Posted on

Board and CEO separation is a painful divorce Part 4

The unfolding South African Peter Moyo vs Old Mutual case is beautiful for the lessons it provides boards and executives simultaneously on various aspects including director conflict of interest, conflict management within a board and, most importantly, crisis management and communication. It is the latter aspect that I want to focus on today. By way of quick summary, on 24th May 2019 the board of Old Mutual Limited released a statement to the Johannesburg Stock Exchange that it was suspending the CEO, Peter Moyo. A few weeks later, another statement was released that Peter Moyo’s employment was being terminated. The reason given was concerns that had emerged relating to a conflict of interest in a company in which Peter Moyo was the chairman and in which Old Mutual was a shareholder. Needless to say the you-know-what hit the fan and Moyo hired a lawyer to sue the company, its board of directors and pretty much anyone who looked at him the wrong way. Both Moyo and his lawyer took to the airwaves and painted a picture of an innocent victim of board injustice, dragging the board chairman, Trevor Manuel into the fray as one already having his own conflicts.

The lesson in crisis management communication is this: take control of the narrative early and quickly. In Moyo’s case, both he and his lawyer took whatever opportunities were availed by television and radio stations to provide sound-bytes and long interviews telling his side of the story. Old Mutual limited itself to press statements with footnotes directing enquiries to the Head of Investor Relations and the Head of Communications. Curious. A bit stand offish, no? But this was likely after the advice of the 10th Battalion of Lawyer Generals who must have said that the board and its chairman cannot be seen to be engaging in the public domain, particularly since Moyo had swiftly taken them to court. When the court issued a reinstatement order on July 30th 2019, Moyo promptly went to work on 31st July, with television cameras conveniently located at the Old Mutual headquarters building entrance. The cameras recorded Moyo’s unsuccessful attempt to go to his offices and the polite rebuffing as his access cards didn’t work and he couldn’t go past the client meeting rooms. Drama fit for a Mexican telenovela.

It is however important to note that Old Mutual and the 10th Battalion were doing a phenomenal job of giving their side of the story. On their company website. If you want to learn the art of being open and transparent about a crisis of magnificent proportions, please visit that website. There is a whole section dedicated to giving a synopsis of the events from the beginning and the materials related to the court case. One colorful and artfully designed communication piece titled the “Peter Moyo Case Factsheet” provides a play by play response to every single assertion that Moyo has made against the company and its board.

Many more dry, impassive and robotic press statements later, the Old Mutual chairman finally put a human face to the board’s side of the story and speak to the public in September 2019 at a press conference and several other carefully orchestrated media interviews. Unfortunately he stepped into every executive’s nightmare: a gaffe landmine. Trevor Manuel, the board chairman said “If you take a board imbued with the responsibility and accountability and you get that overturned by a single individual who happens to wear a robe, I think you have a bit of a difficulty.” Eric Mabuza, Moyo’s lawyer took to the press with much relish at this gaffe, claiming that Manuel was essentially dismissing the entire judiciary since they all wear robes.

To his credit, Manuel owned the statement and apologized unreservedly for the comment a few days later. “It was never my intention to show disrespect to the learned judge or his judgement. I accept that my language was wholly inappropriate…..and sincerely regret the manner in which I did so. My respect for the judiciary is unshaken and rooted in our sound legal process where all voices are heard with remedies available to address differences of legal position.” Kudos to the lawyer who drafted this penitential masterpiece.

There will be no winners or losers when this case ends, is my prediction. This case will have to be settled out of court, out of the glare of the cameras and judges and the verbal fisticuffs that the protagonists have been undertaking outside of the courts. An out of court settlement that will allow both sides to save face is an imperative outcome of this convoluted discourse. It will let this matter slide into the annals of board mishaps and permit both sides to lick their wounds and move forward. After all CEOs, more often than not, never leave with empty hands.

