It’s one thing to see the law being created. It’s another to see it being applied. The outcome of the Uchumi Supermarkets Ltd (USL) enforcement action by the Board of the Capital Markets Authority (CMA) was one of the best precedents set by the regulator since John Hanning Speke discovered Lake Victoria as the source of the Nile. As a corporate governance educator, I am constantly asked for local case studies since our curriculum is replete with American and European examples, as those are more mature markets that have built up a significant jurisprudence of corporate scandals and enforcement actions thereafter. Kenya itself has a litany of white-collar scandals, but very little in the form of punishment for the perpetrators of corporate malfeasance.
The CMA has undoubtedly set the tone for board directors and key officers of listed and non-listed public companies in this town which tone is as clear as the waters in a baptismal font as evidenced by the allegorical language used. “The Chairman and the directors will be required to “disgorge” their director allowances.” A dictionary meaning of disgorge is to “yield or give up funds, especially funds that have been dishonestly acquired.” Another definition of the same word is “to eject food from the throat or mouth.” And therein lies the allegory, the hidden meaning. Directors who allow malfeasance to occur on their watch and are remunerated during such time are feeding from the wrong trough and will be asked to regurgitate those emoluments swiftly, unashamedly and unequivocally.
The former chairperson and two former non-executive directors of USL were disqualified from holding office as directors or key officers of a publicly listed company, a company that has issued securities, or a company that is licensed or approved by the CMA for a period of two years. They were also asked to return the director allowances paid to them for the financial years 2014 and 2015. Finally, they were instructed that if ever a listed company saw it fit to appoint them to a board after they had atoned for their sins and sat in director purgatory for two years, they would be required to attend corporate governance training before being eligible for appointment.
The former chief executive officer and the former finance manager were also disqualified from holding office as a directors or key officers of companies that are regulated by the CMA. The regulator will also be filing a complaint at the Institute of Certified Public Accountants regarding the professional conduct of the two who are registered Certified Public Accountants.
In retrospect, what the named Uchumi directors and officers have gotten is a rap on the knuckles. They dodged a bullet provided by the current and newly operationalized Companies Act 2015 that allows a shareholder to bring a derivative action against a director for negligence, default, breach of duty or breach of trust. And the regulatory outcome would set enough of a precedence to warrant a shareholder to pursue this course of action in our highly litigious country. The new Companies Act 2015 has given a lot of teeth to stakeholders – including the company itself – to seek retribution for malfeasance or wrong doing on the part of the very parties supposed to maintain the best interests of the company. In light of the fact that a law cannot be applied retrospectively, and the fact that these breaches happened before 2015, the main worry for the named directors is how to mpesa those funds back to base and, for the officers, what color tie to wear to the disciplinary hearing at ICPAK.
The CMA itself issued a new corporate governance code in 2015 (CMA Code), and relied on its fairly modern tenets, that codified director fiduciary duties, in its conclusions about the creative accounting undertaken by the officers of Uchumi and overseen by the non executive directors. Quoting the CMA press release on the Uchumi decision: “The inquiry further established that in some instances the USL branch expansion program was undertaken without due regard to the Board’s fiduciary duty of care due to the absence of a proper risk management framework being in place. It was also established that in some instances, USL pre-financed landlords in addition to making payment of respective commitment fees, but nevertheless the branches were never opened or funds recovered.”
Under Chapter 6 of the CMA Code titled Accountability, Risk Management and Internal Control, boards of directors are required to put in place adequate structures to enable the generation of true and fair financial statements. The Code explains that the rigours of risk management by the board should seek to provide interventions that optimize the balance between risk and reward in the company. In layman’s language: Figure out what could possibly go wrong in the company whose board you sit on and ensure you put in place processes that recognize that risk and, where possible, mitigations for such an eventuality. Furthermore all times ensure the financial statements reflect- rather than conceal – those risks. In the Uchumi case, paying developers of buildings where you intended to open new branches in advance and not putting into place protection measures in case your advance funds were mis-directed to personal Christmas slush funds, was a big mistake. Those pre-payments that were not being recovered should have been provided for or written off entirely.
In light of all the recent corporate scandals, and our seeming inefficiency in prosecuting white-collar thugs dressed in oversized Bangkok knock off suits, the CMA enforcement action is a breath of fresh air. While the directors have all gotten off fairly lightly with a mild disgorgement, it is the social pariah status that will be the most effective deterrent for board directors in this market. I’m not sure that there is a self respecting board in this town, whether in the public or private sector that wants a “director formerly known as the Uchumi guy” serving on its board anytime soon.