Lessons from India's (Dabbawallas) lunch deliverymen

Source: An article by Carol Musyoka from Business Daily Africa
http://www.businessdailyafrica.com/Opinion+++Analysis/Lessons+from+Indian+lunch+deliverymen/-/539548/1515248/-/item/0/-/r0g02g/-/index.html

Ownership inherently drives behaviour.

As simple as that. Compare this to the performance of firms or individuals who have little interest since they have little or no ownership. More later.

"...the dabbawalas do not consider themselves employees, nor do they consider the Mumbai Tiffin Box Suppliers Association as their employer.

The dabbawalas are shareholders and entrepreneurs, albeit all earning the same amount of money every month within their respective teams."

Government Interference - Case #1 - Kenya Airways

"Raila orders KQ to suspend layoffs" reads the headline. And click on the link provided to read more.

I am no apologist for KQ's Board of Directors & Management - which in my view decimated KQ's shareholders' value - and my views can be found here (FY 2011-12 results), here (Corporate Governance) & here (Irregular Commission Payments).

So back to our task at hand. Remember the elections are around the corner & the blabbermouths are out in force!

"Prime Minister Raila Odinga has directed Kenya Airways to suspend the planned retrenchment of its employees expected to see between 650 to 1500 employees lose their jobs."

The government owns about 30% of KQ. The other 70% is NOT owned by GoK. Unlike GoK, the other 70% expects KQ to make a profit. A decent profit. If the PM, Raila Odinga, wants KQ to 'suspend' the retrenchment, then by all means provide KQ with one or all of the following to help it recoup its potential losses:

1. Reduce the tax on fuel used by the planes when they fill up in Kenya.
2. Reduce the taxes on plane tickets purchased in Kenya.
3. Reduce the charges levied by 100% GoK owned airports including JKIA.
4. Reduce the taxes on spare parts & consumables like tyres imported by KQ.
5. Reduce the bureaucracy that impedes businesses & increases costs.

"It is not clear where the prime minister was drawing his powers, given that the airline said it was implementing a decision reached by its board of directors, in which the government is represented."

These 'roadside declarations' made famous in daniel moi's days should not be gussied up & made to look anything but. They are not what Kenya needs. Kenya needs structures & governance that lasts after a politician is long dead & buried/cremated/interred.

"Naikuni said the exercise started on August 1, 2012 owing to the large increase in headcount in 2011/12, significant annual staff salary increments, and costly decisions driven by the Collective Bargaining Agreements (CBA) negotiations with the staff unions driving labour costs to unsustainable levels."

Many employees, including senior Management, in Kenya do not want a stake in firm. They want a salary. Simple. Yet they want benefits of 'capital' without investing a dime. KQ's staff won good concessions from KQ but failed to see it could kill the airline. And KQ's Management is to blame too. They agreed to those concessions.

Bottomline: There is no free lunch. Someone always has to pay the piper. Politicians need to let businesses do their thing. If there is an illegality, then let the police & courts do their work.

Mortgages - Are banks at risk?

Original source from Business Daily - Click the link below
http://www.businessdailyafrica.com/New+mortgage+laws+tie+down+spouses++/-/1248928/1469428/-/87e4mxz/-/index.html

A marriage certificate is now a critical document for anyone applying for a mortgage loan thanks to new land laws that require the involvement of spouses in property acquisition.

What happens to spouses (traditional marriages, etc) who do not Marriage Certificates?

And for the prospective home buyers still in the singles’ club, a sworn declaration of their status would be required as new legislation - intended to protect the interests of the borrowers’ spouse, takes effect.

What if the borrower lies to the Bank/Lender that s/he is single?

The demand that the spouse is involved in the acquisition of property financed by a lender, as envisaged in the Lands Act, is aimed at ensuring that the immediate family is aware of any loans sought to either acquire matrimonial property or where the property has been given as security for a loan.

The immediate family - what's the definition? Do they just have to informed or do they have to OK the transaction?

Doesn't this lock out a spouse who is moving out of the matrimonial home due to a divorce, separation or other event?

A much bigger concern for borrowers who had kept their spouses in the dark over such loans, is that the new laws will apply to existing and new mortgages, meaning less obscurity about financial dealings in the family setting.

What happens to an EXISTING loan/mortgage? What if as a strategic move, the spouse of the Borrower objects? Do banks have to write off these loans?

So far, mortgage lenders have said that thousands of home loan borrowers will be required to re-draft their loan agreements to comply with the regulations which make a spouse’s consent critical in accessing credit. “All mortgage charges will be re-drafted to ensure that spouses assent to the borrowing,” said Frank Ireri, the managing director at mortgage lender Housing Finance.

The Loan Agreements may be re-drafted but what if the spouse (or spouses) object? In essence, it means the Lender is out the money.

Mr Ireri explained that the laws were aimed at protecting the borrowers, where lenders have had a free hand in dealing with the mortgaged property with little regard to the interests of the borrowers and the immediate dependents.

This is a huge step forward for consumers.

It is the reality of losses presented by the new regulation that will prompt the lender to draw up new mortgage charges on all home loans...

