African Investor Relations

The Companies Bill in Kenya 2008 has a few progressive parts to it, and when its finally adopted, say in 2032, it will impact Kenya’s capital markets significantly. However, there is a disconnect however between what is achievable and practical in Kenya and what the new Companies Act says.

Take for example the following sections of the act regarding the electronic storage of company records. The use of the word “may”, without saying “how” is dangerous from a practical perspective. There is no 5 year definitive road-map for the development of Kenyan capital markets, one that adopts a technology platform, indicates how it’s to be embedded in current practices and evolves from there. The Companies Act has just been dumped and the mess will be sorted as we go along.

The initiatives to de-mutualise the NSE may go well, but unless the market knows what its final goal is, Kenya’s market will remain fragmented and imperfect.

The growth of the market will be driven by bringing Kenya’s uninformed retail shareholder base becoming an informed retail shareholder base. At the moment there is nothing to suggest that this is happening in a structured and meaningful manner. Legislation that adopts electronic platforms without considered advice on the implications is set for failure and the end user, the investor, is likely to suffer.

618 Meaning of “company records”

In this Part “company records” means any register, index, accounting records, agreement, memorandum, minutes or other document required by the Companies Acts to be kept by a company.

619 Form of company records

(1)        Company records—

• (a)        may be kept in hard copy or electronic form, and
• (b)        may be arranged in such manner as the directors of the company think fit, provided the information in question is adequately recorded for future reference.
• (2)        Where the records are kept in electronic form, they must be capable of being reproduced in hard copy form.
• (3)        If a company fails to comply with this section, an offence is committed by every officer of the company who is in default.

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Shareholders can force listed companies in Kenya to publish their shareholder concerns over the audit, or cessation of an auditors services on a website. The threshold at which this can be mandatorily implemented is 5% of the issued share capital or 100 shareholders. Given the high number of shareholders in Kenya and the high number of Facebook users getting the 100 shareholders in line could be easy to line up some rather disruptive PR for a listed company. What’s the purpose of this, really?

458 Members’ power to require website publication of audit concerns

(1)        The members of a quoted company may require the company to publish on a website a statement setting out any matter relating to—

(a)        the audit of the company’s financial statements (including the auditor’s report and the conduct of the audit) that are to be laid before the next financial statements meeting, or

(b)        any circumstances connected with an auditor of the company ceasing to hold office since the previous financial statements meeting, that the members propose to raise at the next financial statements meeting of the company.

(2)        A company is required to do so once it has received requests to that effect from—

(a)        members representing at least 5% of the total voting rights of all the members who have a relevant right to vote, or

(b)        at least 100 members who have a relevant right to vote and hold shares in the company on which there has been paid up an average sum, per member, of at least 1,000 shillings.

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I spoke to a Kenyan listed company yesterday. It’s starting to happen as I predicted. Shareholders are demanding hard copy annual reports.

Listed company directors in Kenya have sat back content with saving US$20,000 of printing costs now that the hard copy  annual report distribution requirement has been dropped by the regulatory authorities. But they have not invested in any PR or any additional resources to ensure that shareholders get the information that they are looking for.

But shareholders want their “book”. The annual report is a tangible product of their investment in the company. I think the issue is emotional for a retail investor. No “book” means something is wrong. A “book” means that they can read the pictures and get a nice warm feeling and touch the pages and smell the ink.

Whilst retail investors may not understand the contents, the receipt of the annual report is an important act of transparency that investors have come to expect and I suspect that even if listed companies in Kenya had zooty websites and email alerts, there would still be a concern from retail shareholders if they did not receive a hardcopy.

This points to the obligation of listed company directors to make use of all resources available to them – websites, hard copies etc. Its the management of this that needs attention otherwise a company doing all of the right things (wrongly) may still have a poor corporate reputation.

Where the regulators in Kenya went wrong is that they acceded to the requirements of Safaricom who needed  to drop the requirement to sent annual reports to all of their shareholders – all +/-800,000 to “save costs”. What should have happened is that the share registrars should have been required to record whether a shareholder could opt-in to receiving electronic communications (as defined – no-one has defined the content for this so far). Its a simple mailing list management function. The opt in should have been permanent.

At the moment this opt in function has not been functional in Kenya. The the USA the market moved from a physical to an opt in electronic regime, and then the default became electronic and the hard copy opt in was offered. But only after experience showed that this was working.

Kenya is part of Africa and so we can ride rough shod over retail investors because there are no consequences. They are uneducated, have no reasonable recourse to any law, to capability of representation, no support from the regulators.

But they are humans and they have emotions and this needs to be managed. At minimal cost to listed companies.

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The duties of Directors will be set out in law when the new Kenyan Companies Bill is adopted into law (not anytime soon). In the interim, Kenyan companies are in no-man’s land with respect to how they are to communicate with shareholders. Kenyan directors are not acting in the interests of shareholders, they are not promoting the success of the company and they are not maintaining a high reputation for business conduct as a result.

Here is some text THAT WILL BE PASSED INTO LAW in the future. It states pretty clearly what directors should do. I further consider the implications of not implementing progressive shareholder communications practices in light of this legislation by way of a few questions:-

Duty to promote the success of the company

(1)        A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—

If Directors do not spend say US$10,000 a year in ensuring that their shareholder proxy materials are widely available to shareholders, is this acting in good faith? If money is an issue how does the Board determine what is a reasonable amount? Since the dropping of the requirement to distribute hard copy annual reports is it reasonable for listed companies NOT to apply any of the savings (many hundreds of thousands of US$) to alternative means of communicating with shareholders?

