The Supreme Ugandan Shadow Director

One dark night, two men are walking home after a party and decide to take a shortcut through a cemetery. Right in the middle of the cemetery they are startled by a tap-tap-tapping noise coming from the misty shadows. Trembling with fear, they find an old man with a hammer and chisel, chipping away at one of the headstones.

“Walalala!” one says after catching his breath. “You scared us half to death. We thought you were a ghost! What are you doing, working here so late at night?”  “Those fools!” the old man grumbled. “They misspelled my name!”

Last month, our Ugandan brethren were caught up in a governance kerfuffle involving the highest office in the land. In early July 2022, the Board of Uganda Airlines appointed Ms. Jennifer Bamuturaki as the new Chief Executive Officer. Actually, that’s not true. According to an East African newspaper article published on July 7th that reported the appointment, what really happened was that on July 5th the chairperson of the airline’s Board received a letter from the Minister for Works and Transport, General Katumba Wamala. The letter informed the Board Chairperson that Ms. Bamuturaki, who up until minutes before the letter was received had been serving as interim CEO for more than a year, had been appointed as the substantive CEO.

The good General wasn’t trying to take one for the team. He shone a bright light into the misty governance shadows and stated that it really wasn’t his idea and that actually, the directive had come from the permanent occupant of Uganda’s State House back in April. The East African article doesn’t delve into why it took the Minister another three months to act on said directive, but we are not here to question the slow grinding wheels of bureaucratic execution. And neither was the Ugandan Parliament interested in that time lapse. What they were interested in was how in heaven’s name someone who didn’t apply for a job get it in the first place? Moreso since the globally renowned firm PwC had been appointed by the airline’s Board to spearhead the recruitment of the CEO and the process was still ongoing.

So on August 17th  2022, Ms. Bamuturaki appeared before the Parliamentary Committee on State Authorities and State Assets to answer questions about her appointment. The Committee found that she did not have the minimum academic qualifications required for the job as advertised by PwC, but found that her 15 years of experience surpassed the 10 years required on the advert. After flexing their legislative muscle and making all the requisite noises (Kenyan jurists might call it hot air and somewhat of a wild goose chase) required for their constituents to know that they were hard at work, that was it. The good lady continues to lead the airline and life moves on as it very well should.

What the State House occupant did was to direct the Board from the shadows. The interesting thing is, under company law anyone who provides direction from the shadows can be dragged out into the light to attract the same kind of liability as a substantive director in the event you-know-what hits the fan. They are called a shadow director. Section 2 of the Ugandan Companies Act defines it quite explicitly by stating that a director includes any person occupying the position of director by whatever name called and shall include a shadow director. The Kenyan Companies Act gives a little more illustration on what this shadow directorship looks like. While not expressly using the word “shadow director” section 3 provides that a director is any person who a) occupies the position of a director by whatever name the person is called and b) any person in accordance with whose directions or instructions the directors of a company are accustomed to act. Such advice excludes that coming from a professional capacity such as lawyers or auditors for example.

The good General who is the line Minister already set the trend for the Board in case of any trouble that may emerge ahead. He pointed his finger upstairs and said in the immortal words of Shaggy, the reggae singer, “It wasn’t me”. In the unlikely event the Board of the airlines is ever in the dock for corporate malfeasances due to the acts or omissions of the CEO, they too can sing in unison “It wasn’t us” while being left solo at the lights of presidential immunity.

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Twitter: @carolmusyoka

Hotel expansion leads to talent contraction

[vc_row][vc_column width=”2/3″][vc_column_text]Two weeks ago today, at or about 11 o’clock in the evening, I arrived in Canaan. The Golden Tulip Canaan to be precise. It’s a brand spanking new hotel that is less than 2 months old, built in the heart of Kampala’s Nakasero district. Having arrived late in the night the hotel’s unmistakable silhouette could be seen from a distance due to the exterior glowing LED lights cleverly positioned to create a picture frame on the entire front of the edifice. A very friendly staff checked my tired bones in but not even exhaustion could stop me from appreciating what a new hotel smells and feels like in the beautifully furnished rooms and spacious bathrooms. But the promised land of four-star hospitality came to a crashing halt the next morning at breakfast.The receptionist had informed me that breakfast would be served from 6:30 a.m. but having walked in at 7:00 a.m for a client breakfast meeting, I found little sign of life or food in the dining room. It went down Joshua’s hill from that point on and only a fairly responsive manager helped to stem the unraveling crisis that ensued.

