The institutions that do this well outsource the whistleblowing framework to an independent third party whose number is widely circulated within the organization. Staff members are encouraged to call that number or send an email with the assurance that the information will be handled sensibly by a non-aligned entity. The third party entity provides these reports directly to the organization’s board audit committee for directive action to be taken. It is imperative that the feedback loop on the whistleblowing falls outside of current management for obvious reasons: management might be part of the problem. Outsiders have no way of knowing what rot goes on inside an institution until the crap hits the fan. What the CMA Code has done is provide a way to protect investors and enable them to hold issuers of securities to a higher standard of transparency. However, this can only work successfully if the CMA plays its enforcement role judiciously.

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How Not To Grow Revenues-A Lesson From Wells Fargo

[vc_row][vc_column width=”2/3″][vc_column_text]In case you missed it, the United States provided yet another wonderful case study in bad corporate governance in the Wells Fargo case this past September.

On September 8th 2016, Wells Fargo Bank was fined $185 million (Kes 18.5 billion) by regulators after it was found that more than 2 million bank accounts and credit cards had been opened or applied for without customers’ knowledge or permission between May 2011 and July 2015. Employees had been opening and funding accounts in order to satisfy sales goals and earn financial rewards under the bank’s incentive-compensation program.” Dice it or slice it, this was a fraud of monumental proportions that had to have been known from the top. Or was it known? Well, John Stumpf was not trying to take one for the team. Following the termination of about 5,300 employees (about 1% of the workforce) in relation to the allegations, the champion stallion appeared on television on September 13th 2016 quite unapologetic. “I think the best thing I could do right now is lead this company, and lead this company forward,” in response to calls for his resignation. Stumpf was acting straight out of the African leadership playbook titled “Id Rather Die Than Resign.”

A week later, Stumpf met the inimitable Massachusetts Senator Elizabeth Warren. Ms. Warren had done her homework extremely well and in 17 short minutes excoriated the bank CEO. I’ve extracted the first painful minutes here:
Warren: Thank you, Mr. Chairman. Mr. Stumpf, Wells Fargo’s vision and values statement, which you frequently cite says: “We believe in values lived not phrases memorized. If you want to find out how strong a company’s ethics are, don’t listen to what its people say, watch what they do.” So, let’s do that. Since this massive years-long scam came to light, you have said repeatedly: “I am accountable.” But what have you actually done to hold yourself accountable? Have you resigned as CEO or chairman of Wells Fargo?
Stumpf: The board, I serve —
Warren: Have you resigned?
Stumpf: No, I have not.
Warren: Alright. Have you returned one nickel of the millions of dollars that you were paid while this scam was going on?
Stumpf: Well, first of all, this was by 1 percent of our people.
Warren: That’s not my question. This is about responsibility. Have you returned one nickel of the millions of dollars that you were paid while this scam was going on?
Stumpf: The board will take care of that.
Warren: Have you returned one nickel of the money you earned while this scam was going on?
Stumpf: And the board will do —
Warren: I will take that as a no, then.

Two things to note here: First of all is how Stumpf was trying to bring in his board of directors as the reason why he was not resigning. We will never know if his board quite frankly wanted him gone by this time but couldn’t get garner the guts to ask him to leave, after all he was both Chairman and CEO. Secondly, he also laid the decision to pay back his past bonuses squarely on the board’s hands. Under Warren’s probing eye, he was not trying to take the flak for not paying back unfairly earned bonuses. On this one, he was going to go down with his board. Having seen how Wall Street executives had walked away with a slap on the wrists following the global financial crisis of 2008, Warren went for the jugular:
Warren: OK, so you haven’t resigned, you haven’t returned a single nickel of your personal earnings, you haven’t fired a single senior executive. Instead evidently your definition of “accountable” is to push the blame to your low-level employees who don’t have the money for a fancy PR firm to defend themselves. It’s gutless leadership.

