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Local Retail Giants Give Us Pride

My first trip to Lagos, Nigeria was in 2014, an experience that will forever be etched in my mind as a journey of paradoxical discoveries. I was the guest of an expatriate living in Lagos at the time and we went grocery shopping to a supermarket that specialized in imported foodstuff. The shelves were heaving with European dairy products and all manner of tinned basic goods like tomato paste, tinned pineapple and imported fruit. I asked my host [of Kenyan extraction] if we would be going to a local supermarket and, chuckling, she responded that if it was a Nakumatt equivalent I was looking for, it didn’t exist. “Everything that you’re used to is imported here, even the most basic item like packaged fresh milk.”

This was Nigeria. Africa’s largest sized country by population which at the time was about 176 million. I returned to Kenya with an enormous appreciation for the local retail giants that existed at the time in the form of Nakumatt, Tuskys and the smaller supermarket chains that had a majority of locally produced goods on their shelves juxtaposed with imported equivalent options in some select outlets. Our own homegrown retail giants had spawned a veritable supply chain of local goods that were being manufactured or grown for local consumption. From Kenyan farm to fork. From Kenyan factory floor to our homes. All via the numerous branches that dotted the country and, in Nakumatt’s case, the region. Nakumatt and Tuskys were revenue hot. Until they were not.

Nakumatt’s spectacular collapse in 2017 with over Kes 35 billion in debts owed to banks, employee liabilities, suppliers and other non-banking lendors will remain one of corporate Kenya’s vintage case studies. The Netflix movie that will be made about this debacle will quite likely be titled: “Titanic: The Money Hole that sunk MV Nakumatt”. Its cousin Tuskys suffered from an excruciatingly slow puncture demise after years of courtroom family drama that started in 2013 on the sharing of the spoils amongst shareholders, some of whom were in active management and some of whom weren’t. The former were viewed by the latter to be feeding from the communal family trough for their own individual benefits. An external chief executive officer was brought in, hounded out acrimoniously, brought back in when the commercial bankers cuffed the shareholder ears like the petulant children they were, and then pffft, the internal wrangles slowly brought the company to its knees. That story cannot be told in a Netflix movie, rather it will be a series titled “Game of Thrones Tuskys Edition”.

The upshot of these two spectacular failures is that there were significant operational and governance control failures. In Nakumatt’s case, money leached out, but the eye watering size of the amounts point to a finance team that looked the other way and who had a complete lack of whistle blowing ability because, well who does one whistle blow to when it is the shareholder themselves punching the holes into the ship? In Tuskys case, family members’ ability to do business with the supermarket chain presented significant conflict of interest challenges particularly if there was no way of creating an arms-length policy for that business to be done. Something that could have been cured had there been a policy framework for related party transactions from the beginning. After all, there was a family trough for communal eating and how could all members eat rather than just the ones with long necks?

A friend who heads a retail lobby group reminded a group of us recently that we should never underestimate the sheer amount of entrepreneurial talent that sits in this country and is exemplified throughout our economy in the form of local supermarkets, restaurants and hospitality outlets. The failures of two of the leading retail chains gave the space for other local chains to emerge and fill that space seamlessly. Yes, there may be one significant foreign chain at play, but we have several local options to choose from all of which continue to give a legitimate end market for the local agricultural and manufacturing value chain.

What will separate the boys from the men for these local supermarkets that are slowly becoming large corporate entities as we watch? Starting with a spectacular end in sight “Armageddon: We all crash and burn like those Nakumatt guys” and working backwards to see how that can never happen. A board made up of qualified independent and shareholder directors would be a good start to providing the appropriate risk based oversight independent of active management.

