Diversified financial services firm Britam and Equity Group Holdings Ltd (EGHL) have ended their near-two decade relationship, just five months after the former completed its buyout of the latter’s stake in mortgage lender, Housing Finance (HF).
In a statement released last Thursday, Britam said the bank’s Group Managing Director James Mwangi had voluntarily resigned from its board and described the decision as “mutual,” but left the undercurrents untouched.
“This is purely a voluntary move, agreed mutually with Britam’s board of directors to help us further minimise conflict of interest risks, as Britam has recently enhanced its shareholding in banking services provider Housing Finance (HF),” said Britam Chief Executive Officer Benson Wairegi. Keen observers may have already connected the dots and realised that Mr Mwangi’s decision to step down from Britam’s board came just two months after Mr Wairegi declined to offer himself for re-election to the EGHL board.
After the HF buyout, the potential for conflict of interest amongst directors that held shares in both companies, such as Mwangi and Wairegi, whether real or perceived, was just too high.
It was going to be difficult to convince other board members, especially Britam board members, that Mwangi was acting in the best interests of Britam on some issues that touch on HF, if he’s simultaneously Equity’s boss. The same applied for Wairegi at Equity.
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“But this does not mean that we have become enemies. I will still maintain my four per cent shareholding in Britam and support the company as a shareholder,” Mwangi told The Beat in an interview.
Getting into the banking business by buying out Equity’s stake in HF, which brought its shareholding to 46 per cent in the mortgage lender, was an offensive move by Britam, while Equity’s disposal of its shares was defensive.
This brought a clear shift in the thinking process among the directors. There was no way they were going to be loyal to two competitors. The battle lines had been drawn, and it was Wairegi who blinked first by resigning from Equity’s board.
The buyout of Equity’s stake resulted in Britam increasing its shareholding in the mortgage lender to 46.08 per cent from 21.32 per cent. The proposed acquisition is expected to give Britam a firm grip on the mortgage industry.
Earlier this month, two of the bank’s appointees to the HF board - David Ansell and Shem Migot Adholla - resigned from the board of HF. All these moves have seen the three companies comply with corporate governance guidelines set by the Central Bank of Kenya (CBK).
“It’s all about governance and striving for excellence. Britam acquired Equity’s stake in HF and by that virtue, we became competitors.
There was no way from a point of governance that Mwangi would have continued to sit on Britam’s board. I retired from Equity’s board and Mwangi retired from our board,” said Wairegi.
The story of how Britam and Equity ended up with HF is long-winded one. To understand exactly what happened, you have to travel back to 2007, when Mr Mwangi took over as Equity chief executive.
Eight years ago, Kenya’s financial services’ horizon looked very different from how it has turned out. Equity Bank was a struggling bank that was targeting small businesses and small-time depositors.
Because it wanted to get into property and development financing but didn’t have the capacity, it devised a strategy: Buy into an existing mortgage lender and make it successful.
It already had a working relationship with the British American Investment Company (BAICL- now Britam) but was still operating with small and medium enterprises as it sought to build its own portfolio.
It partnered with BAICL to buy into HF. Then, the idea was to create one huge financial services behemoth (Equity, Britam and HF combined) - a one-stop financial services shop that would offer insurance, mortgage and other services and achieve higher returns on capital.
Equity Bank and BAICL concluded negotiations with the Commonwealth Development Corporation (CDC Plc) for the private transfer of a 24.9 per cent shareholding they (CDC) had held in HF for over 40 years.
The consortium would later replace CDC as the anchor shareholder at the mortgage lender.
The choice of the Equity/BAICL axis was no coincidence.
The combination of three companies was motivated by the strong synergistic possibilities of combining HF’s product competencies in financing property development and purchase, Equity Bank’s unique bond with the then over 1.4 million customers and British American’s financial strength and insurance.
But a funny thing happened on the way to the dream business model. Equity Bank took off on a wild growth curve, probably beyond anyone’s wildest expectations.
Given a choice between keeping HF, which would have been purely for dividends - because Equity had started its own mortgage business - the bank decided to offload the mortgage lender and focus its business elsewhere. The company is in its prime and is hitting on every cylinder. It is very successful and has created families of thriving subsidiaries in Uganda, Tanzania and Rwanda, and even waded into markets long considered difficult, such as South Sudan, with a lot of ease.
With 10 million customers and counting, Equity is on an upward trajectory. It doesn’t need the synergistic competencies HF would have brought along, because it has metamorphosed into the biggest bank in terms of customer numbers in Africa and is has peaked as the most profitable bank in Kenya.
“HF had become our rival. When Britam bought HF, it became untenable for me to sit on Britam’s board because of corporate governance issues. I would have had access to privileged information about HF, which is improper,” said Mwangi in an interview with Business Beat.
A similar scenario took place in two of the biggest companies in the world - Google and Apple - in 2009, after Apple announced that Dr Eric Schmidt, then chief executive officer of Google, would resign from Apple’s board, a position he had held for about three years.
Apple and google
“Eric has been an excellent board member for Apple, investing his valuable time, talent, passion and wisdom to help make Apple successful,” said the late Steve Jobs, who was then Apple’s chief executive.
“Unfortunately, as Google enters more of Apple’s core businesses, with Android and now Chrome OS, Eric’s effectiveness as an Apple board member will be significantly diminished, since he will have to recuse himself from even larger portions of our meetings due to potential conflicts of interest.
Therefore, we have mutually decided that now is the right time for Eric to resign his position on Apple’s board.”
Mwangi’s resignation from Britam’s board is right in line with the growth strategy Equity is rolling out as it seeks to expand into 10 other markets across the continent. After about a decade of outracing the market, the final change in the composition of the boards of the three companies, shows Equity’s determination to change focus.
It is now doing what other large companies such as Apple and Google did before investing in new segments, maintaining its core. So far, it seems to have its strategy right.
The significance of this goes way beyond Equity’s expansion plans. For the last decade that it has dominated the Kenyan market, the company has set the agenda for the banking industry - the most dynamic slice of the Kenyan economy.
Where Equity leads, everyone from former partners such as HF, to rivals and corporate Kenya follows. But ask Mr Mwangi whether Equity did the right thing by selling off HF and he bristles.
“No. They had become our competitors. The alternative was to keep HF, for purely dividends, but was this necessary given our current situation?” poses Mwangi.
“The fundamentals are right for growth in a different direction and our plan is to replicate Equity’s success in Kenya across other countries in Africa. We have put together a global management team with the best brains you will find anywhere in the world for this and I can assure you the future looks good,” he said during an interview in his office at Equity House in Upper Hill, Nairobi.
For Equity Bank, the sale served a double role as it also made the bank compliant with Central Bank regulations that discourage banks from having strong control of other financial institutions that are not subsidiaries.
While confirming the board’s decision, Wairegi paid a glowing tribute to Mwangi who previously sat on four crucial Britam board sub-committees, including the Investments and Strategy sub-committee.
He was replaced by Walter Andrew Hollas, a former senior partner and chief executive officer at PriceWaterhouseCoopers. Earlier this year, Equity effected changes to its board and brought in new directors, reshuffling some of the existing ones.
Entrepreneur Adil Popat was appointed a director of Equity Group Holdings alongside Evelyn Rutagwenda and John Staley. Popat is the chief executive and principal shareholder of Simba Corporation, which has interests in hotels, car rentals, and motor vehicle dealerships, including the local BMW franchise.
Mr Staley was previously a non-executive director of Equity’s subsidiaries in Uganda, Rwanda, and Tanzania. Ms Rutagwenda was a non-executive director of Equity Bank, Rwanda.