[email protected]

Twitter: @carolmusyoka

 

 

Posted on

Uchumi Directors are not living happily ever after

[vc_row][vc_column width=”2/3″][vc_column_text]It’s one thing to see the law being created. It’s another to see it being applied. The outcome of the Uchumi Supermarkets Ltd (USL) enforcement action by the Board of the Capital Markets Authority (CMA) was one of the best precedents set by the regulator since John Hanning Speke discovered Lake Victoria as the source of the Nile. As a corporate governance educator, I am constantly asked for local case studies since our curriculum is replete with American and European examples, as those are more mature markets that have built up a significant jurisprudence of corporate scandals and enforcement actions thereafter. Kenya itself has a litany of white-collar scandals, but very little in the form of punishment for the perpetrators of corporate malfeasance.

The CMA has undoubtedly set the tone for board directors and key officers of listed and non-listed public companies in this town which tone is as clear as the waters in a baptismal font as evidenced by the allegorical language used. “The Chairman and the directors will be required to “disgorge” their director allowances.” A dictionary meaning of disgorge is to “yield or give up funds, especially funds that have been dishonestly acquired.” Another definition of the same word is “to eject food from the throat or mouth.” And therein lies the allegory, the hidden meaning. Directors who allow malfeasance to occur on their watch and are remunerated during such time are feeding from the wrong trough and will be asked to regurgitate those emoluments swiftly, unashamedly and unequivocally.

The former chairperson and two former non-executive directors of USL were disqualified from holding office as directors or key officers of a publicly listed company, a company that has issued securities, or a company that is licensed or approved by the CMA for a period of two years. They were also asked to return the director allowances paid to them for the financial years 2014 and 2015. Finally, they were instructed that if ever a listed company saw it fit to appoint them to a board after they had atoned for their sins and sat in director purgatory for two years, they would be required to attend corporate governance training before being eligible for appointment.

The former chief executive officer and the former finance manager were also disqualified from holding office as a directors or key officers of companies that are regulated by the CMA. The regulator will also be filing a complaint at the Institute of Certified Public Accountants regarding the professional conduct of the two who are registered Certified Public Accountants.

In retrospect, what the named Uchumi directors and officers have gotten is a rap on the knuckles. They dodged a bullet provided by the current and newly operationalized Companies Act 2015 that allows a shareholder to bring a derivative action against a director for negligence, default, breach of duty or breach of trust. And the regulatory outcome would set enough of a precedence to warrant a shareholder to pursue this course of action in our highly litigious country. The new Companies Act 2015 has given a lot of teeth to stakeholders – including the company itself – to seek retribution for malfeasance or wrong doing on the part of the very parties supposed to maintain the best interests of the company. In light of the fact that a law cannot be applied retrospectively, and the fact that these breaches happened before 2015, the main worry for the named directors is how to mpesa those funds back to base and, for the officers, what color tie to wear to the disciplinary hearing at ICPAK.

The CMA itself issued a new corporate governance code in 2015 (CMA Code), and relied on its fairly modern tenets, that codified director fiduciary duties, in its conclusions about the creative accounting undertaken by the officers of Uchumi and overseen by the non executive directors. Quoting the CMA press release on the Uchumi decision: “The inquiry further established that in some instances the USL branch expansion program was undertaken without due regard to the Board’s fiduciary duty of care due to the absence of a proper risk management framework being in place. It was also established that in some instances, USL pre-financed landlords in addition to making payment of respective commitment fees, but nevertheless the branches were never opened or funds recovered.”

Under Chapter 6 of the CMA Code titled Accountability, Risk Management and Internal Control, boards of directors are required to put in place adequate structures to enable the generation of true and fair financial statements. The Code explains that the rigours of risk management by the board should seek to provide interventions that optimize the balance between risk and reward in the company. In layman’s language: Figure out what could possibly go wrong in the company whose board you sit on and ensure you put in place processes that recognize that risk and, where possible, mitigations for such an eventuality. Furthermore all times ensure the financial statements reflect- rather than conceal – those risks. In the Uchumi case, paying developers of buildings where you intended to open new branches in advance and not putting into place protection measures in case your advance funds were mis-directed to personal Christmas slush funds, was a big mistake. Those pre-payments that were not being recovered should have been provided for or written off entirely.

