KENYATTA UNIVERSITY MPPA PROGRAM

APP 808- CORPORATE GOVERNANCE

NAME OF STUDENT: ERIC KARIUKI GACHOKI.

REG NO C153/CTY/PT/27575/2014.

INDTRUCTOR: PROFESSOR NGENO.Introduction

Corporate governance can be defined as the system by which companies are directed and controlled" (Cadbury Committee, 1992).

Corporate governance involves a set of relationships between a companys management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.Corporate governance means how to make the balance between the board members and their benefits and the benefits of the shareholders and the other stakeholders. (M.Tarek Youssef, 2007)Corporate governance is concerned with creating a balance between economic and social goals and between individual goals while encouraging efficient use of resources, accountability in the use of power and stewardship and as far as possible to align the interests of individuals, corporations and society.

I will focus on Co-operative bank of Kenya on analyzing the issue of corporate governance in Kenya.Brief History of co-operative Bank of Kenya

Co-operative Bank of Kenya was registered as a co-operative society on the 19th June 1965. The main objective for its establishment was to mobilise financial resources and provide banking services to the co-operative movement. In 1994 the Bank converted to become a fully-fledged commercial bank offering the complete range of financial services beyond the captive Co-operative sector to include personal, corporate and institutional customers.

Co-operative bank performance during Mr Erastus Mureithis time, as the managing director. June 1998 to year 2001.

Mr Mureithi stint at the helm of the Bank ended when the bank reported a significant reduction in profits by posting Kes 2.3 billion loss for year 2000.After he left the bank ,he was sued by the bank for abuse of office during his time as the managing director. Co-operative Bank said in court that Mr Mureithi was supposed to pay tax from his monthly benefits and allowances, but made the bank pay by virtue of his position as MD.

According to the bank, the tax accrued from benefits of a car valued at Sh2.9 million, Sh10 million insurance premiums with Sh3.2 million tax, and Sh4.5 million school fees and air-tickets for his children amounting to tax worth Sh 474, 241.

The court was told that Sh11.2 million was in taxes imposed by the Commissioner of Income Tax on the former CEO in accordance with the provision of the Income Tax Act chapter 470. The money was paid to Kenya Revenue Authority (KRA) on behalf of Mr Mureithi when he served as the banks CEO between 1998 and 2001 for unpaid taxes on his monthly benefits and allowances.

The court directed Mr Mureithi to pay the bank Sh11.2 million and interest since year 2003, pushing the payout to about Sh25 million.

Co-operative bank performance during Mr Gideon Muriuki time, as the managing director. Year 2001 to date.Mr Muriuki took over the bank as the Managing director in year 2001 when the bank had made a massive loss of Kes 2.3 Billion in year 2000.The bank has experienced complete turnaround from a loss making institution posting gross profit of Kes 10.87 billion for the year ended 31st December 2013.

However his tenure has also faced controversy, the listing of the bank in the Nairobi stock exchange and the current under hand tactics of preventing Mwalimu sacco from acquiring a majority stake in Equatorial Commercial Bank. The listing of co-operative bank at Nairobi Stock exchange, example of poor corporate governance.The co-operative bank of Kenya was registered in 1965 as a co-operative society with 100% shares privately being owned by ordinary Kenyans through their co-operative societies. The banks by laws were amended in 1996 to allow individual members of registered co-operative societies to buy shares.

In April 2007 the directors conspired and hatched a plan to acquire the banks shares at par value ahead of a planned initial public offer. The aim was to make huge profit gains after listing of banks shares at the Nairobi stock exchange and to consolidate their positions in the board.During the banks AGM held in Karen in 2007, the delegates of the bank were informed that the bank intended to sell class B shares to its senior managers in an effort to enhance staff retention. Cunningly during the AGM the chairman of the bank failed to disclose to the AGM the following facts regarding the new shares:a) The specific number of class B shares that would be sold to the staff.b) Over 50% of the new class B shares would be sold to the directors.

c) The bank also intended to sell class A shares to Co-operative societies.d) There was a plan to convert the bank from a society to a company and list the bank shares in NSE in 2008.

The AGM adopted the chairmans speech granting a blanket approval to the bank to issue and sell undisclosed number of class B shares to its senior staff.

