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Business and Economy Class Shareholding

There is what the hard working Kenya Power technicians fix on the ground. Then there is what the hard working Kenya Power owners fix up there in the rarefied ownership air. Last Tuesday October 17th, Kenya Power issued a press release on the platform formerly known as Twitter. Headed “Kenya Power moves to change board composition to reflect the company’s shareholding structure,” the accompanying statement was an eye watering, 50 megawatts of rapid fire shuffling of a governance deck of cards. The usual sweet nothings prevailed: “to safeguard the interests of minority shareholders in line with good corporate governance standards…” was the first red flag for me. A company that regularly switches up its billing methodology depending on what side of Greedywich Mean Time it woke up that morning is not one that will safeguard anyone. Ever.

The press statement gave a heads up about an extraordinary general meeting (EGM) coming up with an agenda to amend the memorandum and articles of association. This was in order to, and I quote KPLC, “The amendments provide a mechanism for appointing Directors in a manner that proportionately reflects the Company’s shareholding structure. Currently, the Government holds 50.09% of the Company’s shares. In the proposed restructuring, the Government, who is the majority shareholder, will appoint five directors while the remaining shareholders will elect four directors.”

Now it gets very interesting. The government, with a majority thinner than a mosquito’s proboscis, was looking to protect minority shareholders by appointing five directors to the minority’s four? The author of the press statement had been thoroughly set up to write a telenovela script. So when the company put out a full page advertisement two days later with the EGM notice, I sipped a cup of very hot tea and slowly read each special resolution proposed in this carefully scripted act.

The amendments to the articles will create two classes of shares. Class A shares or economy class in the governance Boeing 787 Dreamliner to be held by the hoi polloi and Class B shares or business class to be held by the National Treasury. While both classes get to the same destination in terms of rights and privileges, economy class A shares are entitled to elect four directors. The business Class B shares are entitled to appoint the balance of the directors. Elect versus appoint. That is the class difference.

I do not want to impute mischief in the intentions of the press statement’s author, but the proposed amendment to Article 96 of the company’s articles states that “the directors shall be not less than seven and not more than ten in number.” Why would the press statement say that the government would appoint five directors, when the articles clearly provide that they can appoint up to six directors? Legally speaking, if these changes pass, shareholders at the next annual general meeting will only have the power to elect four directors. The government will have a right to appoint up to six directors, or the “balance”. What this does is to protect the government appointment directors from being rotated out of the board during an AGM. And yet the same full page notice of changes includes article 96 (B) that says the composition of the Board shall comprise a number of directors which fairly reflects the company’s shareholding structure. Since Article 96 provides for up to ten directors, I don’t think a 60:40 director split reflects a fair split for a shareholder who owns 50.09%. Fluff. Period.

It gets even more interesting. The chief executive officer of Kenya Power in the past has also been a managing director, meaning he has a seat on the board of directors. For some listed companies, executive directors are usually exempted from going through the vagaries of election at AGMs through express exemption clauses in the articles. Going forward will the CEO’s directorship be elected or appointed? I went to the governance section of the KPLC website and found  hastily and very poorly scanned board charter and board manual documents. There was no sign of the existing articles. According to section 2.4 (iv) of the soon to be re-written board manual, all directors are supposed to submit themselves to election at the AGM every three years. So will the managing director be elected by shareholders to take up one of their “fairly distributed” four seats on the board? Or will he be appointed by the majority shareholder? What these changes are purporting to do is ensure the majority shareholder’s directors have guaranteed seats on the board, while inelegantly controlling the appointment of the managing director who is quite likely the missing sixth director in the press statement.

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Twitter: @carolmusyoka

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Lights Under The Procurement Table for Kenya Power

“Who let the dogs out?
Who, who, who, who, who?
Who let the dogs out?
Who, who, who, who, who?”

The above lyrics from the song released in the year 2000 by the Baha Men form part of a catchy, dance floor chorus that sticks in one’s mind like a screen saver on permanent loop. They also aptly describe the unrelenting attack currently taking place on the board of directors of the listed utility, Kenya Power (KP).

Mr. Bernard Ngugi, who had been head of procurement by the time he procured the promotion (cheesy pun fully intended) was appointed as KP chief executive officer, in October 2019. Bernard’s lights were turned down low in early August 2021 when his resignation was accepted by the Board and an acting CEO Ms. Rosemary Oduor, appointed to replace him.