Stumpf, who had probably had the best legal brains prepare him for the Senate hearing, had even been trained on the classic “I don’t recall” technique for any questions whose answers might lead to self incrimination. But Warren was in no mood to take prisoners and gave the classic ultimatum.
“You know, here is what really gets me about this, Mr. Stumpf. If one of your tellers took a handful of $20 bills out of the cash drawer, they probably would be looking at criminal charges for theft.
They could end up in prison. But you squeezed your employees to the breaking point so they would cheat customers and you could drive up the value of your stock and put hundreds of millions of dollars in your own pocket. And when it all blew up, you kept your job, you kept your multi-million dollar bonuses and you went on television to blame thousands of $12 an hour employees who were just trying to meet cross-sell quotas that made you rich. This is about accountability. You should resign.
You should give back the money that you took while this scam was going on and you should be criminally investigated by both the Department of Justice and the Securities and Exchange Commission. This just isn’t right. A cashier who steals a handful of twenties is held accountable. But Wall Street executives who almost never hold themselves accountable. Not now, and not in 2008 when they crushed the worldwide economy. The only way that Wall Street will change is if executives face jail time when they preside over massive frauds. We need tough new laws to hold corporate executives personally accountable and we need tough prosecutors who have the courage to go after people at the top. Until then, it will be business as usual. ”
It is noteworthy that it is not only Kenya that is struggling to get corrupt practices actively prosecuted, especially those perpetuated by “untouchables”. And after that lacerating and very public questioning, the bank’s independent directors announced on September 27th that Stumpf would not be receiving $41 million (Kes 4.1 billion) of promised compensation while they launched an independent investigation. Clearly, being thrown under Stumpf’s bus was not what they had signed up for and necessary action was taken.

John Stumpf threw in the towel and finally resigned on October 12th 2016 from the Wells Fargo Board and also stepped down from Chevron Corp and Target Corp on October 19th 2016 where he served as a non-executive director. An honorable action that was a day long and a dollar short.
[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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Imperial Audit: 42 Billion Reasons Why Directors Should Be Cautious

[vc_row][vc_column width=”2/3″][vc_column_text]A pilot was welcoming passengers to the flight shortly after take off. “Thank you for flying with us this morning. The weather is…..” He broke off his welcome with a sharp scream followed by, ”Oh my God, this is going to really hurt. It’s burning.” There was complete radio silence for a full minute before he returned. “Ladies and gentlemen I sincerely apologize for that incident, as I dropped a very hot cup of coffee on my lap. You should see the front of my trousers!” Out of the back came a worried shout from a passenger, “If you think yours are bad, you should see the back of mine.”

The Imperial Bank forensic report is out and any bank director, actually scratch that, any director of a Kenyan company should be having severe indigestion right about now. Following its findings, the Central Bank (CBK), the Kenya Deposit Insurance Corporation (KDIC) and the bank in receivership have sued nine individuals, one deceased person’s estate and eight companies in a bid to recover Kshs 42.4 billion of the banks assets and deposits. Yes, the figure is simply eye watering by its sheer size. This civil suit represents a watershed moment for corporate governance in Kenya. With the exception of three independent non-executive directors (INEDs), the other seven individuals (including the deceased) were directors representing the eight companies that were shareholders in the bank.

While the individuals are being sued for breach of fiduciary duty – a basic tenet of corporate governance – the companies therein named are being sued as being beneficiaries of what may come to be Kenya’s single largest corporate fraud since the 19th century explorer Henry Morton Stanley stepped off a boat onto Kenyan shores.
Over the period of ten years from 2006 to 2016, the bank was found to have operated two banking systems, with the illegitimate system passing through over billions of shillings in fraudulent disbursements over that period. The non-executive directors, including the chairman, were tightly joined at the hip and had cross shareholding in various other companies some of which were property related. In view of the fact that this was starting to look like a brotherhood of veritable kleptomaniacs, the three INEDs who joined in quick succession- two who joined on 1st of July 2014 and one on 1st February 2015- may not have been on the board long enough to cotton on what was, and had been, going on for the previous nine years. But today they are jointly and severally liable for years of mismanagement. These chaps were probably pleased as punch to have made it to the board at all and may have been snookered by the fast talking CEO, whose verbosity is alleged to have steamrolled various discussions on the board audit committee which he regularly attended. Now the three INEDs have to get lumped with the other directors all of whom have been painted with a mouthful of accusations over and above breach of fiduciary duty including negligence, gross negligence, fraud and theft.

