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Rewarding Men Who Produce Something

“When you see that in order to produce, you need to obtain permission from men who produce nothing – When you see that money is flowing to those who deal, not in goods, but in favors – When you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you – When you see corruption being rewarded and honesty becoming a self-sacrifice – You may know that your society is doomed.” Ayn Rand – Russian philosopher and writer.

I was recently pointed to the quote above by a friend who was perturbed that from the turn of the century, the Nairobi Securities Exchange (NSE) had only had about fifty two companies listing their equity which grew to sixty one by the time the NSE went public in 2014 and listed itself on the exchange, to the current sixty six companies in 2021. In short, in twenty one years the NSE has only had about fourteen or so companies go public. The question is why? Yet in that time, there has been a marked increase in Kenya Shilling billionaires, a number of whom have done nothing other than been at the right place at the right time, including – if the parliamentary inquiry into the KEMSA COVID-19 related procurements is anything to go by – just walking past the KEMSA doors and “angukia-ing” a tender just like that!

As Kenyans we have become inured to the fact that almost absolutely nothing happens to the perpetrators of the corruption related economic crimes. In Ayn Rand’s words “when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you”… it makes one stop and ponder if there is an invisible co-relation between the lack of growth in the capital markets and the growth of graft billionaires who tie up the justice system with adjournments and all manner of technicality cans kicking the case down an unending road.

The truth is, there is a high cost of doing business the legitimate way in this country. Paying your varying taxes on time, complying with the myriad local and national licensing requirements to trade and navigating through a myriad of employment regulations and court jurisprudence that over the years favor the employee over the employer is equally exhausting for many small, medium and large enterprises. Two interesting developments have occurred this year. The first was the attempt by Kenya Revenue Authority (KRA) to introduce the minimum 1% tax on turnover for all companies. This was brought to a screeching temporary halt by the courts in April this year as we await the outcome of any appeals that KRA will make. The second is the current National Hospital Insurance Fund (NHIF) (Amendment) Bill in parliament making it mandatory for employers to match the NHIF contribution paid by their employees.

With the increasing cost of doing business it is small wonder that companies, that are for all intents and purposes excellent candidates for listing on the securities exchange due to their growth potential and significant economic contribution are reluctant to raise their profiles any further than necessary, as the amount of disclosure on legal and financial business aspects make them targets of those “men who produce nothing” as Ayn Rand lyricizes. By flying under the radar of non-disclosure as is required of publicly listed companies, businesses can go about their work without worrying who from the KRA is monitoring their semi-annual results publications in the print media while comparing and contrasting with the tax returns that are being made.

The winners here are the banks, as debt financing has far more attraction for the borrower due to the reduced number of eyes that get to see their financial statements. The losers are the business owners who do not get an opportunity for price discovery that listing provides to enable the equity holders determine the market driven value of their equity, as well as an easier route to realize a gain on their sweat by selling to external shareholders and raising additional alternative capital which in some ways is cheaper and longer term in nature than debt financing.

“When you see corruption being rewarded and honesty becoming a self-sacrifice – You may know that your society is doomed”, Ayn Rand quips. We are not a doomed society yet and I refuse to consign our fate to this negative conclusion. But there is some food for thought in how our regulatory and tax framework in all matters business can reward those that actively produce goods and services for the betterment of our society.

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Twitter: @carolmusyoka

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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.