In light of all the recent corporate scandals, and our seeming inefficiency in prosecuting white-collar thugs dressed in oversized Bangkok knock off suits, the CMA enforcement action is a breath of fresh air. While the directors have all gotten off fairly lightly with a mild disgorgement, it is the social pariah status that will be the most effective deterrent for board directors in this market. I’m not sure that there is a self respecting board in this town, whether in the public or private sector that wants a “director formerly known as the Uchumi guy” serving on its board anytime soon.

[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

 

Posted on

Too Big To Fail-A Lesson From Deutsche Bank

[vc_row][vc_column width=”2/3″][vc_column_text]“We enable our clients’ success by constantly seeking suitable solutions to their problems. We will do what is right—not just what is allowed.” That is the classic statement of values from the Deutsche Bank website. In case you missed it, one of the world’s largest and oldest financial institutions has been lurching from scandal to scandal over the last few years and hammering a rusty nail into the coffin that is the “too big to fail” theory. The scandals have occurred largely in the last ten years of its nearly 150 year history and range from artificially propping up housing prices in the 2007-2008 financial crisis to participating in the notorious Libor scandal, to covert spying and espionage of its critics, to doing dollar denominated business with the US sanctioned countries of Burma, Libya, Sudan, Iran and Syria.

There’s not enough space or regulator imposed penalty dollar signs that can efficiently cover those malfeasances on this page, so I’ll focus on just one that makes short shrift of their statement of values. In the early days of 2015, an internal investigation dubbed Project Square that was looking into Deutsche Bank’s Moscow office trades revealed that a 36-year-old American trader Tim Wiswell had overseen over $10 billion of mirror trades that helped siphon cash out of Russia and mainly into London.

The concept was beautiful in its simplicity. An online article on Bloomberg titled “The Rise and Fall of Deutsche Bank’s ‘Wiz’ Kid” outlines the grab-a-bag-of-popcorn-for-the-drama narrative of how Tim Wiswell – Wiz to his friends – brought down the Moscow investment banking unit of Deutsche Bank. Wiswell’s desk, which never had more than a dozen or so employees, carried out thousands of mirror trades over a four year period. The size of the trades would be not too high as to raise an inordinate amount of eyebrows, somewhere in the range of $10-15 million per transaction.
Wiswell, who was promptly fired once Project Square was released, sued the bank for wrongful dismissal and lost. He claimed that at least 20 of his bossed and colleagues, including two supervisors in London, knew about the trades because they were carried out openly. The counterparties were also taken through “strict vetting” by the sales team using a compliance framework that was reviewed in both Moscow and London if any issues were identified. They all passed muster.
But how long had the compliance teams within Deutsche Bank been sticking their heads in the sand? The August 29, 2016 issue of The New Yorker magazine provides a well-written investigative piece on the $10 billion scandal. According to the article, on one day in 2011, the Russian side of a mirror trade, for about $10 million, could not be completed as the counterparty, Westminster Capital Management, had just lost its trading license. The Federal Financial Markets Service in Russia had barred two mirror trade counterparties, namely Westminster and Financial Bridge, for improperly using the stock market to send money overseas. The failed trade was a problem for Deutsche Bank, the New Yorker argues. It had paid several million dollars for stocks without receiving a cent from Westminster. The episode should have raised serious suspicions – especially given the revoking of Westminster’s license – but apparently it did not. The failed trade was resolved over a year later in November 2012 when Westminster repaid Deutsche Bank and the mirror trades continued.