One could very well argue then, that banks owe a duty of care to their directors to provide rigorous training in both corporate governance and risk management. There are now 42.4 billion reasons why bank directors need to know what they are signing up for. Actually, I could kick it up a notch and say that the CBK should require a made-for-purpose bank director training that one must undertake before they sign off on those ‘Fit and Proper Forms’ that are required for any bank director and senior officer before appointment to the board.
Yet the CBK is not entirely blameless in this mess, as all this happened on their watch. The regulator cannot claim that it relied on audited accounts to arrive at their conclusions for renewal of licenses. There were glaring irregularities in the governance such as the Board Executive Committee undertaking the role of the Board Credit Committee (BCC) without the proper structures in place including having an INED chair the BCC as per Prudential Guidelines. There were allegedly no notices for or minutes of meetings for a BCC from as far back as 2006. Someone was asleep at the wheel over at the banking supervision unit. The lack of INEDs until February 2014 should also have raised a slap on the wrist from the regulator. But it doesn’t appear to have. The only redemption here is that the regulator eventually stepped in, and quite likely because there was a new sheriff in that town.

Whether that amount of money is feasibly recoverable is something for the courts to determine. And directors should not try and draw comfort that they can ask the companies whose board they sit on to put in indemnification provisions in the articles of association or in their appointment letters. Section 194 of the Companies Act 2015 specifically voids any provisions that a company may make to exempt directors from any liability that attaches from negligence, default, breach of duty or breach of trust. However, companies are permitted to purchase Director and Officer (D&O) Liability Insurance to provide that specific indemnity from negligence etc. But there’s a catch. The same Companies Act does not allow D&O cover to provide indemnity (i) against fines from criminal proceedings, (ii) fines from regulators for non-compliance, (iii) defense of criminal proceedings and, finally, (iv) defense of civil proceedings brought by the company itself in which judgment is given against the director.

Therefore even if the Imperial directors had D&O cover, such cover busts two out of the four prohibitions above, viz (ii) and (iv) since the company is the plaintiff in the civil suit.

What’s the moral of this sordid story? Being a director of any company is risky business. Being a director on a board full of business buddies is even murkier business, the kind that requires one to keep a set of adult diapers on hand as they undertake the flight of their lives.
[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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Banking scandals are not unique to Kenya

