Capital markets regulator is investigating the procurement practices that have sparked a vicious boardroom war at internet service provider AccessKenya and allegedly caused the company’s shareholders a Sh300 million loss.
The investigations began after shareholders petitioned the regulator, citing the findings of two audit reports that the company’s board commissioned following a disagreement over the procurement of the metro fibre optic network in 2009, according to Capital Markets Authority (CMA) chief executive Stella Kilonzo.
“The Capital Markets Authority did indeed receive two audit reports by Deloitte & Runji & Partners raising some concerns over corporate governance issues. This being a matter currently under review, the Authority cannot comment until such inquiries are completed,” Ms Kilonzo said.
The two separate audits found lapses in the procurement of the inland cable.
At the centre of the investigations is concern among some shareholders that decision making at AccessKenya remains in the grips of the Somen family to the exclusion of independent directors despite the firm going public three years ago.
“Evolution of governance structures and the decision-making processes do not seem to have kept pace with the change in ownership of the business and requirements to embrace best practices of listed companies,” says Deloitte in its audit adding that informality associated with decision making in closely held entities appears to have continued even after the company went public.
Shareholders petitioned CMA after Deloitte questioned the composition of AccessKenya’s executive suites and recommended that key positions such as that of chief financial officer (CFO) be held by a non-member of the Somen family.
The internet service provider is run by brothers Jonathan (chief executive) and David (executive director) while their father Michael Somen chairs the board.
CMA said it had received petitions from the shareholders and was reviewing the two audit reports to determine the course of action.
Corporate lawyers said the investigations may seek to establish whether minority shareholders have failed to realise shareholder value or suffered losses as a result of the corporate governance issues raised in the twin reports.
The report by Runji & Partners — a local engineering firm — seen by the Business Daily indicates that AccessKenya lost more than Sh300 million in the inland fibre project.
It was however dismissed by the management and some directors on grounds of factual inaccuracies and unsubstantiated comments.
The 150 kilometre inland cable is estimated to have cost the firm Sh450 million, having been revised downwards from the initial quotation of Sh624 million.
Deloitte’s audit report, which was accepted by the board, accused the company of breaching CMA guidelines on corporate governance.
The report suggests that the Somen family continued to make important decisions without seeking consensus in its board or making adequate information available to other directors.
This is in breach of CMA guidelines on corporate governance that requires the management to supply the board ‘with relevant, accurate and timely information to enable them discharge their duties.’
From the time it went public in June 2007 till June 2009, AccessKenya had a seven member board including the three Somens and Michael Turner, a private equity manager said to have been invited to the board by the Somens.
Other members of the board were Eddy Njoroge the managing director of KenGen, Ngugi Kiuna (a director at TransCentury) and Mungai Ngaruiya.
The three have since resigned from the firm claiming that they were being forced to serve at the discretion of the majority shareholder.
Mr. Kiuna is said to have been forced out from the board on March 19, Mr. Njoroge resigned on March 26 while Ngaruiya quit on May 3.
“As a board member I serve the interest of the company and not individual shareholder. The recent removal of Mr. Kiuna is a warning that we serve the board at the discretion of the majority shareholder,” said Mr Njoroge in his resignation letter, adding that the chair had been reluctant to solve the corporate governance issues at the firm.
The Somen family had a combined stake of 26 per cent in December 2008 with the other top 10 shareholders having stakes of between 2.27 and 1.28 per cent.
Last June, AccessKenya appointed two more directors, Titus Naikuni (CEO of Kenya Airways) and commercial lawyer Paras Shah (a partner at Hamilton Harrison and Mathews) in what was seen as an attempt to stop polarization in the board.
Mr Shah is known to enjoy close ties with the Somens and his firm Hamilton Harrison and Mathews are AccessKenya’s lawyers.
Michael Somen also worked at the law firm for 39 years.
Deloitte also queried the Somen family’s continued stranglehold on key executive positions in the firm and recommended that the roles be held by independent parties.
Friction in boardroom
“Given the overlap between parties who are owners, directors and managers of the business, it is important that all parties are clear in what capacity they are acting when they make important decisions,” the report says.
The friction in AccessKenya’s boardroom began immediately after the IPO when David was elevated to an executive director’s position in breach of a shareholder agreement signed before the flotation that all executive positions would be vetoed by the board, said a source familiar with the matter said.
“It went against the pre IPO agreement, and David has been operating without a job description sanctioned by the board,” said the source.
David is also a managing director of IT firm—Virtual IT—based in London, and shares his time between the two firms.
The differences however escalated on March 9, 2009 during a board meeting to discuss the fibre project.
Arguments over the costing of the project split the board down the middle pitting Mr Njoroge, Mr Kiuna and Mr Ngaruiya against the Somens—Jonathan, Michael and David — and Mr Turner.
Mr Kiuna and Mr Ngaruiya questioned the deal, arguing that the management had not presented them with vital information on the project when it sought their approval through e-mail on December 22, 2008.
Deloitte’s audit says Mr Kiuna had insisted on seeing the figures on the projected return on investment, names of the suppliers and financial quotations, map of the fibre layout and technology evaluation.
It is the hardening of positions between the two camps that led to the two special audits.
Differences over the outcome of that audit and how the company should deal with it led to the resignation of the three directors.
Deloitte’s take on the fibre project is that the firm breached its procurement policy and management failed to offer sufficient information to the directors at the approval stage.
“There is evidence that critical decisions on the Fibre Project including its implementation were made in a rush,” said Deloitte.
“This is evidenced by the fact that issues raised by certain directors were not addressed before award of contract and commencement of the Project and the fact that the approval process was done on e-mail.”
The fallout over the audit reports led to the postponement of the firm’s annual general meeting (AGM) from May 4 to August 31.
Jonathan said the meeting had been pushed ahead to allow the firm work on the governance issues raised by Deloitte and appointment of more directors.
On Wednesday, the firm shares stood at Sh17 having dropped 17 per cent in the past three months, making it the worst performing share in the market at a time when the tide has been lifting nearly all boats.
The benchmark NSE-20 index—which tracks the performance of blue chip firms— made a return of 20 per cent during the same period buoyed by optimism over Kenya’s economy.
The fallout comes amid low reduced earnings from the firm having reported a pretax profit of 182.3 million shillings compared with 263.4 million shillings in 2008, hit by heavy investment in upgrading its network and the fibre optic cable.
The heavy investments also hit its cash flow with firm returning a negative cashflow of Sh98 million, down from a positive cashflow position of Sh109 million at the end of the previous year.
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