On that same morning, this newspaper in an article titled “13 new hotels to enter Kenya in next 5 years” quoted a PriceWaterhouseCoopers (PWC) Hotel Outlook report that predicted 13 new hotels opening in Kenya by the year 2021 which would add 2,400 rooms and expand hotel capacity in Kenya by 13%.This creates an oxymoronic impact: good news for the industry, bad news for the industry. The good news is the fact that Nairobi’s continued growth as a regional business hub and conference destination could only be sustained with the necessary supporting infrastructure of an expanded airport, feeder roads and international business grade hotels.

The impending entry of international hotel brands such as Sheraton, Mövenpick, Ramada, Hilton, Best Western, Radisson and Marriott is a testimony to the country’s growing international business stature and provides an excellent opportunity for overall service in the hotel industry to upscale. The bad news is the fact that such rapid growth in the same industry will lead to significant movement of experienced hotel staff in an extremely limited four and five star hospitality segment.

Business human resource strategies take one of three forms: build, buy or a combination of both. A build strategy may be more cost efficient in the short term as the organization hires low experienced staff but it requires massive investment in training to up skill employees to the service levels required. A buy strategy is effective in the short term as the organization hires experienced staff typically at a premium over their current salaries at their existing places of work. But such premiums add a cost to the overall payroll and create discrepancies in pay scales for staff at the same level within the buying organization. A combined strategy allows for a careful balancing and targeted acquisitions, while ensuring the “bought” resources are embedded as part of the training strategy required to maintain the service levels.

Whatever the HR strategy, existing four and five star hotels will have to adopt a defensive mechanism to stem the impending talent attrition.Throwing money at this problem is not a viable option as our hospitality industry is still recovering from the effects of terrorist attacks and the subsequent travel advisories leveled against Kenya in the last four years. This will require some scratching of heads to find and develop golden handcuffs to lock down experienced and talented resources while also preparing to lose the second layer beneath them who are chomping at the career growth bit and are the obvious targets for new employers. The good news is that Utalii College should see a resurgence in activity and demand for training from new recruits.Even better news is that there are now homegrown options for the many Kenyans working in the Middle East hospitality hubs of Dubai and Qatar. For all the money used to build a hotel, the last thing a hotel investor wants to create is my recent Canaanite experience: all the lights are on, but no one is home. People drive a business, not just posh facilities.

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

Chasing The Truth In Parliament

[vc_row][vc_column width=”2/3″][vc_column_text]Last week, an unlikely source in the form of a Parliamentary Committee helped to unseal the tightly held lips of the Chase Bank’s board of directors. The directors had been summoned to assist the Committee to understand the challenges that faced the Bank, resulting in the same being placed under receivership by the Central Bank of Kenya. This was an opportunity for the board to give its side of a controversial story, a tale that has as many versions as there are heads to the Greek mythical hydra. The story caught my attention for one reason only: The directors called the auditors professionally ignorant. Actually let me quote the exact statement here: “The Musharakah Agreements for each of the SPVs clearly show Chase Bank’s 99% interest in the Musharakah assets. Deloitte’s insistence on treating this as a normal loan or advance can only be labelled as professional ignorance at best.” Part of the dispute between the auditors, Deloitte in this case, and the board of directors has been on the treatment of a series of real estate transactions either as internal loans to a key shareholder (according to the auditor) or as Musharakah assets (Islamic financing terms according to the directors). So I pored over the submissions made by the directors in their vigorous defence of these assets.
Banking is premised on the fact that there are depositors who want a safe place to put their money, and there are borrowers who require to borrow funds for consumption. The bank is simply an intermediary. In the case of Islamic banking, the institution applies Sharia compliant procedures in the booking of those deposits and loans. The key point here is: there must be a customer. Period. Finito. Whether it is mainstream or Islamic banking there must be an individual or an entity who is the customer. But the directors state thus in their parliamentary submissions:
“Subsequently, Deloitte rejected the Musharakah Agreements and Deloitte insisted that the Musharakah properties be charged to the bank, thus effectively classifying the SPVs as Loans and Advances rather than Islamic investments as documented. These loans would then become technical insider loans, as the shares in the SPVs were held by the two directors, albeit held in trust for the Bank. Chase Bank’s Management emphasised to Deloitte that treatment of the Musharakah assets as Loans and Advances would be in contravention of not only the principles of Islamic banking (and therefore a breach of trust with Islamic depositors), but also of Section 12(c) of the Banking Act and
would incorrectly treat these as an insider loan. It was evident that Deloitte were simply not interested in appreciating the nature and substance of the Musharakah Assets or the principles of Islamic banking.”