[vc_row][vc_column width=”2/3″][vc_column_text]In October 2010, I wrote a piece in this newspaper about a lady called Cecilia Ibru, the disgraced former CEO of Oceanic Bank in Nigeria. Prior to August 2009, Mrs. Ibru had been the Chief Executive Officer and Managing Director at Nigeria’s Oceanic Bank International Plc since 1997. Cecilia Ibru, at sixty three years of age, was regarded as the First Lady of banking in Nigeria since she was the first female leader to raise her bank’s equity to N25bn, (approx $203m in 2010), the first female to head the 5th largest bank and the 9th largest company quoted on the Nigerian Stock Exchange and in the year 2000, the first female CEO to post over N1bn profit ($8m in 2010 value terms) in a financial statement.
Her sterling career came to a less than illustrious end in August 2009, when the Nigerian Central Bank Governor Lamido Sanusi fired the CEOs of five of the country’s largest banks, including Mrs Ibru, for massive irregularities in corporate governance and lending. On the 7th of October 2010, a Federal High Court in Lagos sentenced Mrs Ibru to 18 months imprisonment without an option of fine for abuse of office and mismanagement of depositors’ funds. Mrs Ibru was also ordered to forfeit assets worth N191 billion ($1.5bn) comprising of 94 prime properties across the world including the United States of America, Dubai and Nigeria to the Assets Management Corporation of Nigeria.
It’s useful to put context to what was going on in the Nigerian banking sector at the time. In 2005 the Central Bank of Nigeria initiated one of the most ambitious regulatory policies to date: an increase in the capital base of banks from 2 billion Naira (about US$ 12.5 million at the time) to 25 billion Naira (US$156 million) in order to improve their competitiveness in the international market. This led to a consolidation in the banking sector from roughly over 80 banks to just 24 banks. The global financial crisis of 2008 impacted the Nigerian economy hard, as international investors pulled out of the stock exchange to plug in gaps resulting from losses in other developed markets. By pulling out of the markets, local investors in the Nigerian stock market were left holding shares that had significantly lost value due to the fire sale activities of international investors, a fact that exposed the vulnerability of how those local investors bought the shares in the first place: through shaky, unsecured loans from a few unscrupulous banks. Nigeria subsequently suffered from a financial crisis of its own. Governor Lamido Sanusi, in a February 2010 speech at the Convocation Ceremony of the University of Kano, gave a bare knuckled synopsis of what went wrong: “The huge surge in capital availability occurred during the time when corporate governance standards at banks were extremely weak. In fact, failure in corporate governance at banks was indeed a principal factor contributing to the financial crisis. Consolidation created bigger banks but failed to overcome the fundamental weaknesses in corporate governance in many of these banks. It was well known in the industry that since consolidation, some banks were engaging in unethical and potentially fraudulent business practices and the scope and depth of these activities were documented in recent CBN examinations.
Governance malpractice within banks, unchecked at consolidation, became a way of life in large parts of the sector, enriching a few at the expense of many depositors and investors. Corporate governance in many banks failed because boards ignored these practices for reasons including being misled by executive management, participating themselves in obtaining un-secured loans at the expense of depositors and not having the qualifications to enforce good governance on bank management. In addition, the audit process at all banks appeared not to have taken fully into account the rapid deterioration of the economy and hence of the need for aggressive provisioning against risk assets.
As banks grew in size and complexity, bank boards often did not fulfil their function and were lulled into a sense of well-being by the apparent year-over- year growth in assets and profits. In hindsight, boards and executive management in some major banks were not equipped to run their institutions. The bank chairman/CEO often had an overbearing influence on the board, and some boards lacked independence; directors often failed to make meaningful contributions to safeguard the growth and development of the bank and had weak ethical standards; the board committees were also often ineffective or dormant.
CEOs set up Special Purpose Vehicles to lend money to themselves for stock price manipulation or the purchase of estates all over the world. One bank borrowed money and purchased private jets which we later discovered were registered in the name of the CEO’s son. 30% of the share capital of Intercontinental bank was purchased with customer deposits. Afribank used depositors’ funds to purchase 80% of its IPO. It paid N25 per share when the shares were trading at N11 on the NSE and these shares later collapsed to under N3. The CEO of Oceanic bank controlled over 35% of the bank through SPVs borrowing customer deposits. The collapse of the capital market wiped out these customer deposits amounting to hundreds of billions of naira. The Central Bank had a process of capital verification at the beginning of consolidation to avoid bubble capital. For some unexplained reason, this process was stopped. As a result, we have now discovered that in many cases consolidation was a sham and the banks never raised the capital they claimed they did.”
Subsequent Central Bank of Nigeria Governors, following Sanusi’s tough stance, have done a lot to restore the confidence in the banking sector. It is both noteworthy and admirable that Sanusi took a view of full disclosure of massive fraud in the industry rather than endorse the cover up tendencies of his predecessors thereby receiving international acclaim for his willingness to drag Nigeria’s financial industry through the mud in order to restore sanity, stability and much needed confidence.

[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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Board Directors Do Not Have X-Ray Vision

[vc_row][vc_column width=”2/3″][vc_column_text]Have you visited ABC Place on Waiyaki Way? If you happen to be driving there you first arrive at a poorly designed ticketing booth, maneuvering your car to an impossible angle that will enable the driver’s window to align with the knob you need to press in order for a parking ticket to emerge. Having just missed scraping the ticketing booth with the front bumper, you lurch forward and find polite but firm security guards who do a car search. These astute and fairly discerning gentlemen request you to open your door, open all the passenger doors, throw a bleary eye into the glove compartment and subject the boot of your car to a physical search. Once done, they will cheerily wave you off. Wait. If you have a handbag, or any other bag in your car, they will not subject it to an internal search since handbags in cars purportedly do not present clear and present danger. So the other day I take a taxi to ABC Place and as we are approaching the vehicular entrance via the deceleration lane, the taxi driver politely asks if I can disembark before he drives in. Why, I ask? He says that if he drives me inside he will have to pay for parking even for the 2 minutes it would take for me to haul myself out. Being of reasonable extraction, I obliged him and stepped out and watched him fishtail out of there in relief. I walked in as if to enter and those usually polite-because-I’m-in-a-car security guards stopped short of baring their teeth at me. I was informed in no uncertain terms that pedestrians have their own entrance, round the back towards the parking exit. I tottered all the way back towards said entrance and had to go through a turnstile, handbag search and security black magic wand over my body. I learnt a valuable lesson that day. Security threats via individuals are to be found more from pedestrians with handbags than occupants of motor vehicles.