What happens if the Borrowers refuse to play ball?

Banks are also required to involve tenants and all interested parties, including spouses and guarantors, before disposing of any property to recover outstanding loan amounts where property has been used as security.

Wow! Involving Tenants means the banks will be forced to hold off on the sale for ages! What if a tenant refuses to assent to the sale or a reduction in the rental rate? Can they blackmail the bank?

ARM vs KQ - Performance & CEO's ownership

Pradeep Paunrana, the CEO of Athi River Cement, is a substantial shareholder of ARM.
March 2009 ARM was trading at 60/-. July 2012 the price of the shares 198/-.
Pradeep has raised funds to expand the firm's operations without diluting the shareholders' value.

Titus Naikuni, the CEO of Kenya Airways, has ZERO shares in KQ. His compensation is probably in the region of KES 30-40mn annually [based on the info on the Annual Report under Executive Directors' compensation].
March 2009 KQ was trading at 18/-. July 2012 the price is 14/-.
The under-performing Board raised funds by diluting existing shareholders through a huge (16:5) Rights Issue that required exemptions from the CMA to be considered successful.














Comparing the two on the same graph. ARM in red. KQ in blue.

KQ Results for FY 2011-12 - Lousy!

KQ's PAT for 2011-12 down 53% vs FY 2010-11

I wonder if the CEO, CFO or Directors will take a similar pay cut?
Yes, when pigs fly during a blue moon seen on a sunny day.

Nairobi's Railway Commuter System

It is gratifying to see the commuter railway system being built. http://www.businessdailyafrica.com/Corporate+News/Future+of+Nairobis+transport+takes+shape+/-/539550/1416372/-/157kn4w/-/index.html

At the moment the only line is the 2.2kms from Syokimau to Embakasi but I hope the process/construction is fast-tracked from CBD (Moi Ave) to JKIA which will cut down on the traffic plying the roads between the CBD & JKIA.

A conceptual sketch of the Commuter Railway System

Kenya Airways Rights Issue Results Announcement Delayed

The date of the announcement of the of the results of KQ's 2012 Rights Issue has been pushed from 30th May 2012 to 6th June 2012.

I wonder why...

Kenya will remain King of the East African jungle

I came across this little tidbit in The East African... Museveni backs First Lady for the presidency

This is not unique to Uganda.

• USA - Bill Clinton who backed his wife, Hillary Clinton, for the top job in 2008 though this was 8 years AFTER he retired as the president.
• Argentina - Cristina Elisabet Fernández de Kirchner succeeded her husband as the president in 2007
• India - Rajiv Gandhi succeeded his mother, Indira Gandhi, as PM after she was assassinated in 1984

Unfortunately for Uganda, the tension & potential instability over the Yoweri Museveni succession will allow Kenya to steal a march over Uganda in the following areas:

• Infrastructure - Railway, Roads & Air. It's simple. Kenya plans to build a railway from Mombasa/Lamu to South Sudan. The earlier plan was to extend the Mombasa-Nairobi-Kampala line to Hoima-Juba but now it  is likely Kenya might just go Lamu-Juba (with a spur to Ethiopia). The loss to Uganda will be substantial. Add roads by-passing Uganda heading to South Sudan. As for Air Travel, Kenya is far ahead already & a new/expanded airport will only help extend the lead.
• Oil Refinery - Uganda is slightly ahead on this matter since it found viable oil finds 3 years prior to Kenya (2012). The good news for Kenya is that South Sudan (as well as potential oil finds in Kenya) makes for a better case for a new refinery planned for Lamu.

Kenya's only competitor for good governance (not that the bar is high) is Rwanda which plans to build a new airport in Kigali to compete as an East African hub. Rwanda has been in the forefront of integration & plans to sue other EAC countries to reduce non-tariff barriers.

It is unfortunate that Kenya will benefit at the expense of the regional neighbours but this is not Kenya's doing. Ideally, there should be a concerted effort to increase regional trade by reducing barriers but investing in unstable situations is pricier & not every investor is comfortable.

Kenya screwed up in 2007-8. It is easy to blame the politicians but they did not go out with machetes to hack their neighbours but idiots/sadists among us did. Kenya is an African country & I (sadly) expect at a few election related deaths. Not unique to Kenya or Africa. This happens regularly in Pakistan, Middle East (Bahrain, Iraq, etc), India, etc.

*Yes, I am being (slightly) pessimistic but very few regime changes or elections in Africa over the past 10 years have been violence free. Perhaps these were not at the scale of the Kenyan debacle but somewhat violent*

Tanzania (generally peaceful political transitions) with it's misguided "We are Southern Africans" has held it back from usurping Kenya's clout. I expect the economy of Northern Tanzania to remain reliant on Kenya - a net consumer of fruits, vegetables & grains. If Kenya expands the Port of Mombasa before the Tanzanians smell the roses, then the supply of many goods into Tanzania will be dominated by supply chains via Kenya.

*** As an aside, thumbs up  to Kiran Jain (born in Kibos, Kisumu & whose parents still live here) who heads Dehli Airport's "airline marketing & route development". Hopefully, she returns to Kenya at some point & revamps JKIA!!!

