The Myburgh report regarding African Bank’s demise: key learnings in a governance context

By Phomolo Rabana, Analyst, Perpetua Investment Managers

A wise man once told me: it’s a funny thing that happens in the corporate world sometimes; the qualities attributed to a person’s success and rise, are the same qualities that are attributed to their failure on the way down. When things are going well, he’s ambitious, he’s thinks ‘out the box’, he’s smart, he’s got good judgement. But when fortunes change, he’s arrogant, he’s not realistic, he’s too ahead of time, he’s naïve. 

I guess how you get things is not always how you keep them.

The Myburg report’s findings about African Bank CEO, Leon Kirkinis

The Myburgh report was released earlier this month on the 12th of May.  It’s an intriguing read, and provides insight into the demise of African Bank (ABIL). From our perspective, it makes us wonder what can be learnt from this event. After all, there was a time when ABIL traded close to R30/share (Figure 1); had a market capitalisation of over R32bn; was well favoured; and its CEO at the time, Leon Kirkinis was revered by market for all he had accomplished. At the time, his was a good story to tell; founder turned CEO, running a highly profitable operation, and offering investors both good growth prospects and an attractive dividend yield.

Furthermore, he had many qualities a good CEO should have; he had ‘skin in the game’ (he was a large ABIL shareholder); and was very knowledgeable about the business – one he essentially built. According to the Myburgh report, some of the words used to describe him by his colleagues were, ‘amicable’, ‘too nice a person’, ‘very hands on’, ‘very optimistic’, ‘extremely charismatic’, and ‘had the ability to rally the troops’.

However, upon reflection of the events that led to ABIL’s unravelling in 2013 and Mr Kirkinis’ resignation in May 2014, the Myburgh report uses the word ‘hubris’ to describe Mr Kirkinis’ personality – although he was in a position of power, he appears to have lost touch with reality and overestimated his own competence and capabilities: Mr Kirkinis believed “he was right; everyone else was wrong.”  The report further states even post the demise, Mr Kirkinis was “unrepentant and unapologetic” and indicated that ABIL had been wrongly placed under curatorship – and if it hadn’t it would have had a rosy future in 2015 and beyond.

How you look at it is pretty much how you’ll see it – Rasheed Ogunlaru

In any case, while it is all very well to talk of ‘turning points’, one can surely only recognise such moments in retrospect. Naturally, when one looks back to such instances today, they may indeed take the appearance of being crucial, precious moments in one’s life; but of course, at the time, this was not the impression one had – Kazuo Ishiguro

What about ABIL’s board and other executive directors?

We’ll leave it to the courts to ultimately attribute blame in the overall demise of African Bank. However, there were some findings from the Myburgh report that are worth highlighting as they underscore the importance of having strong and competent boards.

Often it is the allure of the title of board director that draws people to serving on company boards. However, all potential directors and shareholders must be specifically aware that the title comes with an equally weighty fiduciary responsibility, and significant reputational risk, should things go wrong on your watch.

  • Overwhelmingly influenced by the CEO

Of the four executive directors who served on the ABIL and bank boards over this crisis period (Mr Kirkinis, Mr Sokutu, Mr Fourie, and Mr Nalliah) the Myburgh report found that Mr Kirkinis (Group CEO until 6 August 2014), had an overwhelming influence over the board and the entire operations of the bank. So much so, the report reveals that it appears he unilaterally concluded the significant R9,8bn acquisition of furniture retailer Ellerines in 2007 without a due diligence or complete board approval.

  • A gap in appropriate competence

Mr Sokutu, the Chief Risk Officer of the bank over the past 10 years, was not qualified to hold his position. He did not have a good understanding of the underlying processes and principles of risk management within the bank, and also had a severe drinking problem as the report details. While another executive director, Mr Fourie by his own admission had no technical banking skills, and was not in a position nor was he qualified at all to contribute meaningfully to resolving the operational challenges the bank faced.