I scratched my head and read the report twice over. At no point did the directors say who the ultimate customer was. I mean, a bank doesn’t wake up and decide to give a loan out to a customer, whether Islamic or otherwise. Why was there no attempt to say that this was an unfair treatment of a yet-to-be-named customer who had borrowed from the bank in good (Islamic) faith? That the assets were bought in the name of the SPV is not in doubt. That the SPV has two Chase directors as the shareholders is not in doubt. But where the shareholders were holding the shares “in trust” for the bank is where it starts to get “grab-a-bag-of-popcorn” interesting. The directors fail to mention if a “deed of trust” was provided to the auditors as evidence of that understanding between Chase Bank on the one hand and the SPV shareholders on the other. I mean, one doesn’t assume trust falls off the back of the Kisumu express train, it must be documented somewhere, right? The directors beat their Islamic financing drum further by dragging in the regulator into their drama: “On 26th July 2012, Chase bank wrote to the Director of Bank Supervision at CBK requesting CBK to revise the Central Bank Prudential Guideline on Publication of Financial Statements and Other Disclosures to accommodate Islamic products and
specifically:
(i) the Islamic Banking Income received to be reflected separately in the Profit and Loss
Account;
(ii) The Islamic Banking Expenses also to be reflected separately in the Profit and Loss
Account;
(iii) The Islamic Banking investments or Financing Activities as a separate Asset line in the
Balance Sheet;
(iv) The Islamic Deposits or Liabilities as a separate Liability item in the balance Sheet; and
(v) A separate Off Balance Sheet line item for Islamic banking.
The CBK has not objected, in the absence of any changes to the Prudential Guidelines, to the classification and treatment in any of its reports to the Bank.”

I have to admit, that this submission by the directors stumped me. If you wrote to the regulator and asked to be reporting Islamic Banking products separately, and the regulator did not object, then why do your 2014 and 2015 financial accounts not reflect the same? I zoomed across to the only fully-fledged Islamic Banks in Kenya, Gulf African Bank and First Community Bank (FCB) websites to see how their Islamic assets are recorded. Their professionally competent auditors in the name of KPMG and PriceWaterhouseCoopers (PWC) respectively reported loans as “financing activities (net)” exactly as Chase had requested the CBK to do in (iii) above. (It’s noteworthy that PWC audited the FCB accounts in 2014 but the 2015 published accounts are silent on who their auditors were) If Chase directors had knowledge as far back as July 2012 on how “Musharakah Assets” should be recorded on the balance sheet why wait until June 2016, or four years later, to call their auditors professionally ignorant? And why are the Islamic depositor funds not separately recorded yet the directors have vigorously highlighted the potential breach of trust for the Islamic depositors if Musharakah Assets are treated as loans and advances?

The Chase Bank saga is a case study of corporate governance failure, weak internal controls, questions on the auditors’ scope and depth of review and a passionate to almost rabid love for the brand by its most loyal customers. But on the back of all of that are innocent depositors who must always remain in the minds of all bank directors whose oversight role gets heavier with each passing day.

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

Angel Investors as Key Drivers of Entrepreneurship

An angel appears at a board meeting and tells the chairman that in return for his unselfish and exemplary behavior, the Lord will reward him with his choice of infinite wealth, wisdom, or beauty. Without hesitating, the chairman selects infinite wisdom.
“Done!” says the angel, and disappears in a cloud of smoke and a bolt of lightning.
Now, all heads turn toward the chairman, who sits surrounded by a faint halo of light.
One of the directors whispers, “Say something.” The chairman sighs and says, “I should have taken the money.”