Just like night follows a day of resignation, and zebras follow wildebeests, the current Board [which was only appointed in July 2020] suddenly started getting bad press in the media and negative mentions in parliament culminating in the summoning of board members last week to the Ethics and Anti-Corruption Commission to answer to questions of “corrupt” procurement. The chairperson, Ms.Vivienne Yeda, was also summoned last week to the Energy Committee of Parliament to answer to several questions that were so all over the map that Google would have a problem trying to point anyone to find the actual direction that the Committee was heading. From asking for the distinction between an executive director and a non-executive director (something which a parliamentary intern would happily research in all of five minutes), to asking about the details of why Mr. Bernard Ngugi resigned, to the applicable law used by the Board in its refusal to procure meters which had been already approved in a procurement plan and budget, to the implementation status of the human resource structure that had been submitted to the State Corporations Advisory Committee.

Can you procure the key issue that is being hidden in plain sight here, obfuscated by other non-issues such as HR structures and meaningless definitions of directors? Jumping into last week’s attack fray was the secretary general of Kenya Electrical Trades and Allied Workers Union, which represents KP workers, who accused the directors of undermining top management and over reaching on procurement matters. I’m actually quite confused as I have never seen Union officials coming out in defense of non-Union members in the form of senior management. But perhaps I will procure some discernment in due course.

Section 15(1) of the State Corporations Act states that a Board shall be responsible for the proper management of the affairs of a state corporation and shall be accountable for the moneys, the financial business and the management of a state corporation. KP falls within the ambit of the Act as it is controlled by the government who have a majority shareholding of 50.086%. Whereas a Board is not involved in the sausage making part of the procurement process, they are well entitled – as the fiduciary responsibility holders – to give direction on what is to be procured, ask questions on why it should be procured and determine how much the procurement should cost in total through a budgetary process. The board does not get involved in the actual procurement nuts and bolts such as requesting for proposals as that is a management operational function.

When the Board exercises its oversight responsibility, and in this case such responsibility is guaranteed by the State Corporations Act, one starts to wonder why so many noses are being put out of joint. Having listened to the cries of Kenyans who have ceaselessly questioned their high electricity bills, and having scratched the surface and found stock obsolescence and inflated stock purchasing which have to be paid for by hitherto unsuspecting consumers, the new KP Board has drawn a line in the sand and said the days of blindfolded oversight end here. As the late cabinet minister John Michuki aptly said, “When you rattle a snake, be prepared to live with the consequences.” The KP Board has rattled a venomous procurement snake and is currently living the nightmare of dodging its fangs which are emerging disguised in various forms because, after all, the best defense is a strong offense.

The best that we can do, as observers of this nightmare on Kolobot street, is rally behind a Board of directors that is being crucified at the altar of corporate governance and having their individual reputations sullied as a result. It bears noting that people of good integrity will now be highly reluctant to join parastatal boards. But that’s exactly what the venomous snakes want and, in this animal corruption kingdom, more dogs will be let out as we watch.

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Twitter@carolmusyoka

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Oversight, Insight and Foresight

Once upon a time many, many years ago I was an executive director in a bank that had foreign shareholders from different jurisdictions. Consequently, the quarterly board meeting season was a whirlwind week full of back to back board committee meetings starting on Monday, that culminated into the main board meeting typically on the Thursday of the week. Friday would find many of us flat out on our beds in sheer exhaustion, the most tired person being the company secretary who would have had to produce meeting summaries from each committee session that would have to be tabled to the full board. By Thursday morning the company secretary was a strong candidate for taking on a zombie role in the Walking Dead television series. Why were the meetings structured this way? Since a number of the non-executive directors would be flying in from other jurisdictions, it made paradoxical sense to schedule all the board committee meetings and the board meeting back to back to make more efficient and economical use of director time. The paradox in this case was that it led to rushed committee meetings to ensure that one committee session didn’t eat into the time of another that had cross membership of directors. As a result some items on the agenda were skimmed over, which defeated the purpose of committee meetings that are primarily created to undertake a deeper dive into subject matters that could weigh down a main board meeting.

The main beneficiary of this inefficiency was of course the management. By structuring the agenda in a certain way, we could ensure that “difficult” topics were placed towards the end, when discussions would have to be expedited in order for the meeting to be concluded within the allocated time slot. But one of the foreign directors was a fairly astute gentleman who read the committee packs with a hawk’s eye, appearing at meetings with multi-colored page stickers on the pages that he had highlighted sections in felt tip which he would draw everyone’s attention to. When we once attempted to reduce the bulky board packs using more visual charts and less narrative, he vocalized his contempt in a stinging rebuke saying that we were trying to conceal some facts and he did not see the issue in the reams and reams of paper of mind numbing operational detail that had to be produced every quarter. Well that brought a screeching halt to our attempts to de-bulk the pack.

