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Shareholder primacy key to avoiding COVID-19 financial land mines

By Eric Karuti

Shareholder primacy requires that the Board of any Company must act in the best interests of its shareholders. Under the concept, the shareholder is placed at the centre of the company’s corporate governance structure. The interests of other stakeholders such as the consumers, employees and the external society are largely regarded as secondary to the interests of the shareholders. A prime example of how shareholder primacy comes into play is in the form of private equity where the principal focus is on shareholder returns. Equity Bank, through its investment arm, Equity Investment Bank, has recently received media coverage for its plans to offer equity investments for micro, small and medium sized enterprises in the Information and Communication Technology sector. Ultimately, this move is geared towards enhancing Equity’s shareholder returns.

It is beyond dispute that the COVID-19 pandemic has caused widespread disruption of economies and livelihoods in the world over. Whereas efforts by the Kenyan government in reviving the economy have been notable, including the roll out of vaccinations which has given room for optimism, shareholder participation in financial governance aspects in the country’s private sector has faced its fair share of challenges. This has largely been due to the companies focussing their resources towards maintaining buoyancy and in turn, neglecting to robustly involve their shareholders in key decisions in the company’s financial aspects. This only serves to undermine their value as shareholders in the long term.

Prudent companies that have remained transparent and accountable to their shareholders and have encouraged their participation in their financial governance aspects have found their shareholders maintaining loyalty and to an extent, making concerted efforts to have the company remain afloat. Contrastingly, those that have failed to do so have found themselves being subjected to increased exposure to litigation and disparaged public image. 

Among other duties, the board is mandated to ensure that the company grows its profitability. Within the context of the COVID-19 pandemic, such growth is even more crucial owing to the uncertainties brought about by the pandemic in general, the unpredictable spike in infections and the unpredictability surrounding the various vaccines being rolled out.

Additionally, under section 143 of the Companies Act, 2015, the board is mandated to ensure that the company meets its developmental goals and to be conscious of how the society at large may perceive their decisions. The board must therefore not only make sound decisions with the aim of enabling the company to stay afloat during the pandemic but must also make decisions geared towards sustaining its social, moral, ethical fabric in the long-term. At the same time, the board must keep preserving the interests of the shareholders.

In the wake of the pandemic, the government has stepped up efforts geared towards safeguarding the country’s corporate governance structure. For instance, the Capital Markets Authority issued Circular No. CMA/MRT/005/2020 on 27 May 2020 which provided the requirements for convening and conducting virtual general meetings by issuers of securities to the public. With the significant role that the shareholder plays in the corporate governance structure, it can be argued that through such measures, the government has recognized the growing significance of the duty of transparency and accountability as owed by the Company to its shareholders especially in the wake of the pandemic.

Where internal dispute resolution mechanisms fail, derivate action and shareholder activism are regarded as among the most effective avenues for enforcement of shareholder primacy in matters financial governance. However, the relative scaling down of court operations, teething problems associated with the judiciary’s e-filing platform, the general public’s apprehension that the pandemic may cause their disputes to experience undue delays and the overall lack of public confidence in the judicial system all contribute to the doubts attached to court-endorsed litigation as a means of effectively safeguarding shareholder primacy through derivative action.

On the other hand, shareholder activism has also been confronted with challenges stemming from increased uncertainty regarding changes in consumer behaviour and the uncertainty surrounding the full resumption of the economy. Funding for shareholder activism has also proven problematic for shareholder activists as investors in activism campaigns have now shifted their focus to alternative investment targets given that access to capital is at present, largely elusive owing to market volatility.

With the main focus being placed on liquidity needs, rebound after the pandemic and the general health of businesses, safeguarding shareholder primacy in financial governance may be deemed as a secondary concern. This is in stark contrast to the pre-Covid-19 period where shareholder primacy created an allure especially in the managerial aspects of the company in instances of corruption and gross mismanagement of the company’s affairs by top brass management.

Shareholder primacy is without doubt a necessary tool in enforcing good financial governance practices. However, in light of the pandemic and its associated uncertainties, the effectiveness of its enforcement has been severely undermined. It is therefore imperative for companies to adopt a holistic and inclusive approach in keeping its members, especially minority shareholders, constantly appraised of its financial goings on by keeping open and flexible lines of communication. In turn, this alleviates the likelihood of interventions such as needless litigation or activism campaigns which may only serve to injure the company’s brand and reputation.

The article has been featured in the Business Daily on 27 April 2021.