A total of 2,522,376 new class A and class B shares were allegedly sold to insiders who included the banks directors, senior staff and co-operative societies for Kshs 252 Million. Before listing the shares were split in the ratio 1:100 and after the IPO the share price was Kshs 9.5. The share allocated to insiders would fetch 2.4 Billion.Table showing how the shares were allocated

NoBeneficiary%Shares NoPar ValueIPO Value

1.Directors55%1,389,960138,996,0001,320,462,000

2.Senior Staff44%1,109,650110,965,0001,054,167,500

3.Co-op societies1% 22,7662,276,600 21,627,700

Total100%2,522,376252,237,6002,396,257,200

Directors acquired 1,389,960 class B shares of Shs 100 each that would fetch Kshs 1.32 Billion at Kshs 9.5 after the share split in the ratio 1:100 in the banks IPO which was to be in December 2008.The directors also granted themselves contrary to CBK rules and regulations loans totaling to 74 Million in 2007 and 2008 to facilitate the acquisition of said shares. The managing director Dr Gideon Muriuki acquired 681,121 class B shares of Kshs 100 each. This would fetch Kshs 650 Million at Kshs 9.5 after the share split and IPO at NSE. The MD used 68 Million to purchase the shares thereby fixing the bank and making a personal profit gain at the expense of the bank of Kshs 580 Million.Mr Muriuki is ranked as the second highest shareholder of the bank after the co-operative saccos and the highest individual shareholder. The senior staff members were offered 1,109,650 by the directors for 111 Million with the sole aim of winning their support and co-operation.The middle and junior staff were denied the shares and compelled by the MD to buy the shares through the Initial public offer. The staff members were compelled to borrow loans through the bank to buy its own shares.

This amounted to insider trading which involves participation by corporate officers, directors or employees in the trade of stock based on confidential or privileged corporate information, seeking to make profits based on the information.Top five directors shareholding after listing at NSE as at, 31 December 2008.

NoDirectorShare holding%Amount paidprofit

1Gideon Muriuki 68,121,00049%68,121,000579,028,500

2Stanley Muchiri8,000,0006% 8,000,00068,000,000

3Julius Riungu7,700,0006%7,700,00065,450,000

4Macloud Malonza5,110,0004%5,110,00043,265,000

5Rosemary Githaiga5,090,0004%5,090,00013,126,450

Under hand dealing by co-operative bank to prevent mwalimu sacco from acquiring majority stake at Equitorial Commercial bank.

Data from Sacco Societies Regulatory Authority(Sasra) ranks Mwalimu as Kenyas largest Sacco by assets that are worth Sh24.5 billion in the year ended December 2013.Mwalimus current membership is 57,521 .The Saccos 2013 financial statement shows that its loan book was at Sh20.96 Billion and members deposits were Sh18.5 billion as at December 2013.Previously restricted to banking with Co-operative Bank, Saccos were allowed to bank with institutions of their choice after the liberalization of the co-operatives market in 1994. However, Co-op Bank, which is Kenyas fourth largest lender, has managed to retain 95 per cent market share of Saccos business to which it offers all the banking services including lending and ATM services.

Sacco Societies Regulatory Authority (Sasra) , Kenya Union of Savings and Credit Co-operatives (Kuscco), Central Bank and Competition Authority had approved the deal for mwalimu sacco to acquire Equitorial bank. However Industrialization and Enterprise Development ministry reversed approvals as a result of protest by the Co-operative Alliance on the manner in which the transaction was handled. Commissioner of Co-operatives argued that Mwalimu Sacco did not present due diligence report on Equatorial Commercial Bank by Ernst and Young at its annual general meeting to enable members approve the deal from an informed position.

However, Sarsa and Kuscco oppose the reasons given for stopping the deal. The two blame what they term as an invisible hand, conflict of interest and fear of competition saying there are forces out to frustrate Mwalimu Saccos expansion into banking. Industry insiders point an accusing finger at the Co-operative Bank as the invisible hand. They claim the bank fears competition and loss of business from a major client.The conflict of interest arises because Co-operative Alliance of Kenya is the apex umbrella body for the co-operative movement which is opposed to mwalimu acquisition of Equatorial bank. Three of Cooperative Alliance board members are all linked to Co-op Bank. Co-op Bank chairman Stanley Muchiri also doubles up as Co-operative Alliance chairman while CIC Insurance chairman Japheth Magomere is the alliance vice-chairman. Co-op Bank holds 25 per cent stake in CIC Insurance.CAKs chief executive, Mr Daniel Marube, remains an employee of Co-op Bankto date, implying that he is on the lenders payroll.

Conclusion One of the major pillars of corporate governance is transparent and open leadership with accurate and timely disclosure of information relating to all economic and other activities of the corporation. It is evident that the board of directors of co-operative bank contravened this key pillar before the listing of the banks shares.

The directors did not act with integrity and fairness in allocating themselves huge chunks of shares at the expense of the shareholders.The behavior of the directors is well captured in the agency theory which states that people are self interested rather than altruistic and cannot be trusted to act in the best interests of others. The theory states that superior information available to managers allows them to gain advantage over owners of a firm. This conflict of interest has been well captured through co-operative bank shares listing and mwalimu sacco vision of growth into a bank which is being frustrated.References1. Citizen Newspaper Dated 1st November,2014.2. Cardbury Committee Report (1992)

3. Daily Nation Newspaper Dated 2nd February,2015.. 4. M.Tarek Youssef, 2007