Uchumi’s story should return directors to the drawing board

On July 31, 2016, I read in the daily newspapers that the Cabinet would extend a Sh1.2 billion financial bail-out to Uchumi Supermarkets with conditions.

Some of the conditions included addressing the moral hazard and conducting an audit of management to ascertain that they were of high integrity.

Yet, just over two years ago, November 2014 actually, Uchumi Supermarkets issued a document called an Information Memorandum (IM) to its 17,835 shareholders. The document asked them to invest Sh895 million in the business, by participating in a rights issue.

Each shareholder on the register would be offered three new shares at Sh9.00 each, for every eight shares they held. If a shareholder did not wish to take up their rights, they could trade their rights on the Nairobi Securities Exchange (NSE) or do nothing and simply let them expire.

A shareholder as did new investors, also had the option to buy rights from other shareholders through the NSE, increasing the amount of money they would invest in Uchumi Supermarkets.

Their money would be used to support the opening of new branches in Kenya, Uganda and Tanzania. Some of the capital would be used to upgrade five branches in Kenya.

Why would you invest in Uchumi Supermarkets? Rewind to May 30, 2006 when the shares of Uchumi were suspended from trading on the NSE.

The retailer owed KCB and PTA Bank Sh957 million. In July of that year, the two banks appointed Jonathan Ciano as the specialised receiver and manager.

In 2010, Uchumi repaid its debts to KCB and PTA Bank. Shareholders, suppliers and the Government of Kenya came together and agreed to convert loans and interest worth Sh854.2 million into new shares in Uchumi.

On May 31, 2011, the company’s shares resumed trading on the NSE. Mwai Kibaki, then President, was the guest of honour at the ceremony and Mr Ciano, the man credited with turning around the company, was Group CEO.

Uchumi continued to grow. As at June 2014, the company had 37 branches in Kenya, Uganda and Tanzania. Its expansion had been funded through internally generated funds. The brand was well known in the region.

The shares could be bought and sold on all four of East Africa’s stock exchanges. In the IM of 2014, the Board of Directors endorsed the rights issue.

The board felt it was in the interests of the company to proceed with the transaction and urged shareholders to buy the shares, particularly since they were being offered at a discount.

Mr Ciano was expected to continue in his role as Group CEO. It is presumed that the board of Directors acts in the interests of the shareholders of the company.

The board that was recommending the sale of new Uchumi shares had presided over the turnaround journey of the retailer. As an investor, I would see no reason not to follow the advice of the Board.

Under Clause 13.1 of the IM, Uchumi stated that it had adopted sound corporate governance structures under which the directors oversaw the management of the company on behalf of its shareholders.

In addition to having attended corporate governance training, Uchumi had ensured its board members were familiar with the business of the retailer.

I also want to draw your attention to ‘Important Notice’ on Page 7 of the IM. In the Notice, the directors accept responsibility for the information and the opinions expressed in the IM. They confirm that the information is true and accurate and no information material to Uchumi or its shares was withheld.

The agents of the board — the transaction advisers that wrote the IM — obtained their information from the company (Board and Management).

The Notice also stated that the preparation of the IM by the transaction advisers should not be considered a recommendation by the advisers to buy Uchumi shares.

Independent evaluation

Indeed, shareholders and interested parties were informed that the information in the IM should not have been the sole basis for making an investment decision. Instead, they were asked to conduct an independent evaluation of Uchumi.

I presume most investors made their decision based on the endorsement of the board of directors and the Government of Kenya, the largest shareholder with a 13.4 per cent stake, that publicly announced that it would be taking up all its rights.

However well intended, it could have created a moral hazard scenario. Investors would presume that the Government would always come to Uchumi’s rescue.

I would like to end by quoting the Clause 2.1.1 Capital Markets Act Guidelines on Corporate Governance Practices by Public Listed Companies in Kenya 2002 ‘Every public listed company should be headed by an effective board to offer strategic guidance, lead and control the company and be accountable to its shareholders.’

Further, “[the board should establish relevant committees and delegate specific mandates to such committees as may be necessary. The board shall specifically establish an audit and nominating committee.”

Where was the board and specifically the audit committee in the period between November 2014 and June 2015 when it terminated the contract of Mr Ciano, Chadwick Omondi Okumu and Michael Kibbe, Group CEO, CFO and HR manager respectively?

Joram is the CEO of the Institute of Directors Kenya.