The key role for a good board is to provide oversight, insight and foresight. The oversight role is buttressed by the fiduciary role that board directors play whether in public, private, state owned agencies or not for profit institutions to exercise a duty of care to the organization’s stakeholders over the manner in which the organization is delivering its mandate. The insight role requires board directors to partner with management helping them to perhaps see past the blinkered view management may have of the organization’s business by bringing their own experiences and perspectives from their professional and personal lives as customers. Management benefits from getting a wider horizon on the impact operational decisions may be having and constructive challenge as well as positive builds on decisions being made and executed. The foresight role is one of the most critical, as it requires board directors to keep management on its toes in terms of the strategic future of the organization. Directors have to ensure that management does not get bogged down in the day to day operations of the organization while losing fundamental sight of how the ground is shifting under their feet. Longevity of the institution is a director’s responsibility as management might often focus on short term objectives that meet their annual bonus desires rather than long term objectives that ensure the organization is still standing and relevant in the next decade.

Our board at that time long, long ago was heavily focused on its oversight role. So much so that there was minimal time spent on providing insights nor foresight on where the organization should be headed. The board and committee agendas were designed specifically to fulfil that role and subsequently the institution jogged on the spot for a long time while competitors pivoted and thrived as they broke new frontiers in banking. A board, through a good agenda setting, should always ensure that it strikes a healthy balance between looking in the rear view mirror and steering the vehicle to a successful future. You can never reverse into a glorious future!

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Twitter: @carolmusyoka

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When is it time to leave a Board

Habida joined the board of the Burnley Policy Institute (BPI) as an independent non-executive director. BPI, a non-governmental organization, was created to provide well-funded academic research in agricultural best practices to influence government agricultural policy. Habida was asked to join the audit committee of the board due to her accounting background. At one of the committee meetings she attended, Anthony, the BPI finance manager, tabled the quarterly accounts and Habida noted that the US Dollar current account was sitting flush with cash. “Why don’t we place these funds into a fixed deposit instead of letting them lie idle in the current account?” she posed to Anthony. Anthony didn’t miss a heartbeat. “These are funds that we received from a donor and our donors are very strict that their funds need to be utilized strictly for programmatic activities and not to be placed in deposits to earn interest.” Habida was taken aback at the missed opportunity to leverage on sweating a liquid asset, but understood that a donor-funded organization like BPI had to abide by the rules set by those who gave it critical funding.

Two quarterly meetings later, Anthony tabled the accounts and Habida noted that there was significant growth in the “interest earned” section of the income statement. As the discussion on the accounts wore on, she asked Anthony why this line item had grown. Anthony, always quick on the take, didn’t miss a heartbeat. “That is interest earned from some deposits that we placed at XYZ Bank.” Habida quickly glanced at Mary, the chair of the audit committee. Mary didn’t notice that Habida was nonplussed at Anthony’s response and waved at him to continue his presentation. “I’m sorry Mary, but I am a little confused,” Habida interjected. “A few months ago, Anthony here said that donors do not allow us to place funds in fixed deposits as we are supposed to put their funds into programmatic activities. So what is the source of these deposits at XYZ Bank since all our revenue is donor sourced?” This time, Anthony missed several heartbeats. Eventually he managed to croak out a fairly lame explanation about how the source of these deposits was from a donor that had not placed any restrictions. But Habida smelled blood in the water and followed through on her piranha instincts, asking Anthony what the deposit placement policy was, who approved which banks the deposits would be placed in and what were the actual interest rates paid.

Mary, noting Anthony’s obvious discomfort, turned to Angela, BPI’s executive director who had been quietly observing the heated exchange. Angela sighed loudly and leaned back on her chair. “Honestly, I don’t understand accounting and, quite frankly, I have never understood what Anthony does so I just leave him alone.” Habida took note of Angela’s laissez faire attitude and made a mental note to have a private word with Mary, the audit committee chair as well as the chairman of the board later.  She worried about the inconsistencies in Anthony’s answers which, in her experience, spoke to the possibility that Anthony may have been placing the institution’s funds in banks that were willing to “reward” him for such placements and these were not necessarily the most stable of financial institutions. A few months later, Habida resigned from the BPI board when it became apparent that there seemed to be no clear direction from the board chair as to how to handle a potential financial scandal in the making, in an institution where the chief executive had no qualms announcing to her head of finance that her ignorance of his work meant that she was happy to leave him alone. This is a one hundred per cent true story that happened here in Kenya, and one I have used several times when I am teaching corporate governance to directors. I use this story in the context of when should someone leave a board that they are sitting on? This story usually generates heated debate, as some students feel that Habida should have stayed on to try and fix the problem while others feel that the problem is insurmountable and Habida made the right decision to leave. As some pescatarian wonk once quoted, a fish rots from the head. The lack of a sense of urgency by the executive director to deal with a potentially rogue finance manager together with the board chair’s relaxed attitude about the executive director’s capacity to manage the finance manager made Habida extremely nervous and she worried about her own reputation as a director. About a year after Habida’s resignation from the board, Angela was forced to resign when a senior member of her team executed a bloodless coup after leading two staff strikes protesting against her incompetence. And BPI lived happily ever after. I think.