But the patterns of suspicious activity were wagging their tails for the average compliance eye to pick up. Clients of the mirror trade scheme consistently lost small amounts of money: the differences between Moscow and London prices of a stock often worked against them and clients had to pay Deutsche Bank a commission for every transaction. The apparent willingness of counterparties to lose money again and again should have sounded an air raid alarm that the true purpose of the trades was to facilitate capital flight. The counterparties for the mirror trades were not owned by Russian oligarchs. They were brokerages run by Russian middlemen who took commissions for initiating mirror trades on behalf of rich people and business eager to send their money offshore, the New Yorker reveals further. A businessman who wanted to expatriate money in this way would invest in a Russian fund like Westminster, which would then use mirror trades to move that money into an offshore fund. The offshore fund then wired the money, in dollars, into the businessman’s private offshore account. An internal research report by Deutsche Bank titled Dark Matter, and which was totally unrelated to the unraveling scandal in Russia, revealed that Britain had significant unrecorded capital inflows. Since 2010, wrote the research duo of Harvey and Winkler, about a billion and a half dollars arrived in London every month and a good chunk of it was from Russia. “At its most extreme, the unrecorded capital flight from Moscow included criminal activity such as tax evasion and money laundering.” A month after this research report was released to much media debate, the $10 billion scandal broke out, revealing exactly how another department within Deutsche Bank played a big role in that economic anomaly. Of the eighteen billion dollars that the researched had estimated was flowing into the UK each year, about 20% had arrived there as a result of the trades made at their own bank. Deutsche Bank is now facing billions of dollars in penalties, at the last count they were fighting off a $14 billion penalty from the Department of Justice in the United States for mis-selling mortgage securities in the run up to the 2008 financial crisis. This is against a provision that they have made for $5.6 billion for legal costs related to all the scandals they are currently facing. The share price has of course tanked and analysts are concerned about its viability as a going concern if these penalties are exacted, as they’d have to go back to shareholders to raise the cash for making the penalty payments.
I’ve written about Deutsche Bank’s value statements today, and Wells Fargo value statements a few weeks ago. I’m sure if we dug deep within the bowels of Imperial, Chase and Dubai Banks locally, we would find a value statement or two posted proudly at the head office reception. I’m starting to build a healthy cynicism for value statements of any kind. If anything, banks should have a uniform statement globally: “We’re here to take your money, use it, make our money and hopefully give you a return. Someday”

[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

Posted on

How Not To Grow Revenues-A Lesson From Wells Fargo

[vc_row][vc_column width=”2/3″][vc_column_text]In case you missed it, the United States provided yet another wonderful case study in bad corporate governance in the Wells Fargo case this past September.

On September 8th 2016, Wells Fargo Bank was fined $185 million (Kes 18.5 billion) by regulators after it was found that more than 2 million bank accounts and credit cards had been opened or applied for without customers’ knowledge or permission between May 2011 and July 2015. Employees had been opening and funding accounts in order to satisfy sales goals and earn financial rewards under the bank’s incentive-compensation program.” Dice it or slice it, this was a fraud of monumental proportions that had to have been known from the top. Or was it known? Well, John Stumpf was not trying to take one for the team. Following the termination of about 5,300 employees (about 1% of the workforce) in relation to the allegations, the champion stallion appeared on television on September 13th 2016 quite unapologetic. “I think the best thing I could do right now is lead this company, and lead this company forward,” in response to calls for his resignation. Stumpf was acting straight out of the African leadership playbook titled “Id Rather Die Than Resign.”

A week later, Stumpf met the inimitable Massachusetts Senator Elizabeth Warren. Ms. Warren had done her homework extremely well and in 17 short minutes excoriated the bank CEO. I’ve extracted the first painful minutes here:
Warren: Thank you, Mr. Chairman. Mr. Stumpf, Wells Fargo’s vision and values statement, which you frequently cite says: “We believe in values lived not phrases memorized. If you want to find out how strong a company’s ethics are, don’t listen to what its people say, watch what they do.” So, let’s do that. Since this massive years-long scam came to light, you have said repeatedly: “I am accountable.” But what have you actually done to hold yourself accountable? Have you resigned as CEO or chairman of Wells Fargo?
Stumpf: The board, I serve —
Warren: Have you resigned?
Stumpf: No, I have not.
Warren: Alright. Have you returned one nickel of the millions of dollars that you were paid while this scam was going on?
Stumpf: Well, first of all, this was by 1 percent of our people.
Warren: That’s not my question. This is about responsibility. Have you returned one nickel of the millions of dollars that you were paid while this scam was going on?
Stumpf: The board will take care of that.
Warren: Have you returned one nickel of the money you earned while this scam was going on?
Stumpf: And the board will do —
Warren: I will take that as a no, then.