(a)        the likely consequences of any decision in the long term,

If for the sake of a few dollars thousands of retail shareholders (and possibly institutional investors) are alienated in their right to receive shareholder information, will this have positive or negative consequences for the company in the long term? The consequences in the short term are that shareholders are demanding their “book”  (annual report) direct from the offices of the listed companies. Disturbing management. How does a listed company “guess” how many annual reports to print? Should directors consider the commercial benefits of communicating with shareholders progressively as a means of obtaining some return on their investment?

(b)        the interests of the company’s employees,

Is it in the interests of employees to have all of the information available to investors in order that investors make educated investment decisions available to them? If employees have the same access to the information that shareholders do will this instill a sense of belonging and motivation?

(c)        the need to foster the company’s business relationships with suppliers, customers and others,

Does the manner in which a company treat its shareholders and investment community impact its overall reputation in the market?

(d)       the impact of the company’s operations on the community and the environment,

(e)        the desirability of the company maintaining a reputation for high standards of business conduct,

Could the absence of good shareholder communications affect a company’s reputation for high standards of business conduct?

(f)        the need to act fairly as between members of the company.

If the information needs of the institutional investors are considered over those of retail in shareholder communication practices could this be perceived to be or actually be treating members of the company unequally?

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The current 2010 “bill tracker” (a simple PDF file) of the Parliament of Kenya makes no mention of the Companies Bill, 2008, the piece of legislation that formalises electronic shareholder communications in Kenya. This means that the legislation is not on the agenda, and in the absence of the issuance of guidance from the Nairobi Stock Exchange, on electronic shareholder communications, the rights of shareholders are being compromised.

No-one apparently cares at the moment because no-one is giving the issue any thought. The parties at the most risk are the listed companies because at some point in the future a grumpy shareholder or two may not receive their proxy material and they will incur financial loss.

Without being a shareholder in every company it’s difficult to tell what measures listed companies are taking to protect themselves. Probably none. Kenyan directors’ awareness of these issues appears to be non-existent and where there is an awareness the

The attitude of Kenyan directors is that they will comply with the minimum. That’s just not enough because currently there is no minimum. Kenya’s regulators have said that it is up to the companies themselves to set guidelines – there are no minimum standards to guide or support these companies. The majority of listed companies passing resolutions on shareholder communications are doing so without informing their retail or minority shareholders of the full implications. And they have the casting vote.

There are also corporate governance codes to consider, best practices and the intention of the new act. I am not aware of any body that is engaging Kenyan companies on the implications of the Bill. The IOD Kenya needs something to do…..this is it.

I am not privy to whether any professional shareholders are engaging the companies in which they have invested about the efficient receipt of shareholder communications. I can tell you what’s happening though: listed companies are looking after their bigger shareholders by sending them all material directly probably in hard copy. All shareholders have the same rights to this and shareholders should be treated equally. In the absence of a disciplined online shareholder communications practice can listed companies treat one set of shareholders differently to another? They obviously can, but its not right unless these initiatives are carried out within an overall corporate governance framework that is progressive and disciplined.

I think it’s just a matter of time before there’s a dispute.

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In South Africa the private sector came to the party in sponsoring the formulation of a new corporate governance code. It’s good for PR and your logo belongs to the IODSA website forever. For the accounting firms the prospect of referral work is high. The model is good. It’s what you would call a win-win situation. So why no similar initiatives in Kenya and Nigeria?

Here are the sponsors to the online corporate governance appraisal initiative in South Africa:-

Note that South African Government also has a hand through the SITA.

Have a look at the IOD Kenya website in Kenya. There are no corporate sponsors to the IOD Kenya. Yet every year one of the greatest corporate events is when the top companies in East Africa are awarded their prizes by a large accounting firm. Much pomp and ceremony. Where’s the substance? These winning companies are chosen largely by the movement in their price which itself is a result of the volatility in a market where information availability is imperfect.

The IOD Kenya website has one upcoming event. There is nothing on the blog. There are many subjects to blog about in Kenya. Especially relating to corporate governance.  The website does not instill confidence in the role of the organisation. It should.

I would love to get an insight as to why the Kenyan and Nigerian markets have not adopted the same approach as the South African companies. They all have corporate governance codes, they all have compelling needs to improve corporate governance, they have private sector critical mass to underwrite any of these initiatives on a sustainable basis. Is it a case that the persons running these organisations are incompetent and cannot garner support or is it a collective case of “we couldn’t give a s…” ? The regulators certainly aren’t taking the lead.

The same has happened in Zimbabwe. The much trumpeted new corporate governance code for Zimbabwe has fallen in a heap. There’s no money, executives are busy.

Is it the absence of human resources? Are business environments too corrupt in Kenya and Nigeria to address this issue at all? Not sure – would love to hear your views. In Zimbabwe companies are under severe strain and the issue of corporate governance at the top level has yet to be resolved so there is an excuse – or a real reason to take governance seriously – depends on what your outlook on life is.

The silent cost to this is lower equity valuations.

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