Posted on

Supermarket Governance

A man walked up to a beautiful woman at the supermarket and asked, “You know, I have lost my wife here in the supermarket. Can you talk to me for a couple of minutes?” 

The woman is intrigued and asks him, “Why?”

The man replies, “Because every time I start talking to a beautiful woman, my wife appears out of nowhere” 

 The supermarket business is a tough business. By the time Nakumatt was collapsing into a debt ridden heap, it owed about Kes 18 billion to suppliers. Hard working manufacturers, importers of goods and aggregators of fresh produce for whom delayed payments had been the bane of their cash starved existence. If the Nakumatt board of directors had been reading their board packs keenly, particularly the financial ratios, they should have noticed that the days payable ratio was growing at an alarming rate. The days payable ratio shows the amount of time that companies take to pay creditors and therefore demonstrates the rate at which a company is burning through cash. If the days payable are high, then creditors are not being paid quickly and, in fact, are actually financing the company as their debts are being used as an alternative to short term borrowing from a bank.  

 Conversely, the days receivable ratio shows the amount of time that companies take to receive payment from their debtors. In the Kenyans supermarket business these would typically be in the 3-5 day range as the bulk of shopping is done by cash or mobile money with a small percentage doing credit card purchases which take 3-5 days for the card companies to settle with the supermarket. Thus the spread between days payable and days receivable is a sweet spot for an efficiently run company: receive your sales in cash as quickly as possible and pay your creditors in the longest time that you can negotiate or dictate. This reduces a company’s need to borrow from a bank for working capital as it uses its supplier debt to finance the working capital cycle.  

 But wait a minute. Did Nakumatt even have a board in the first instance? Well they had sign boards for their more than 60 retail outlets, cheese boards for the Camembert and Brie de Meaux served at the owner’s quarterly celebratory lunch and diving boards for the owners to jump off into the depths of a plunging pool during luxurious summer holidays in the Greek Island of Mykonos. But certainly not a board of directors who should have provided independent oversight over the financial and operational performance of that supermarket behemoth.  

So it was with great pleasure when I read the June 2022 media announcement by French private sector financier Proparco on its conditional investment into the Naivas Supermarket business. Partnering with Mauritian conglomerate IBL Group and Germany’s DEG, they jointly acquired a 40% interest in Naivas. After waxing lyrical about the benefits of the investment, part of which would be used to pay out other institutional shareholders like the International Finance Corporation and a few other private equity funds, Proparco stated what opportunity lay ahead. “This transaction also offers Proparco the opportunity to provide targeted expertise to Naivas and its stakeholders on environmental, social and governance matters…as well as further developing the local eco-system involving suppliers of the Naivas store network.” 

 In the  Business Daily on June 27th 2022, an article titled “Proparco of France buys Kes 3.7 billion Naivas stake” stated that Naivas is set to close the financial year ending June 2022 with a gross turnover of $860 million (Kes 101 billion) and an ambition of raising it to $1billion(Kes 117 billion) in the next financial year. The same article quoted the IBL Group Chief Executive Arnaud Lagesse as saying, “With 84 outlets in 20 cities and towns across Kenya, it has put modern grocery within everyone’s reach. Naivas also contributes to the Kenyan economy, notably by employing over 8,000 people.” 

Naivas is not a piddling roadside kiosk. Not with an annual turnover approaching an eyewatering billion dollars and 8,000 employees in 20 towns across Kenya. That turnover is off the backs of hundreds of suppliers who in turn employ thousands of employees. Naivas, quite simply, is a substantive Kenyan economic cog. So yes Proparco, we look forward to what we hope will be obsessive governance starting with an effective board of directors and the commitment to uplifting a proudly Kenyan supplier ecosystem. This is because every time we Kenyans start getting attached to a local supermarket chain, disaster, like the missing wife in the anecdote above, appears from nowhere. Ask the Tuskys and Nakumatt owners. Proparco, you and your external shareholder consortium are riding a huge moral obligation stallion. Please do not let Naivas suppliers and employees down. Good luck! 

 [email protected] 

Twitter: @carolmusyoka 

Posted on

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]