  • Inability to withstand perceived or actual conflicts of interest

ABIL (the group including Ellerines) and the bank boards were identical in composition and held meetings at the same time.  The issue arose when the bank started providing significant financial assistance to Ellerines from September 2012 (initially in the amount of R450m). At the time the financial assistance commenced (be it in the form of guarantees or loans), the board of ABIL and the board of the bank were effectively conflicted – as what might have been in the interests of ABIL (the group that owned Ellerines) might not necessarily be in the interests of the bank.  Interestingly when all directors were canvassed at the time about whether they perceived there to be a conflict – all bar one non-executive director disputed there was a conflict or perceived conflict. When Ellerines was eventually placed under business rescue in August 2014, it owed the bank R1,4bn and both sets of directors of both entities were one and the same.

  • Lack of internal credibility and influence

The only executive director who at times disagreed with Mr Kirkinis, was Mr Nalliah, the bank’s financial director since May 2009. However, as he was still earning his stripes in the organisation, he appeared not to have much sway, and was overruled by Mr Kirkinis. However, Mr Nalliah correctly disagreed with Mr Kirkinis on the bank’s provisioning and credit policies, and its treatment of accounts in duplum (arrears).

ABIL’s board should have been more proactive in attending to this issue considering that the Group’s auditors, Deloitte, highlighted that ABIL’s treatment of accounts in duplum (arrears) was not in compliance with accounting requirements. Furthermore, Deloitte believed that management’s impairment practices, although acceptable, leaned towards the less prudent side. Given that ABIL operated in the riskier segment of the lending market – unsecured lending, its accounting practices ought to have been more prudent, not aggressive.

My model for business is The Beatles. They were four guys who kept each other’s kind of negative tendencies in check. They balanced each other and the total was greater than the sum of the parts. That’s how I see business: great things in business are never done by one person, they’re done by a team of people – Steve Jobs

Perpetua research metrics place high importance on governance in financial companies

Governance is extremely important, more so we believe for financial companies. This is why at Perpetua Investment Managers, as part of our proprietary ESG analysis we conduct on all companies that we write fundamental research group reports on – we place a greater weighting on the importance of governance factors in respect of financial companies and banks. This would be in contrast to mining companies for example where we would place a greater weighting on environmental and social factors.

This ESG analysis and our concerns over governance at ABIL played a significant role in our ultimate decision not to expose client funds to ABIL two years ago. This was despite the fact that on many investment metrics the share screened as attractive. There were a few factors we struggled to overcome in the investment decision, namely:

  1. Oversaturated levels of debt – we were concerned about the long-term sustainability of a business model that charged clients exorbitant interest rates.
  2. Use of funds – ABIL’s client base used those borrowed funds primarily to finance consumption, or the repayment of other debt, as opposed to fund investment or asset purchase.
  3. The binary nature of the investment outcome – this was our judgement of the state of play as we were doubtful about management’s credibility and objectivity as they repeatedly maintained that they were comfortable that the business was sufficiently capitalised (which effectively turned out to be not the case).

Considering the above factors in the framework of our assessment of the governance (G) and social (S) aspects facing the business, we ultimately decided not to invest on behalf of our clients.

In conclusion

The Myburgh report does provide some key learnings, particularly around the importance of board strength, that all investors and market participants, and even company management, can learn from. For investors it highlights specific red-flags to look out for when analysing a potential investment opportunity.

There are no guarantees in life or investing, and we like all investors will make mistakes along the way. However we want to learn from all experiences and use them to become even better, more skilled fundamental investors. It is for this reason that at Perpetua we developed our proprietary risk rating and ESG analysis system that we conduct when writing fundamental research group reports. We believe it will help us to better mitigate against potential company and industry specific risk by limiting our exposure to riskier companies in riskier industries, without being overly conservative on potential investments that may be attractively priced, notwithstanding the risks.

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