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Twitter: @carolmusyoka

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

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Entitled and Uncouth Heirs to the throne

[vc_row][vc_column width=”2/3″][vc_column_text]Last Tuesday, a video of a nauseating scene at the Tuskys management offices went viral on social media. In case you missed it, an entitled, uncouth and mealy mouthed ragtag of young family members burst their way into the Tuskys CEO’s office and demanded that he leave the premises immediately. Having engaged some media journalists to film this Mexican soap opera in its full but cheap theatric version, the posse used choice epithets and kindergarten taunts to push the CEO out of his office, into his car and out of the premises. What they did was, to say the least, a childish but very public display of corporate ignorance. Legend has it that many years ago, the grandfather, Joram Kamau, started the business as a small provisional store called Tusker Mattresses in Rongai, Nakuru county. He grew the business slowly and eventually expanded by opening the first store in Nairobi’s Tom Mboya Street, as his some of his sons joined and helped to grow it into the successful enterprise that it has become. He passed away but ensured that the shareholding of the business, which had been formally structured into a private company, was distributed amongst his seven children. However, since early 2012, the public has been treated to sibling fistfights and courtroom battles for control of the multi billion shilling turnover business.

Let me tell you young rabble-rousers what no one else will tell you: the business may have been started by your grandfather, but now has multiple stakeholders who are deeply invested in its success. The first of these stakeholders are the employees who wake up at the crack of dawn every morning, while you turn on your mattress in blissful slumber, to walk or ride to work in the supermarket branches and at the head office. Their daily labor output helps to serve customers who purchase the goods that produce the revenue that eventually filters into dividends that line your mealy mouthed pockets. The second key stakeholders are the suppliers of the stocks on the shelves of the supermarkets. If no products are delivered, no sales will be generated. The third key stakeholders are the banks that lend the working capital to the business. They monitor the cash flow with beady eyes, ensuring that money generated from goods sold is not diverted to other non commercial uses, as that will spell disaster in the form of non-repayment of loans. The business is no longer a small, rural kiosk. It’s a corporate entity.
A typical family business goes from rags to riches and back to rags in three generations. Research has shown that only about 10% of family businesses make it to the fourth generation. Once you rabble-rousers have deposited your juvenile theatrics at the left luggage counter at the Tom Mboya Street branch, you urgently need to put together a family constitution that is an instrument often used by wealthy families to avoid future disputes. According to a KPMG Canada advisory paper titled “Constructing a Family Constitution” a family constitution serves three purposes. Firstly, it documents the values and principles that will underpin the conduct of the family business. Secondly, it defines the strategic objectives of the business. Finally it sets out the way in which the family will make the decisions affecting the ownership and management of the business.

The fact is that many family businesses don’t fail because the business has become unsound; rather they fail because the family member disputes derail the business from the successful track laid out by the original founder. The KPMG paper finds that from their own research there are five common issues for family businesses namely balancing family concerns and business interests, compensating family members involved in the business, maintaining family control of the business, preparing and training a successor and finally, selecting a successor. What we witnessed on television last week, was clearly a dispute over the last point, that is, some family members clearly have not accepted the current external successor that was appointed primarily to dilute the dispute about an internal successor running the business as was previously the case. That this fight was going to happen was inevitable. The KPMG research paper finds that as any family business grows into the second generation, the demands of the business and the demands of the family members working in it begin to diverge. The family dynamic may be that while not all the children or grandchildren are interested in running the business, all are highly interested in receiving the benefits in the form of dividends therefrom. The family constitution therefore helps to address these issues for current and future generations. A good constitution thus takes into consideration a number of issues such as the strategic business objectives that should reflect agreed family values and aspirations for the business. It should also include the process for hiring, assessing and remunerating family members employed in the business together with the rules for nominating and appointing management successors and the process for nominating and assessing individuals for appointments to the company’s board of directors or family council. Further, it should cover the composition and rules of conduct for a family council, communication and disclosure policies between the company and family, the process for resolving conflicts about the business between members of the family, rights and obligations of shareholders as well as the recommended or compulsory retirement age for family directors and managers. Finally, the constitution should also include the process for buying out family shareholders in the business, and clearly articulate policies concerning external, non-family ownership and management of the business as well as procedures for amendments to the constitution.

It’s never too late to write a family constitution but it is best done during the lifetime of the founder to ensure that his or her values are distinctively captured for posterity. It then helps to avoid the despicable television drama that the Tusky’s grandchildren have sullied their grandfather’s name and memory with.

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