Why do I narrate this long and unnecessary soliloquy? Boards of Directors are often managed in a similar manner. I have avoided commenting on the Imperial Bank saga largely because it is difficult to fathom and erroneous to paint a broad brush of culpability on the entire board of directors. It is always an enormous reputational risk that individuals assume when agreeing to join any governance board as they are lending their name to the purported governance mechanisms that the organization subscribes to. To the outsider, a board denotes oversight and accountability and a safe pair of hands that stakeholders have entrusted to protect the organization from unfettered management excesses. But the directors as a collective are in exactly the same position as the security guards at ABC Place. They open doors and check the boot and glove compartment, seeing as much as is physically possible with the naked eye.

The pedestrian body search is done at board committee meetings. Greater detail is discussed and more time is spent with management in understanding the scope of financial and operational issues that the organization encounters. But it is critical to note that the operating system of any institution, just like the engine of a car, can be compromised and it would take a forensic investigation or Oketch your car mechanic to open it up and figure out why that catalytic converter light keeps coming on when your driving at 87 km/h. The management of any organization is the actual owner of the business while shareholders are just owners of capital. The management can deliver or destroy value. Management can aim to execute with integrity but still have a few bad apples that sing from a fraudulent hymn sheet against which tight internal controls and compliance should ideally act as a gatekeeper.

Board directors see what the owners (read management) of the car want them to see. A clean boot, an empty glove compartment and a sparkling interior. The engine may be compromised but the car is running smoothly, or so they think. No smoking gun, no grenades. As a director, you only see what management wants you to see. You can ask questions – very hard questions- but if a (manipulated) system generates legitimate reports that are used to guide board oversight then raking directors over hot coals for poor oversight is placing them in a difficult position. Directors spend less than 3 days a quarter providing oversight on a company’s operations. They do not have access to any of the operating systems, nor should they have. They do not have signing powers over any of the bank accounts, nor should they have. But they do carry a heavy responsibility to ask the right questions and demand audits or deeper external investigation where they get a sense that something is not right.

Now if those that are charged with undertaking those external audits are themselves compromised, then the board’s goose is collectively cooked. I have had the pleasure to professionally engage with audit firms during various board assignments. The role of the auditor is to review the processes with which the financial accounts have been generated, to test the assumptions being made by management as well as to interrogate the inputs into the system and the outputs therefrom. If that system has been compromised at the highest level, you’d need the x-ray vision that our security guards are purported to have to assess handbags in cars. A lot of responsibility is placed on audit firms to be all seeing and all knowing. Collectively heaping blame on auditors whose mandate cannot cover running end-to-end tests of all transactions passed is a flawed abrogation of duty. Whose duty is it then? Is it the board, which only comes in four times a year to provide oversight? Is it the shareholders, who have delegated oversight authority to the board and only come together during the annual general meeting? Or is it management who, in actual truth, are the true owners of the business?

[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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Non-Reforms of the Parastatal Kind

Dear Parastatal Politician Director:

Congratulations on the appointment! Your name transcended what must have been several iterations of the best and professional list of qualified candidates for the rigorous task of board director or chairperson. Let me remind you (or perhaps inform you for the first time) about the journey that preceded the gazetting of your name a few weeks ago.

On 23rd July 2013, President Uhuru Kenyatta appointed the Presidential Task Force on Parastatal Reforms (PTPR). The news was met with giddy excitement from right thinking Kenyans as it demonstrated the President’s commitment to actually instilling a new way of driving public sector performance through credible and qualified appointments on the oversight boards of directors. Even better was the composition of the Task Force: Eleven accomplished individuals from both the public and private sector whose experience and professional pedigree were unquestionable.