Two things to note here: First of all is how Stumpf was trying to bring in his board of directors as the reason why he was not resigning. We will never know if his board quite frankly wanted him gone by this time but couldn’t get garner the guts to ask him to leave, after all he was both Chairman and CEO. Secondly, he also laid the decision to pay back his past bonuses squarely on the board’s hands. Under Warren’s probing eye, he was not trying to take the flak for not paying back unfairly earned bonuses. On this one, he was going to go down with his board. Having seen how Wall Street executives had walked away with a slap on the wrists following the global financial crisis of 2008, Warren went for the jugular:
Warren: OK, so you haven’t resigned, you haven’t returned a single nickel of your personal earnings, you haven’t fired a single senior executive. Instead evidently your definition of “accountable” is to push the blame to your low-level employees who don’t have the money for a fancy PR firm to defend themselves. It’s gutless leadership.

Stumpf, who had probably had the best legal brains prepare him for the Senate hearing, had even been trained on the classic “I don’t recall” technique for any questions whose answers might lead to self incrimination. But Warren was in no mood to take prisoners and gave the classic ultimatum.
“You know, here is what really gets me about this, Mr. Stumpf. If one of your tellers took a handful of $20 bills out of the cash drawer, they probably would be looking at criminal charges for theft.
They could end up in prison. But you squeezed your employees to the breaking point so they would cheat customers and you could drive up the value of your stock and put hundreds of millions of dollars in your own pocket. And when it all blew up, you kept your job, you kept your multi-million dollar bonuses and you went on television to blame thousands of $12 an hour employees who were just trying to meet cross-sell quotas that made you rich. This is about accountability. You should resign.
You should give back the money that you took while this scam was going on and you should be criminally investigated by both the Department of Justice and the Securities and Exchange Commission. This just isn’t right. A cashier who steals a handful of twenties is held accountable. But Wall Street executives who almost never hold themselves accountable. Not now, and not in 2008 when they crushed the worldwide economy. The only way that Wall Street will change is if executives face jail time when they preside over massive frauds. We need tough new laws to hold corporate executives personally accountable and we need tough prosecutors who have the courage to go after people at the top. Until then, it will be business as usual. ”
It is noteworthy that it is not only Kenya that is struggling to get corrupt practices actively prosecuted, especially those perpetuated by “untouchables”. And after that lacerating and very public questioning, the bank’s independent directors announced on September 27th that Stumpf would not be receiving $41 million (Kes 4.1 billion) of promised compensation while they launched an independent investigation. Clearly, being thrown under Stumpf’s bus was not what they had signed up for and necessary action was taken.

John Stumpf threw in the towel and finally resigned on October 12th 2016 from the Wells Fargo Board and also stepped down from Chevron Corp and Target Corp on October 19th 2016 where he served as a non-executive director. An honorable action that was a day long and a dollar short.
[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

Posted on

Imperial Audit: 42 Billion Reasons Why Directors Should Be Cautious

[vc_row][vc_column width=”2/3″][vc_column_text]A pilot was welcoming passengers to the flight shortly after take off. “Thank you for flying with us this morning. The weather is…..” He broke off his welcome with a sharp scream followed by, ”Oh my God, this is going to really hurt. It’s burning.” There was complete radio silence for a full minute before he returned. “Ladies and gentlemen I sincerely apologize for that incident, as I dropped a very hot cup of coffee on my lap. You should see the front of my trousers!” Out of the back came a worried shout from a passenger, “If you think yours are bad, you should see the back of mine.”

