Uchumi case sheds light on corporate governance gaps in public companies

Corporate governance are the checks and balances adopted by a company to protect the interest of its stakeholders. It is a system that ensures managers of a company protect the interest of its owners, the shareholders and the stakeholders who include employees, suppliers and outsiders.

The board of directors is the principal target in corporate governance. This is because the decisions of a company are made by the directors sitting at a board meeting.

In the Republic versus Chris Kirubi and 13 others, part of the board of directors of Uchumi was charged with the offence of conspiracy to defraud the supermarket chain and a second charge of breach of public trust. The criminal charges arose from the sale of the Aga Khan Walk branch property, a decision that the board made.

One of the distinguishing features of public companies like Uchumi Supermarkets Limited is that they have a large number of small owners.

This creates two types of challenges. Even though the shareholders typically have ultimate residual control rights, in the form of votes, they are too small and numerous to exercise control on a day-to-day basis. They, therefore, delegate control to a board of directors, which in turn delegates it to management. There is, therefore, a separation of ownership and control.

Secondly, dispersed shareholders have little or no incentive to monitor management because it is costly. Each shareholder, therefore, joy rides in the hope that other shareholders will do the monitoring. Unfortunately, all shareholders think the same way and thus almost no monitoring will take place.

Because of the separation of ownership and control and the lack of monitoring there is a danger that the managers of a public company will pursue their own goals at the expense of those of shareholders. Among other things, managers may overpay themselves and give themselves extravagant perks and may seek to entrench themselves.

They may also carry out unprofitable but power enhancing investments. This is one of the premises upon which the directors of Uchumi were charged with the offence of conspiracy to defraud in the Republic versus Chris Kirubi. However, there was no evidence to support the charge. The court held that the directors did not enter into a conspiracy to defraud the supermarket chain by the sale of the Aga Khan Walk property. In this finding the court relied on the testimonies of witnesses from Uchumi Supermarkets and from Lloyd Masika Limited.

Except for Mrs Mary Ngari, an alternate director to the Ministry of Trade PS, and the investigating officer, the witnesses from Uchumi Supermarkets Limited stated that the sale was proper. Likewise, the witnesses from Lloyd Masika Limited stated that the property was sold at market price.

Shareholders elect the board to act on their behalf and the board in turn monitors top management and ratifies major decisions. In principle, the board has a very important role to play but there are reasons to doubt its effectiveness in practice. The board consists of executive directors, who are members of the management team and non-executive directors who are outsiders.

On one hand, it would hardly be reasonable to expect the executive directors to monitor themselves. On the other hand, the non-executive directors may not do a very good job of monitoring, for several reasons. First, they may not have much financial interest in the company and therefore, may have little to gain from its performance.

Secondly, non-executive directors are busy people who may also be chief executives and sit on many boards thus have little time to think about the company’s affairs or to collect information about it beyond what the management provides.

Finally, non executive directors may owe their positions to the management who proposed that they be made directors in the first place. As well as feeling loyal to management, they may want to stay in good books to be re-elected and continue enjoying their allowances.

One of the pillars of corporate governance is for the board to have strategic objectives and plans and to put in place proper management structures to achieve those objectives and plans.

One of the reasons why the directors in the Republic versus Chris Kirubi case were acquitted was because the court found that in approving the sale and the sale of the Aga Khan Walk property, the directors did not breach any of the internal procedures of Uchumi Supermarkets Limited. Further the Public Procurement Act and regulations did not apply to the supermarket chain since it is not a parastatal.

Internal controls

The Capital Markets Authority has published and gazetted Guidelines on Corporate Governance Practices by Public Listed Companies in Kenya.

Uchumi Supermarkets was at the time a public listed company and these guidelines applied to it. The prosecution did not lend any evidence to show that the board flouted these guidelines. Further, they do not have the force of law and thus breach of the same does not attract civil or criminal penalties.

Shareholder participation in major decisions of the company remains a sound system of internal control to safeguard the shareholders investments and assets. Large shareholders have representatives in the board of directors and therefore, influence decisions by the board and managers.

In the case against Kirubi and others, the court dismissed the charge that the directors acted in breach of public trust. Even though the prosecution’s case was based on the premise that the supermarket was a parastatal, the evidence produced in court proved otherwise since the government with 26 per cent share holding only held a minority interest in Uchumi. The court, therefore, held that the supermarket chain was not a parastatal and thus the board did not public trust.

Ultimately the court decision illustrates the continuous boardroom struggles between majority and minority shareholders. Corporate governance mechanisms are ill-equipped to resolve these issues.

Ms Kilonzo is an Advocate at Kilonzo & Company Advocates
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