Corporate Governance & Independent Directors

Warren Buffet in his Letter to Shareholders in the 2006 Berkshire Annual Report


In selecting a new director, we were guided by our long-standing criteria, which are that board 
members be owner-oriented, business-savvy, interested and truly independent.  I say “truly” because many directors who are now deemed independent by various authorities and observers are far from that, relying heavily as they do on directors’ fees to maintain their standard of living.  These payments, which come in many forms, often range between $150,000 and $250,000 annually, compensation that may approach or even exceed all other income of the “independent” director.  And – surprise, surprise – director compensation has soared in recent years, pushed  up by recommendations from corporate America’s favorite consultant, Ratchet, Ratchet and Bingo.  (The name may be phony, but the action it conveys is not.) Charlie and I believe our four criteria are essential if directors are to do their job – which, by law, is to faithfully represent  owners.  Yet these criteria are usually ignored.  Instead, consultants and CEOs seeking board candidates will often say, “We’re looking for a woman,” or “a Hispanic,” or “someone from abroad,” or what have you.  It sometimes sounds as if the mission is to stock Noah’s ark.  Over the years I’ve been queried many times about potential directors and have yet to hear anyone ask, “Does he think like an intelligent owner?”  

 The questions I instead get would sound ridiculous to someone seeking candidates for, say, a 
football team, or an arbitration panel or a military command.  In those cases, the selectors would look for 
people who had the specific talents and attitudes that were required for a specialized job.  At Berkshire, we are in the specialized activity of running a business well, and therefore we seek business judgment. 


When I criticized the Board of Kenya Airways for not looking out for Shareholder Interests, I had in mind what Warren Buffett has said over the years.

1) Directors should have a significant stake in the business. The best Non-Executive directors, who watch over the CEO & Senior Management have have to have skin in the game, hence open to losses/downside, not pandering to the CEO or Senior Management to receive hefty perks, with all upside & no downside.

KQ's Board [excludes the corporate directors representing KLM & GoK] have less than 25,000 shares worth less than 400,000/- whereas the perks/compensation (as reported) were about KES 6mn. I doubt we even know the full value of the free non-work related flights they (& their families) received thanks to KQ.

2) Directors have to have business judgement not political appointees or because they are 'nice' people.

So many examples of directors who should not be on many boards. Look at the appointees/nominees on GoK controlled (or influenced) firms like Kenya Airways, EA Portland Cement, National Bank of Kenya, etc. Compare the performance of these firms vs their peers or even the NSE in general.

• KQ has destroyed shareholder value. The recent Rights Offer (16:5) was at 67% discount to NAV.
• EAPCC vs Bamburi vs Athi River Mining. ARM (the CEO has a significant stake) has created significant shareholder wealth.
• NBK vs Equity vs NIC vs Diamond vs I&M Bank. NBK has stagnated (I remain an admirer of the CEO) while the others grew tremendously. Equity and I&M Bank's CEOs have significant stakes in the bank. The directors of Diamond Trust & NIC represent the majority/key shareholders.

3) Directors should be compensated by having 'locked-in' shares or options not just cash compensation.

KenolKobil's CEO has options (amounting to at least 4% of the outstanding shares) which has translated into superb growth in earnings as well as an on-going Takeover Bid. Kestrel Capital expects a (at least) 20/- buyout offer which is 60% above the last traded price & significantly higher than the NAV/share. Compare to what the Board of Directors of KQ did to its existing shareholders.

Investment Bankers - Untrustworthy. Ask Warren Buffett

Warren Buffett: “Don’t ask the barber whether you need a haircut.”

Warren Buffett does not trust Investment Bankers. I am not surprised. One of the world's savviest investor has a low opinion of Investment Bankers. So should we.
We have see what they did to investors, shareholders & the public during the housing crisis among other debacles.

http://www.guardian.co.uk/technology/2012/may/23/facebook-founder-regulators-lawsuits?CMP=twt_fd&CMP=SOCxx212

The article (courtesy The Guardian) has this to say:

Goldman Sachs decided to sell nearly half its holding, while Manhattan hedge fund Tiger Global increased its sell-off from 3m to 23m shares. Those most likely to have seen the analysts' forecasts may have decided that the shares were unlikely to enjoy the customary day-one surge, seen when Google and the professional networking site LinkedIn went public. Basically, for those in the know, at $38 a share Facebook was a "sell".

As you can see GS decided to sell out while probably encouraging their clients to buy!

Of course, investor who bought at $38 or higher are to blame as well. The ratios were outrageously high.

In Kenya, we have the case of SIB benefitting from a less than savoury deal on the Kenya Airways Rights Issue. Here is some interesting reading!

The Flying Rip-off

Kenya Airways - Commissions Payment Scam

The late to the party Parliament to probe KQ Rights Issue

As outlined in this article, the perverse incentives for SIB to make sure the Rights Issue went through even if the deal hurt existing shareholders. The Board of Directors failed in it's duty to protect existing shareholders.

If I had to replace the entire Board of Directors of KQ with Warren Buffett, I would do it in a fraction of a heartbeat.