The Imperial Bank forensic report is out and any bank director, actually scratch that, any director of a Kenyan company should be having severe indigestion right about now. Following its findings, the Central Bank (CBK), the Kenya Deposit Insurance Corporation (KDIC) and the bank in receivership have sued nine individuals, one deceased person’s estate and eight companies in a bid to recover Kshs 42.4 billion of the banks assets and deposits. Yes, the figure is simply eye watering by its sheer size. This civil suit represents a watershed moment for corporate governance in Kenya. With the exception of three independent non-executive directors (INEDs), the other seven individuals (including the deceased) were directors representing the eight companies that were shareholders in the bank.

While the individuals are being sued for breach of fiduciary duty – a basic tenet of corporate governance – the companies therein named are being sued as being beneficiaries of what may come to be Kenya’s single largest corporate fraud since the 19th century explorer Henry Morton Stanley stepped off a boat onto Kenyan shores.
Over the period of ten years from 2006 to 2016, the bank was found to have operated two banking systems, with the illegitimate system passing through over billions of shillings in fraudulent disbursements over that period. The non-executive directors, including the chairman, were tightly joined at the hip and had cross shareholding in various other companies some of which were property related. In view of the fact that this was starting to look like a brotherhood of veritable kleptomaniacs, the three INEDs who joined in quick succession- two who joined on 1st of July 2014 and one on 1st February 2015- may not have been on the board long enough to cotton on what was, and had been, going on for the previous nine years. But today they are jointly and severally liable for years of mismanagement. These chaps were probably pleased as punch to have made it to the board at all and may have been snookered by the fast talking CEO, whose verbosity is alleged to have steamrolled various discussions on the board audit committee which he regularly attended. Now the three INEDs have to get lumped with the other directors all of whom have been painted with a mouthful of accusations over and above breach of fiduciary duty including negligence, gross negligence, fraud and theft.

One could very well argue then, that banks owe a duty of care to their directors to provide rigorous training in both corporate governance and risk management. There are now 42.4 billion reasons why bank directors need to know what they are signing up for. Actually, I could kick it up a notch and say that the CBK should require a made-for-purpose bank director training that one must undertake before they sign off on those ‘Fit and Proper Forms’ that are required for any bank director and senior officer before appointment to the board.
Yet the CBK is not entirely blameless in this mess, as all this happened on their watch. The regulator cannot claim that it relied on audited accounts to arrive at their conclusions for renewal of licenses. There were glaring irregularities in the governance such as the Board Executive Committee undertaking the role of the Board Credit Committee (BCC) without the proper structures in place including having an INED chair the BCC as per Prudential Guidelines. There were allegedly no notices for or minutes of meetings for a BCC from as far back as 2006. Someone was asleep at the wheel over at the banking supervision unit. The lack of INEDs until February 2014 should also have raised a slap on the wrist from the regulator. But it doesn’t appear to have. The only redemption here is that the regulator eventually stepped in, and quite likely because there was a new sheriff in that town.

Whether that amount of money is feasibly recoverable is something for the courts to determine. And directors should not try and draw comfort that they can ask the companies whose board they sit on to put in indemnification provisions in the articles of association or in their appointment letters. Section 194 of the Companies Act 2015 specifically voids any provisions that a company may make to exempt directors from any liability that attaches from negligence, default, breach of duty or breach of trust. However, companies are permitted to purchase Director and Officer (D&O) Liability Insurance to provide that specific indemnity from negligence etc. But there’s a catch. The same Companies Act does not allow D&O cover to provide indemnity (i) against fines from criminal proceedings, (ii) fines from regulators for non-compliance, (iii) defense of criminal proceedings and, finally, (iv) defense of civil proceedings brought by the company itself in which judgment is given against the director.

Therefore even if the Imperial directors had D&O cover, such cover busts two out of the four prohibitions above, viz (ii) and (iv) since the company is the plaintiff in the civil suit.

What’s the moral of this sordid story? Being a director of any company is risky business. Being a director on a board full of business buddies is even murkier business, the kind that requires one to keep a set of adult diapers on hand as they undertake the flight of their lives.
[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]