Earlier this month I attended the G-20 Global Partnership for Financial Inclusion, which held a workshop on Financing Entrepreneurship Innovative Solutions in Izmir, Turkey. Turkey currently holds the G20 Presidency and therefore its government played a pivotal role in the organization of the successful of the workshop. One of the panelists was a well-known Turkish entrepreneur, angel investor and author, Baybars Altuntaş, who impressed the audience with his vocalization of tax incentives that the Turkish Government provides to angel investors. I pulled Baybars to the side during a coffee break and asked for more details. Once a person has registered as an angel investor, he is allowed to net off up to 75% of his investment in the start up company against his income tax payable in the year. In other words, a tax holiday of up to 75% of your investment! Baybars added that angel investors tend to get together and pool their funds to reduce the risks as the success rate for their investments was only typically 10%. “Why would one invest money in start ups if only 1 in 10 initiatives succeed?” I quizzed. Baybars smiled the smug smile of the wealthy and responded, “Because the returns from that 10% will make you more money than the losses on the 90%!” I walked away, scratching my head and realizing why my risk aversion would leave me a pauper for the rest of my life.

Angel investment is the provision of financial capital to newly established or growing companies which have novel business models or technologies with high potential for growth and profit but are unable to find eligible financing resources to realize their investments.

Recognizing the inherent benefits that angel investors would provide through entrepreneurial seed capital support as well as stimulating economic growth through job and value creation, the Turkish parliament passed the “Regulation on Angel Investment” law in June 2012 and the Treasury promulgated the enabling legislation in February 2013. The rationale behind the law is to promote the financing of small enterprises and entrepreneurs by providing tax incentives to angel investors. According to a PwC Turkey Asset Management Bulletin, in order to benefit from the tax reliefs provided in the law business angels first have to obtain a license from the Treasury. The business angel cannot directly or indirectly be a controlling shareholder of the qualifying company that it wishes to invest in, neither can the qualifying company belong to his relatives. A qualifying company should, amongst other criteria, be a registered company in accordance to Turkish company law with a maximum of 50 employees and net assets of not more than TRY 10 million (Kshs 354 million). If the business angels participate in qualifying companies whose projects are related to research, development and innovations then the applicable tax incentive is 100% instead of 75%. This is where it gets interesting. In order to get 100% tax relief those activities have to have been supported in the last five years by the Scientific and Technological Research Council of Turkey, Small and Medium Enterprises Development Organization and the Ministry of Science, Industry and Technology. The tax reliefs are applicable until the 31st of December 2017 making it a 5-year program, but the Cabinet can authorize the extension of the date by another five years. Shares acquired by the angel investor have to be held for at least two years and the minimum investment is TRY 20,000 (approximately Kes 700,000) and a maximum of TRY 1,000,000 (Kes 35 million) annually.

So let’s bring this concept home. Imagine if the Kenyan government picked four key economic areas that they wanted to drive with the help of the private sector. Let’s say agriculture, health, technology and education. Then the government wakes up to the fact that they can’t be all things to all people, and that they need to leave the business of business to the best people suited to do it: business people. They then assume that it’s far better to allow a business person to take a risk on an entrepreneur as the business person has a) a much better nose for sniffing out and recognizing good opportunities, b) years of experience in making and losing money therefore an appreciation for and recognition of risk, c) business experience the kind of which they don’t teach in business school leading to mentorship and d) his very own money which defines his skin in the game. The same Kenyan government would then ensure that the business angels’ interests are aligned to the strategic objectives of the relevant ministries for the four key areas. Rather than allocate funds in totality to the Women and Youth Funds, re-route a portion of those funds to backstop a tax incentive program for Kenyan business angels. The benefits hardly merit articulation due to their sheer obviousness. The Government will distribute the risk of repayment from their annual budget allocations to the Women and Youth funds by providing an alternative mechanism for reaching those same stakeholders in a credible, efficient manner that provides the extra flavor of mentorship as well as stronger linkages between the existing business community, women and the youth. Finally, it allows for a wider tax bracket to be formed since, by requiring investees to be formalized legal entities, the investee companies enter into the taxation realm. It shouldn’t take a little wisdom from heaven to permit business angel investing to become a government driven entrepreneurship initiative.

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Twitter: @carolmusyoka