Ideas & Debate

Boards not immune from actions of management

An empty boardroom. Directors must stay alert or face perils of mismanagement. FILE PHOTO | NMG
An empty boardroom. Directors must stay alert or face perils of mismanagement. FILE PHOTO | NMG 

Being a director on a company board is not and should never be for the faint hearted. An article in last Wednesday’s edition of the Business Daily caught my corporate governance side eye.

The story titled “Ochuodho, 3 others to face charges over Sh827m fraud” highlighted a court case that has dragged on for years with the protagonists avoiding criminal conviction for what, on the face of it, appears to be an ordinary financing transaction.

Kenya Pipeline Company had allegedly paid a third party company a large amount of money to enable the third party company make payments on its behalf to its international creditors.

The former managing director Shem Ochuodho, and the third party company’s executive directors were in trouble for getting the Attorney General, finance and energy ministries to approve a transaction, but he is now alleged to have executed an entirely different transaction.

Within the story is a hyperlink to an older story dated January 10, 2010 where a magistrate’s court issued a summons to the same Shem Ochuodho and the former board chairman Maurice Dantas to come to the anti-corruption court to answer to fraud charges over the same case.

There are a number of corporate governance issues that this old Kenya Pipeline Company (KPC) case bring to fore.

To begin with, a transaction was approved by the KPC board (since borrowing has to be typically approved by an institution’s board) but the board chairman (who is responsible for oversight and monitoring via the board) was on the fraud hook together with the managing director (who is responsible for execution).

The lesson here: a board of directors is never immune from the actions of management. Secondly, the necessary external approvals seem to have been obtained from the relevant government officials, but management allegedly executed a completely different transaction.

The lesson here: if your mother sends you to the kiosk to buy flour but you choose to buy Patco sweets instead, you’ll be in deep trouble.

Based on the newspaper articles however, it would appear that the board chairman’s case seems to have dissolved somewhere along the way but should not distract from the fact that sitting on a board, and keeping a keen eye on what management is asking you to approve, is imperative.

More relevance

But the second issue is of more relevance. What the third party was supposed to do was to pay the external creditors on behalf of KPC and sit on the debt for as long as it would contractually take for KPC to pay the third party back.

Why would this deal make sense to the ordinary man sitting in the Rongai matatu (public transport vehicle)? If the deal enabled KPC to postpone its payments to the external creditors past their due date, it would ease the pressure on KPC’s cash flows thereby enabling it to apply that cash to more pressing current commitments.

Secondly, if the deal enabled KPC to convert a foreign currency commitment into a long-term local currency one, it would assist KPC to mitigate against future currency depreciation which would come into play if the Kenya shilling slid south against the US dollar making the foreign currency loan that much more expensive to pay off. (Assuming, of course, that KPC’s revenue model was based in shillings, because if its revenues were in US dollars then there would be a natural hedge).

The story begs the question about what transpired at the KPC board meeting that approved the transaction back in the early years of this century.

Did they ask the following questions: Does this third party have the capacity to undertake this transaction on its own balance sheet? No? Then where is it getting the money to fund the transaction?

From a bank, you say? So why don’t we just go to that bank directly ourselves? At this point a fairly flushed managing director would be waxing lyrical about how the third party company has a better relationship with the bank and can negotiate a far better deal.

Director X, who’s known not to suffer fools gladly, should have raised an eyebrow and asked: “But isn’t the bank that is financing this third-party-knight-in-shining-armour…..our very own bank?”

Clearly this didn’t happen, leading to the current court cases. Directors on company boards should stay alert!