Ideas & Debate

How special interest collective schemes can boost companies

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NSE-listed bank shareholders at a past AGM in Nairobi. FILE PHOTO | NMG

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Summary

  • Special interest schemes can become the ‘lightning rod’ for the shareholder voice of change. They can make far more direct and systemically effective changes than any other investor group could.

In the wake of Uchumi supermarkets’ plan to settle its debt load - through a company voluntary agreement, creditors will now take a 30 percent cut of their outstanding debt.

Additionally, 40 percent of the debt owed to unsecured lenders will be turned into non-cumulative convertible preference shares -, it got me thinking; isn’t the push to have this (once) leading retail giant honour its commitment a different kind of activism?

If so, would the outcome have been different if all these stakeholders had a share in the business? If yes, what tools would they have used to achieve this? The short answer is; special interest collective investment schemes.

Just to give context; shareholder activism comes in many forms, including engaging privately with a company on a particular governance issue, seeking to change some or all of a company’s board of directors or publicly calling for a firm to undergo a transformational change, for example by way of mergers and acquisitions.

Another way this can happen is through special interest groups. But what are special interest collective investment schemes? According to the Capital Markets Authority, these are investment schemes established by a promoter for the purposes of facilitating investment by a special group of individuals with a common interest in a specific listed company and may include farmers, distributors and suppliers among others.

Owing to this structure, these schemes are perfect for a special brand of shareholder activism. With such a high single-stock risk, these special interest groups can engage listed companies rather more forcefully on different issues; from simply refusal to follow a board's recommendations, force the board to drop misguided proposals, reform its corporate culture (note: poor corporate culture has been cited as a contributing factor to its Uchumi’s fall) and/or force them to renegotiate better terms of a transaction.

In other words, through this front-row seat, they can help influence whatever listed company they are attached to.

And why do I think these schemes are best for shareholder activism? The direct commercial interest is a strong incentive. Besides, most ordinary shareholders, including institutional investors, remain largely uninterested (unless they are being hurt financially).

This is exemplified in the pattern of voting at AGMs. It's less likely institutional investors would want to systematically improve governance and accountability as they’re primarily concerned with returns.

Furthermore, the interests of these investors are not always the same. Institutional investors, most of whom are large, sometimes foreign entities, have their own shareholders who may have a different set of objectives.

So, as an example, it’s not always clear whose interests an institutional investor is representing when it meets with chief executives and boards of listed companies.

That noted, this is not to say these special interest schemes are a silver bullet. They certainly can get trapped in the same hole that ensnares most funds. But as a result of their unique positioning, they can become the ‘lightning rod’ for the shareholder voice of change. They can make far more direct and systemically effective changes than any other investor group could.

Mr Mwanyasi is the managing director of Canaan Capital.