The team didn’t sleep, I tell you. By October 2013, The Report of The Presidential Task Force on Parastatal Reforms was ready. The team looked east, west, north and south across the global for best practice in government owned entities (GOE’s). And they summarized it into the report. You need to wrap your fingers around this 229-page report before you rock up bright eyed and bushy tailed at your new boardroom. Problem is, you’ve probably already rocked up. But it’s never to late to learn as the late Kimani Maruge, Kenya’s oldest Standard One pupil, would have told you. The report is easily available on the internet because I highly doubt that the Managing Director of your parastatal distributed it to you at your induction. Yes induction, a process that you were supposed to undergo, right?

But the PTPRs knew then that you probably wouldn’t undergo it. In fact, if you turn to page 56 of the 229 page document (and I congratulate you most profusely if you got this far) you will find the following quote: “The Committee identified a number of issues and challenges with the current framework for recruitment, selection, appointment and induction of boards of GOEs. These include:
• absence of a clear framework for recruitment, selection, appointment and induction of boards of GOEs;
• lack of uniformity in the application of appointment procedures, not least in respect of GOEs;
• inadequate induction processes for board members;
• lack of proper skills mix and bloated boards;
• shortcomings in the process of appointment of CEOs;
• lack of understanding of role of boards by board of directors;
• fusing of the Chief Executive and Board Secretary roles.”

Hey wait a minute, let’s take a step back. Did the PTPRs actually imagine that there has historically been a lack of proper skills mix in parastatal boards? I want to believe that following your appointment this has now been corrected, right?

This was their finding: “Achieving the right mix of talent, skills and experience on boards is critical for businesses. In addition, good corporate governance calls for a proper skills mix in the board for boards to effectively carry out their duties as the minds and wheel of GOEs. An organization that recruits from the widest pool of talent ensures a diversity of experience and perspective in the boardroom that broadens discussion. Diverse views promote debate and challenge group mentality; they are more likely to encourage consideration of alternatives, take into account more risks, and develop contingency plans. The lack of a proper framework for recruitment of boards has led to lack of the necessary mix of skills and talent in boards of GOEs.”

But listen. Things are not too bad. You were picked because you have a role to play on your board. Your political background, your experience as well as your very apparent skills will bring in critical perspectives that will broaden discussion. After all you were picked BY the President himself who had conclusively and exhaustively read the Taskforce’s report. If you read nothing else in that report, please I beg you, read that same page 56, a section titled “Lack of Understanding of the Role of Boards by Board Members.”

In case the Managing Director of your parastatal fails to send you for training, or in the event he does and you fail to attend the same, you need to understand this critical fact articulated in that section: “Directors of GOEs just like their counterparts in private companies are required to discharge their legal duties faithfully. These duties are grouped into two categories, namely duty of care, skill and diligence and fiduciary. One of the legal duties of a board of directors is to act in good faith. This connotes several requirements, including the duty to act honestly and in the best interests of the GOE, to not appropriate the company’s opportunities or receive secret profits and to endeavour to fulfil the purpose for which the GOE was established. They must act in the best interests of the GOE. It is this critical role of boards to act in good faith and act in the best interest of the GOE so as to drive forward its strategy that some board members tend not to fully understand and/or practice.”
Yes, the Taskforce is talking about the other guys on the board. Not you. You have happily taken on your role because you will always act in good faith. Right? In case you need a summary of why you were chosen out of 40 million Kenyans to be on the board, the report captures it beautifully: “In conducting this exercise, the PTPRs was exhorted by H.E. The President to always ask: (a) where does Wanjiku stand in this detailed framework? (b) Is the public sector working for her at all? (c) Is she getting value for her precious investment?” This the Taskforce kept uppermost in their mind.

You must remember that you are there for Wanjiku. In every single board deliberation you must keep this front and centre of your mind. Wanjiku is not your pocket. Wanjiku is not your bank account. Wanjiku is Kenya.

[email protected]
Twitter: @carolmusyoka