A battle for control of NBK boardroom

One day in late March, the in-tray of National Bank of Kenya managing director received a brown envelope from an usual sender.

In the letter, the National Social Security Fund (NSSF), one of its big shareholders, was requesting the bank to enlarge the size of its board of directors to match the pension fund manager’s stake.

NBK Managing Director Reuben Marambii had no idea why, but he and other board members soon figured out: NSSF had hosted a meeting of its trustees a few days earlier and decided to gain more voice in running the bank.

This has sparked a boardroom war that will boil over at the bank’s 42nd annual general meeting next Friday, where the two sides are expected to flex their shareholding muscles.

It all started with the letter by NSSF Managing Trustee Alex Kazongo to Mr Marambii dated March 28, this year, asking NBK to “enlarge the size of the board and increase NSSF representation,” based on a resolution reached between the two on November 24, 2010.

According to communications between the two seen by Smart Company, NSSF, which owns 48.05 per cent of NBK, sought to expand the board to accommodate three new directors.

“We hold 48 per cent stake yet we don’t have a say in running NBK,” an NSSF official who requested not to be named because of the sensitivity of the matter said.

The government holds a 22 per cent stake in NBK, one of the top 10 banks in Kenya, with the rest listed at the Nairobi Stock Exchange.

But the March 28 request was strongly rejected by NBK, arguing that the November meeting was not statutory and thus not binding.

The meeting was attended by three NSSF representatives led by chairman Adan Mohamed and five from NBK, including board chairman Michael Muhindi and Mr Marambii.

“The ‘agreement’ alluded to was one among several exploratory suggestions that came up during the meeting,” NBK’s company secretary Leonard Kamweti said in response. “No firm agreement was or could be arrived at such informal meeting.”

Mr Kamweti said increasing the board size would make it “not only unwieldingly large, but also more expensive” contrary to the rules on good corporate governance.

He argued that expanding it – from the current 12 members – would make it the largest bank board in the country and reflect negatively on National Bank. It would dwarf the boards of industry’s big boys like Kenya Commercial Bank, which has 11 directors.

Even then, expanding the board would not necessarily lead to more NSSF representation because, Mr Kamweti said, “as an institution, NSSF is entitled to being represented by only one person as per Article 71 of the Bank’s Articles of Association and that person is the Managing Trustee, the only Trustee who under statute (NSSF Act) is empowered to manage the NSSF.”

The NSSF later backed off the board expansion plan and is pursuing the more forceful but slippery option of getting its nominees elected as directors at the AGM.

“The Board of Trustees has discussed the matter and resolved that the NSSF will not seek to enlarge the bank board as proposed earlier,” says Mr Kazongo in a May 16 letter to NBK managing director.

“On the other hand, it will not support the re-election of three directors who are due to retire.”

The three directors targeted by NSSF for purging are Dr Jeniffer Riria of Kenya Women Holding, Mr A. C. Juma and P. W. D. Ngumi.

NSSF has nominated three new people whom it will present for election at the AGM to replace the trio.

NSSF feels some of the board members have overstayed their usefulness and it’s time for “change” to bring in new and young “thinking”.

“This is the information age,” said the NSSF official, “We need people with open minds who can support technology and new ways of doing business.”

Mr Marambii, however, said the length or stay of a board is decided by the shareholders and not management.

“If they keep voting someone year after year then it is because they know the benefit they get from the person’s presence in the board,” he said.

But someone familiar with the matter says NSSF is uncomfortable with Dr Riria because being a chief executive of a depositing taking financial institution – Kenya Women Holding (formerly Kenya Women Finance Trust) – there’s a conflict of interest.

The Central Bank of Kenya (CBK), the banking industry regulator, licensed KWFT last year to receive deposits, becoming the second micro-finance institution after Faulu Kenya.

“Guys at NSSF could feel she’s a competitor and her presence on the board thus conflicts with NBK’s interests,” said a corporate governance expert who sought anonymity to protect his business interests.