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Twitter: @carolmusyoka

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Tax Evasion Generates Personal Liability

Well, the running commentaries on the recently read budget will keep us busy for the next few weeks. I will say one thing: it is very aggressive. For aggressive expenditure to occur, there has to be, commensurately, an aggressive revenue collection. Directors of private and public companies need to be alive to the fact that it is not only the Companies Act 2015 that provides strict liability for individual directors for statutory breaches. The taxman has always been waiting in the wings, ready to hold directors liable for tax evasion. Originally Section 116 of the Income Tax Act, Cap 470 provided that where an offence under the act had been committed by a corporate body of persons, every person who at the time of the commission of the offence was a director, general, manager, secretary, or other similar officer of the body corporate, or was acting or purporting to act in that capacity, shall also be guilty of the offence unless he proves that the offence was committed without his consent or knowledge and he exercised all the diligence to prevent the commission of the offence that he ought to have exercised having regard to the nature of his functions in that capacity and in all the circumstances.

Whoa! What a mouthful of a sentence! All those words to simply say: “Boss, if you’re a director or senior officer of a company and that company commits a tax offence, you are also personally guilty of the offence unless you can demonstrate that you were blissfully ignorant and that you were smart enough to try and stop said offence from taking place if your position warranted you knowing that it was going on.”

Someone woke up and realized this was a fairly easy pill to swallow so they designed an amendment to kick the heat up a notch. Particularly in light of the fact that Kenyans love to form companies for all manner of businesses and appoint their friends as directors or proxies. So section 116 was repealed by Act 29 of 2015 and replaced with Section 18 within Act 29 that deals with liability for tax payable by a company.  Because misery loves company and karma is a five letter word related to a female dog, Section 18 brings the company’s shareholders into the tax offence garden party. Section 18(1) states that subject to subsection (2) where an arrangement has been entered into by any director, general manager, company secretary [see what they did there? They clarified the word secretary by narrowing it down to the company secretary] or other senior officer or controlling member of the company with the intention or effect of rendering a company unable to satisfy a current or future tax liability under a tax law, every person who was a director or controlling member of the company when the arrangement was entered into shall be jointly and severally liable for the tax liability of the company.

Hold my glass for a minute. Apart from clarifying that it’s not just ANY secretary on the hook here, the law now provides that it is a controlling shareholder who is also on the hook for arrangements that prevent both current and future tax liabilities being met. A controlling shareholder is regarded as one who beneficially holds directly or indirectly, either alone or together with a related person or persons, 50% or more of the voting rights, rights to the capital or rights to the dividend. So what happens in subsection (2)? This is where an escape hatch from personal liability is provided. The above mentioned persons shall not be liable if they did not derive a financial or other benefit from the arrangement to evade tax. Well that should be easy to prove, right? Don’t get too excited yet. Above mentioned persons also have to have notified both the company and Kenya Revenue Authority (KRA) that they were opposed to the arrangement once they became aware of it.

I think by now you’re getting the gist of KRA’s mandate over you as a non-executive director, executive director, general manager or company secretary of a Kenyan company. Previously you were allowed to plead ignorance as your defence. But the 2015 amendment doesn’t entertain your ignorance of the offences, rather it places on you the dual responsibility of showing that you not only didn’t benefit financially, but that you also went out of your way to send something more formal than a Whatsapp message to that recalcitrant CEO saying that you were NOT trying to be part of the tax evasion scam. With a copy to KRA stat!

Mull on that this week, as you watch our friends at Times Tower go on overdrive this year.

