Would a strong board have saved Nakumatt from financial woes?

The country’s retail industry is going through a significant episode of its existence; Nakumatt Supermarkets, once a regional giant, is seemingly breathing its last.

Nobody, outsiders at least, could have predicted the downfall of Nakumatt. To make matters worse, the retailer’s management remained tight-lipped about the dire situation until their strategy was no longer tenable, leaving the public to speculate.

Nakumatt’s total liabilities stand at over Sh35 billion against assets of Sh5.2 billion, with its beeline of creditors composed of commercial banks, the Kenya Revenue Authority and hundreds of suppliers. Several of its outlets have also been closed due to rent arrears.

The supermarket chain in now under administration, with the courts having appointed Peter Kahi to help resuscitate the business even as creditors bay for liquidation.

Mr Kahi’s preliminary audit into the company reveals some insights into how the business has found itself in such a precarious situation.

The report shows that the retail chain lost more than Sh18 billion worth of stock to fraud, that the expansion spree was fuelled by debt, a reality the firm’s management has admitted to.

Nakumatt did not have to wait for things to get this dire. The supermarket’s financial challenges can be traced back to the non-existence of corporate governance structures.

Since it is privately-owned, Nakumatt is legally exempt from various obligations such as publishing its financial reports. But the limited company was allowed to, among other things, constitute a board to oversee the operations of the business and ensure its growth and sustainability.

All indications point to the fact that Nakumatt lacked this oversight arm and, if at all it was present, was not independent, leaving all major decisions, from procurement to investment, to be made by a handful of individuals.

READ: How Nakumatt found itself in a perfect storm

One of the key responsibilities of a board, and its greatest asset to any company looking to grow, is providing oversight over the enterprise’s affairs.

Successful companies have their operations, finances, decisions scrutinised by board committees overseeing audit and risk, investment, procurement among other key functions. Such committees serve as checks, to audit all the decisions made by a company’s management.

An investment committee, for example, would have detected possible issues with the firm’s pace of expansion.

A risk committee would also have raised the red flag on the same, and ideally developed alternative financing solutions while the audit committee would have arrested the pervasive internal pilferage.

A management committee, would have dealt with possible operational and strategic issues and help in improving coordination within the company’s various business units.

At the board level, the various committees would have collated the information available and reviewed Nakumatt’s progress and performance and forestalled its collapse.

Nakumatt must serve as a good example to other retailers, as well as SMEs and other privately-owned companies, of the importance of a well constituted board.

Not only should these boards be established, but they must also be autonomous in order to make the necessary, and often times difficult decisions. It is only by doing so they can ensure their companies continue operating as a going concern.

Meshack Joram, CEO of Institute of Directors (IOD) Kenya.