Kenya: Will New Companies Bill Lead to a Shift in Retail Investor Protection?

Wednesday, 16 September 2009

The CEO breakfast on investor relations (IR) management, hosted by AIC on 15 September 2009, discussed some of the grey areas that still persist in Kenya’s regulatory environment with regard to online IR management, and whether this indicates a shift in the approach towards investor protection.   In a bullish market, one-on-one meetings between listed companies and their larger investors were well accepted by listed companies and created meaningful interaction. In the current bear market, however, many listed companies have begun to show apathy towards their investors, finds Gregory Waweru, an analyst with Kestrel Capital stockbrokers, warning that in a sluggish market, the communication of strategy becomes even more important. If costs are a concern in the current environment, then online mechanisms offer an affordable alternative. But so far, websites are not picking up the slack either. Most companies in East Africa have not yet fully explored the potential of online communications. If, a few years ago, the lack of access to the internet had been a powerful restraint, this excuse is rapidly falling away: The first of several fibre optic cable ventures has become operational, and internet access will expand exponentially. The largest growth in access will be through handsets as the purchase of computers will still be out of many people’s reach, but digital means of communications will certainly reach a much broader audience. Cost savings were a driving factor in how Safaricom, a key player in the mobile and data business, prepared for their first AGM: Safaricom have made extensive use of recent legal changes that allow the use of electronic means of communications, e.g. providing their annual report in a digital version rather than printing and dispatching paper copies for every single one of the more than 800,000 shareholders. The large number of retail investors may be a logistical headache for Safaricom, but digital means make it a lot easier to deal with this group of shareholders that has previously often been neglected for sheer cost reasons. Transition in the Legal Framework The US Securities Exchange Commission (SEC) has only allowed electronic means of communications with shareholders in 1995. But today, they are the standard, and hard copies of information have to be explicitly requested. In the UK, it is the opposite: Shareholder consent is required for the delivery of electronic communications. In Kenya, electronic communications have not yet become mainstream in IR management, and the regulatory environment reflects this transition: Kenya’s Companies Act requires notices to be given to shareholders ‘in writing’. At first glance, this seems straightforward, but it does not actually define what qualifies as ‘writing’, i.e. it lacks clarity whether electronic means of communication are admissible. Amyn Mussa, a partner in law firm Anjarwalla and Khanna, also suggests that lawmakers need to look at the concept of ‘deemed delivery’ again, i.e. the question when it can be reasonably assumed that a shareholder has received the information sent by the listed company. The new draft Companies Bill, in contrast, is clearer: When information is e.g. posted on a company’s website, this is considered ‘deemed delivery’. This is, of course, much easier for the listed company – but may lead to a dilution of shareholder rights. Perspectives Rob Stangroom cautions that this new proposed legislation would imply a significant shift in the approach to shareholder protection: So far, the underlying principle is that the burden lies with the listed company to make sure – within reason, of course   that the shareholder will receive the company notices. Under the new legislation, this burden would shift to the shareholder who would be expected to make an active effort to obtain information. This, he says, it not necessarily wrong: It may well be that the overall challenging infrastructure of reaching shareholders – unreliable postal services, high transport costs and so on – justify this shift. Safaricom’s approach would certainly suggest that the high costs of attempting to provide all shareholders with a hardcopy of the annual report would not necessarily be rewarded with commensurate success. But it has its own risks: It is one of the fundamental principles of governance, Stangroom argues: The board need to give a reasonable return to shareholders for a given level of risk. In the Kenyan context, the question then arises whether costs savings resulting from simply expecting investors to find the necessary information will worth the possible risk – dilution of shareholder rights and possible litigation. More substantially, can a board adequately assess future risk in the face of such rapid technological changes in digital investor relations platforms? What would constitute significant savings today would no longer be expensive in a year or two. A board, he argues, should err on the side of caution. For an analysis of investor relations management, please also read: Kenya: Investor Relations Management: Practices in East Africa Kenya: Investor Relations Management: Dealing with the Public Kenya: Investor Relations Management: Perspectives Share this article with others: Comments (0) Subscribe to this comment's feed Write comment Show/Hide comment form Name Email Title Comment smaller | bigger Subscribe via email (Registered users only) I have read and agree to the Terms of Usage. Add Comment