Columnists

PE funds looking bad on Paunrana’s ARM

arm

Padreep Paunrana. FILE PHOTO | NMG

Perhaps this is not the appropriate time to write the story of the rise and fall of Padreep Paunrana, corporate titan and long serving chief executive of the listed company Athi River Mining Ltd #ticker:ARM.

I may have to wait until the board of the company finally appoints a new CEO to take over from Mr Paunrana. In a recent regulatory filing, Company Secretary, John Moenga, revealed that the board was at an advanced stage of hiring his replacement.

It is all part of a boardroom shake-up engineered by the State-owned UK wealth fund CDC.

When Mr Paunrana finally steps down, it will be the time to analyse what happens when power moves from a family member and founding managing director of a listed company to a professional recruited by shareholders and creditors on the basis of a solid track record and turnaround experience.

We will address themes such as the ‘owner- occupier mentality’, ‘the star CEO phenomenon’ ‘executive hubris’ and how to rein in boardroom behaviour.

Indeed, we are in the middle of changing times in terms of attitudes by shareholders, investors, unions and the media, towards CEOs of listed companies.

The imperial CEO is gradually being downsized, always criticised by investors for paying themselves big pay packages even when the companies they are running are posting crippling losses.

I predict that we will start seeing more and more resolutions at AGMs, demanding restraint on executive pay practices, especially in cases where listed firms have posted profit warnings.

In the past, dwindling fortunes of companies were explained away by institutional factors such as poor strategy or bad conditions in the broad macro economy.

It was all well for ARM until last month when auditors said the firm has been misrepresenting its financial statements to conceal stale subsidiary debts amounting to Sh 21 billion.

That is when we came to grips with the fact that we were staring at a major corporate governance crisis in what was — at one point— the biggest cement maker in the region.

Corporate Kenya has got to understand that there is a higher calling than trying to fudge numbers.

It is textbook case of what happens when you have a board that kowtows to a powerful founder-owner CEO.

As an investor, can we really trust capital markets in this country anymore?

But what I find even more puzzling is the way global PE funds, namely, the CDC and the International Finance Corporation were also duped.

How could all those global PE funds who kept pouring and committing money into ARM allow themselves to be duped by the management of the company?

Clearly, this is proof that due diligence systems and practices use by these global PE funds don’t work.

Mark you, IFC, the World Bank’s private sector lending affiliate, ranks as one of the World’s largest DFIs.

There are lessons about how massive corporate debt to fund massive expansion projects, involving purchase of billions of shillings worth of expensive equipment can pose major governance risks to a company.

The moment you start seeing a company beginning to take too much corporate debt, especially from foreign creditors, the red flag should be raised.

When you are borrowing dollars from the international markets to pay suppliers of technology and equipment under a governance environment with a powerful management, the governance risks can be very big.

You need a powerful board to defend the company just in case the CEO and top management become rogue. A compliant board leaves the company with no shield.

In Africa, we are seeing a trend where sovereign debt is becoming the new frontier for shady dealings by political elite.

Corporate debt taken for massive expansion projects are becoming a new frontier for shady games that are covered by sophisticated accounting tricks.

ARM net losses in the year ended December rose to Sh6.5 billion with short term liabilities exceeding current assets by a massive Sh13.4 billion.

The share price has fallen precipitously from an average of Sh90 in 2014 to an average of Sh 4.5 in recent trading.

Mr Paunrama’s pay rose by Sh20 million to Sh 114 million in the year ended December 2017, at a time when the company was turning in crippling losses. Something had to give. Noah of the Old Testament was the greatest turn- around artist- he managed to float a company when the whole world was under liquidation. Over to you, Mr Linus Gitahi.