Representing interests

Mr Juma was nominated over 10 years ago by the Federation of Kenya Employers, but he is no longer an official of the organisation.

“He no longer represents our interests,” said the NSSF person. “He does not report to anybody.” Mr Ngumi, a former CBK manager, joined the board six years ago, and NSSF says he doesn’t represent any particular interests.

Mr Marambii said the management has no authority to expand the board. “The size of a board is decided by the shareholders,” he told Smart Company in an email interview. “All that is needed is a suitable shareholders’ resolution to that effect.”

NSSF says its request was within the law, as Section 177 of the Companies Act, only provides for a minimum number of directors.

“We wish to point out,” Mr Kazongo said, “that the role of additional directors is set to go beyond voting during meetings but is intended to add value and bring independent judgement to bear on the bank’s decision making process, which have significant effect on NSSF’s investment. We are of the view that Article 71 of the bank’s articles of association relates to proxy representation during its meetings and is irrelevant in this instance.”

Experts say, based on the guidelines by the Capital Markets Authority, increasing NBK’s board would be imprudent.

“CMA guidelines specify that the size of the board should not be too large as to undermine an interactive discussion during board meetings,” says Mr Lewis Kamau, executive director of the Institute of Directors, an professional organisation of directors.

“That is why increasing NBK board from 12 to 15 may not be an effective a solution.”

Having abandoned the board expansion route, all eyes have turned to Tsavo Ball room at KICC, where the AGM will be held on June 3, and how the public pensions fund manager will manoeuvre its way to getting three new board seats.

The boardroom war casts a new spotlight on a practice that has long occurred in the shadows, but which is now causing concern among regulators and investors. Corporate governance experts say a board should be fairly selected to represent all shareholder interests.

“The company must be attentive to equal or equitable representation when deciding on the board members,” says Ms Catherine Munene, a company secretary and proprietor of Midlands Associates, a company secretarial practice based in Nairobi.

“It is important to have a board with diverse skills, expertise and representation in order to ensure that no individual or small group of individuals dominate the board’s decision-making processes.”

For NBK, and any other company, she says the ideal board should be less about individual directors and more about how they interact with each other and management.

The board should have a diverse group of people so as to introduce different perspectives and opinions and deviate from group thinking.

Board conflicts, as is happening in NBK and earlier at Housing Finance and AccessKenya, divert directors’ attention from important issues and undermine morale, says Ms Munene, “leading to greater differences rather than fostering improved team spirit.”

Some Articles of Association are specific on how the board seats are to be allocated. Some specify that for each percentage of shareholding, say 12.5 per cent, a member is entitled to a board seat.

In the absence of this, directors are elected by the shareholders at the AGM either through voting or a poll. Voting is by show of hands while in a poll every member has one vote for each share held.

“Most likely NSSF will ask for a poll so that they can use their shareholding to elect the new directors,” she added.

If it has its way, it will embolden it to push for more shareholder representation or activism in the companies it holds big stakes like East African Portland Cement (27 per cent), Bamburi (15 per cent) and Consolidated Bank of Kenya (12 per cent).

Shareholder activism

Among other listed companies in which NSSF holds stakes are Nation Media Group (5 per cent), Barclays Bank of Kenya (about 4 per cent) and Kenya Power and Lighting Company (5 per cent).

But NSSF’s moves comes in the wake of the global financial crisis, which has seen shareholders becoming more demanding in playing a greater role in the management of their investments.

NBK posted a 33 per cent rise in its profit after tax to Sh2 billion for the period ended December 31, 2010, compared to Sh1.5 billion in the previous year.

It has turned around from a loss-making entity in the late 1990s, thanks to a cleaning of bad debts by the government under the stewardship of Mr Marambii who was seconded from CBK.

Its 65,000 shareholders are expected this year to get a dividend -Sh0.60 per share for ordinary shareholders and Sh0.15 per share (three per cent) for preferential shareholders -for the first time since 1997.