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Twitter: @carolmusyoka

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Political Fallacies Shouldn’t Drive Economic Behaviour

[vc_row][vc_column width=”2/3″][vc_column_text]In my previous life, I was an executive director on the board of Barclays Bank of Kenya. Being the first female in that position in the bank’s ninety-year history was a testimony to the bank’s progressive shift at the time to a more gender inclusive and younger board. Right outside the 8th floor boardroom at Barclays Plaza, was a toilet facility: for gentlemen only. The ladies toilet was a hop, skip and a jump further down the corridor where the staff bathroom facilities were. Now, a fallacy can be created here: that Barclays Kenya never envisaged a day that women would ever be on their board, and therefore contrived to only have a gentleman’s commode available that was contiguous to the board room. The more likely story is that when the building was constructed, the toilet facility was tucked on as an afterthought, as that boardroom was being partitioned. Back then, it was primarily men on the board and therefore it made perfect sense that it would become a gentlemen’s facility. With the passage of time it was never deemed necessary to add a ladies toilet probably because the female directors on the board never raised it as a mission critical board agenda item. Why do I give this story? I narrate it as it demonstrates how urban legends are created: That women were never imagined to ever join the boardroom and the lack of a toilet is evidence of such myopic thinking. Which is absolutely untrue.

Last week I had an early morning meeting in Upperhill, Nairobi’s rapidly trending “must have” corporate address. I turned onto Hospital Road and the rising sunrays in the salmon colored sky glinted off the steel and glass edifices of several new buildings. Upperhill is a testimony to unplanned gentrification, with a road infrastructure that is struggling to catch up to the real estate capital that has been heavily invested there.

That real estate capital is a further testimony to the fallacy that is often being perpetuated that Kenya is walking an economic tightrope, with certain doom waiting at the bottom of the political circus. The buildings didn’t drop out of a Jupiter sky. They were deliberately constructed by owners of capital that see further past the building’s balance sheet depreciation. I was a little stumped. A building is a large and long-term investment. It is a loud and vociferous “we are here to stay” statement. And there are several of those statements in that square mile or so that forms Nairobi’s emerging financial district. So I asked one of the corporate titans located in Uppherhill as to why there was such growth and development in the area, when the print, television and social media paint such a gloomy picture of the country’s future. His response was reflective of corporate Kenya: Social media in Kenya is an effective pressure valve, it allows for steam to be released regularly to reduce the compressive forces of political dissatisfaction. As a business driver there would be greater fear if voices of dissent had no outlet, as that would mean that the country would be snowballing into a cataclysmic event whose trigger could not be determined, as happened with Tunisia’s Mohamed Bouazizi’s self immolation in December 2010 in protest of police corruption and ill treatment that sparked off the Arab spring. Owners of capital detest the inability to predict or calculate political risk. Kenya’s political risk is seemingly one that can be calculated and absorbed in the cost of doing business in the financial capital of the greater East African region.

Italy provides a classic example of political risk divorcing itself from economic growth. By the time Silvio Berlusconi was taking on the Prime Minister’s office in April 2005 for his third tumultuous shot at greatness, he was forming the 60th government that Italy had had in the 60 years since it had become a republic in 1946. Past Italian governments hardly lasted more than a year on average. Yet Italy remains the 9th largest economy in the world, as well as a card-carrying member of the European Union and the G7 economic powerhouse. How is this possible, when we in Africa have been conditioned to believe that central (and now county) governments are the singular premise on which great economies are grown?

According to a report from Focus Economics, Italy’s economic structure relies mainly on services and manufacturing. The services sector accounts for almost three quarters of total GDP employing around 65% of the country’s total workforce. Within the service sector, the most important contributors are the wholesale, retail sales and transportation sectors. Industry accounts for a quarter of Italy’s total production employing around 30% of the total workforce. Manufacturing is the most important sub-sector within the industry sector. The country’s manufacturing is specialized in high-quality goods and is mainly run by small- and medium-sized enterprises. Most of them are family-owned enterprises. Agriculture contributes the remaining share of total GDP and it employs around 4.0% of the total workforce.
The Focus Economics reports adds that after World War II, Italy experienced a shift in its economic structure. It transformed itself from an agricultural country to one of the most industrialized economies in the world. The force behind the post-war economic miracle was the development of small- and medium-sized companies in export-related industries. In the following decades, the economy has had both ups and downs. It is also noteworthy that Italy is the last Eurozone member on Transparency International’s corruption index at number 69 next to Greece, Romania and Bulgaria. The Italian Court of Auditors estimates corruption to amount to about 40% of public procurement value.
We can and we are already growing into a regional economic powerhouse, if we leave politics to the politicians and simply focus on growing our SME base ourselves. Our stable shilling in recent volatile times also demonstrates our economic resilience. The Italian model substantiates that economic growth, in spite of political turbulence and corruption, is not such a fallacy.

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