There seems to be some signs of shareholder activism emerging in the recent past.  With corporate scandals like Uchumi that hit the market, there could be more of the like hitting the market as the number of listings increase.  This calls for caution among the common-share-holders who always end up the biggest losers.

In Early May, two events brought some heat in the Capital Markets Authority (CMA) and CMA came out fuming.  This came after some misleading reports that were carried out in the two local leading dailies.  The reports alleged that the CMA was to rake Shs. 150mn (US$2mn) from the Kengen IPO (Financial Standard, May 02, 2006) while the other in the Daily Nation brought out the issue of ‘Why firms shun the Capital Markets’ (Daily Nation, May 03, 2006).

In its defence, the CMA was clear that the public ought to distinguish between money that comes to the CMA as revenue and that belonging to the fund.  That the investor compensation fund which is a creation of the law exists to grant compensation to investors who may suffer from loss resulting from the failure of a licensed intermediary to meet its contractual obligations.  Edward Ntalami put it clear that money paid to the fund does not constitute revenue for the authority but is utilized to ‘serve the public good’-  to protect and compensate investors who may suffer losses occasioned by failure of market intermediaries to meet their settlement obligations.

In the recent past, shareholders lost their investment when the retail store- Uchumi Supermarkets Limited was suspended from trading at the Nairobi Stock Exchange (NSE).  Some opposition ministers and activists moved in accusing the government and the CMA of not protecting the shareholders.  Critics of the government claimed that the CMA should have raised an alarm in good time.  Unga Group issued a profit warning following the closure of Uchumi and trading of its shares was never halted, CMA issued no statement and the share price kept appreciating. 

Although activists do not come out strongly at the occurrence of such misfortunes in companies, there are expectations that such groupings will emerge as our markets get larger.  Last week, the NSE chairman was quoted as saying that the speedy matching up of orders brought about by the automated system will see the market turnover go up by over 100% in the next six months.

In the United Kingdom, the government, which is a completely separate entity from business (unlike the local situation where government still owns businesses) has been the front runner in shareholder activism.  In 2004, the government threatened to bring in legislation compelling big shareholders to take a more active role in bringing underperforming companies to task.  Trade bodies representing fund managers have drawn up codes that require them to become more active, as have global bodies such as the International Corporate Governance Network (ICGN).

Private individuals have also joined the debate even creating more room for investor protectionism.  A fund manager in the UK, Hermes, owned by BT Pension Scheme has long been at the forefront of shareholder-activist movement, which urges shareholders o challenge managers of companies about the way they are run.  CALPERS, in California, though a bit smaller plays a similar role in the United States.

The companies involved in activism do not just make noise about the underperforming companies however. Their role revolves around helping improve the corporate governance of companies that are underperforming.  This is done by use of an index tracking fund called Index Tracking Investments.  Interestingly, this fund owns more than 1% of all quoted firms in the UK.  In addition, the fund covers all major markets and regions.  By owning part of the company, the fund definitely gets an opportunity to join in the board seating.  Through this, they are able to intervene on issues such as composition of boards, independence of directors and the pay to directors.

The governance structure of 50% of our listed firms is not very laudable.  Adding that to the partial ownership by the government creates a complete mess.  You perchance have an off pat of the governance issues arising from the East Africa Portland saga that saw six directors exit and the fights that pigeonholed the previous shareholder meeting where shareholders accused the management of not disclosing adequate information.

Activism is usually coupled with ‘shareholder engagement funds’.  As explained by David Pitt-Watson, a trustee of IPPR (Institute of Public Policy and Research) such funds take the approach that helps improve ‘problem companies’.   The approach used is, buy stake in those companies it believes to be undervalued because of financial, strategic, or governance issues- usually becoming one of the largest owners and then engages extensively with the management and boards to resolve them.

Can the buyout of 70% of East Africa Cables (EAC) by the Transcentury Group (when it was poorly performing) be used as a good case scenario in this bearing in mind that they also own part of the Kenya Power and Lighting Company (KPLC) and were at the verge of buying the mortgage finance company, HFCK?  If this qualifies, the Lafarge, the French firm would be an opposite because their ownership of the three cement manufacturers, Bamburi, EAPC, and Athi River Mining (ARM) has not influenced the firm much.

These two cases cannot explain shareholder activism and there have not been any efforts to develop the concept.  The government may have a role, but a slow implementation makes it difficult to come up with tangible results.  The private sector would be best placed to come up with the operation modalities of ventures that are designed to protect shareholders.  However, skill and intuition will be fundamental.   Regrettably, it is not the challenge that the businessmen we have are willing to take.