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Governance pain for firms in ARM woes

ARM

ARM chief executive Pradeep Paunrana. FILE PHOTO | NMG

ARM Cement is the new corporate hitting headlines for the wrong reasons. The second largest cement maker was outed by audit firm Deloitte for concealing stale subsidiary debts amounting to Sh21 billion. This scandal exposes the soft under belly of Kenya’s corporate governance.

First, there is reason to believe that a number of listed firms might be bubbles waiting to explode. It’s observed, even in developed markets, that fat compensation coming from a loss-making company are a red-flags of fraud-attempting executives or meant to silence company executives about dubious financial dealing within a firm.

It’s surprising that our hard-nosed financial analysts missed this forensic hint on a company that has been reporting losses for three years now.

In the last financial year, ARM CEO’s pay rose from Sh20 million to Sh114 million, his deputy took Sh73.2 million, the board took Sh220 million, meaning the three parties alone cost shareholders almost 15 per cent of the company’s total administrative cost.

At the same time, other two senior executives opted to take up an aggregate of Sh70 million shares valued at Sh192 million as additional elements of their compensation.

This can give a picture of the kind of hemorrhage the shareholders were undergoing bearing in mind that this is a loss-making firm now at Sh6.5 billion.

This paper reported recently that ARM is not the only loss-making listed company paying its executives enormous compensations. Among the 12 Nairobi Securities Exchange-listed companies paying their bosses tens of millions, seven of them are loss-making.

READ: PwC administrators take over debt-laden ARM Cement

Therefore, more scrutiny needs to be placed on these firms because it is such executives who find themselves under pressure to justify their huge paycheques, making them prone to doing anything to show improvement on the company’s standings.

Second, the argument that listing in the securities market necessarily exposes family-owned companies to public scrutiny leading to better corporate governance has been blown out of the water by this scandal.

This argument became rifer with the fall of Nakumatt Holdings with a number of finance gurus arguing that if it was listed, the retail chain titan would still have been roaring.

Now, ARM is the first family business to list on the NSE in 1997 and has always been considered among the success stories of family-owned business scaling up into a publicly listed. Despite its long history of being listed, it still managed to get away with falsifying books of accounts which says much about Kenya’s corporate governance system.

Going by ARM shenanigans the argument about Nakumatt stand to be true but because it would have had a chance to hide its financial health status in the public eye (being listed) like ARM and remain afloat for a while. For example, ARM records show that when the firm sold off its assets, fertiliser and mineral production businesses to ease its cash crunch, it sold those assets to a firm owned by the CEO, demonstrating a clear conflict of interest.

Third, another lesson from this scandal is that as NSE runs a campaign persuading more family-owned companies to list, not all family-owned companies should consider listing.

Founded as a small company in 1974, the Paunrana family successfully propelled ARM into a blue chip but at the same time, listing seems to have been it Achilles heels. The company seems to have found itself taking excessive risk in expansionary ventures so as to always increase its share price.

Twenty-one years after listing, the company has wiped out its equity through accumulated debt from its subsidiaries operations. Had it remained a family-owned business that wouldn’t have happened.

Strictly family-owned companies like Bidco, Tuskys, Kenpoly, Chandaria Industries, Kenafrica and others have actually proven that a company can successfully scale to greater heights.