The Warehouse Lease, the Brother and the "Independent" Valuation

Defects in the papers

1. The MD is a related party. His brother's 60% holding makes the lessor a related party of the company (Companies Act 2015; IAS 24). The MD must declare the interest in writing before the matter is discussed, must not be counted in the quorum for that item and must not vote. The papers as circulated ignore this.
2. The valuation is not independent. A firm in which a director is a salaried partner is not an arm's-length valuer; his profit share is affected by the firm's fee and the outcome.
3. Price is above internal evidence. KES 9.6m against an internal estimate of KES 7.2m is KES 2.4m a year, KES 12m over the term - material for a listed issuer and certain to be questioned by the auditor and the regulator.
4. Timing. A vote next week, on a paper already circulated, gives the board no room to obtain an independent report; proceeding would produce a resolution vulnerable to challenge.

Process the board should follow

• Withdraw the paper and defer the decision.
• Appoint an independent valuer with no relationship to any director, with terms of reference set by the audit and risk committee.
• Have the audit and risk committee (or the independent directors meeting alone) review the valuation and recommend; conflicted directors recuse themselves from discussion, quorum and voting.
• Because the transaction is material, seek shareholder approval by ordinary resolution, with the interested party abstaining, on a circular containing the valuation and the alternatives considered.
• Disclose the transaction and its terms in the annual report (CMA Code - comply or explain; IAS 24 note), stating how arm's length was established.
• Minute the reasoning: if the lease proceeds on genuinely better terms than alternatives, say so; if the rent remains above market, reject it.

The two conflicts are different but connected

The conflict of interest belongs first to the firm - it is being paid by the company to value a transaction that benefits a director. But independence is assessed on the director, not on the firm. Because he is a salaried partner sharing in the firm's profits, his own judgement is capable of being influenced, and a reasonable investor would say so. "I did not personally do the work" is not a defence.

Order of steps

1. Disclose in writing, now, before the vote. A failure to declare a material interest is a breach of the duty to avoid conflicts and, for a listed issuer, a breach of the Code. Silence here is the real risk, not the conflict itself.
2. Treat himself as non-independent for this matter. Recuse, ask to be excluded from quorum and voting, and ask the chair to record it.
3. Ask the firm to decline or resign the engagement. This is the preferred cure - it removes the source of the conflict and preserves a board seat the company needs, since only three of nine directors are designated independent.
4. Resignation becomes the honest course if the firm keeps the fee. A continuing, material profit share impairs independence beyond one transaction. He should then resign either the board seat or the firm, state the reason in writing to the chair, and ensure the annual report discloses why an independent director left.

Resigning from the engagement team alone is insufficient; the profit share survives it.

What the audit committee exists to do

It appoints and reviews the external auditor, oversees internal control and the integrity of the financial statements, and reviews related-party transactions and whistleblowing. Every one of those functions is a check on the executive and, in this case, on a transaction involving the MD and, potentially, the chair's own judgement.

Why the combination fails

• A committee that must be able to challenge the chair and the MD cannot be chaired by the chair. The check is removed at exactly the point it is needed.
• The chair has already demonstrated a preference for speed over process ("speeds up decisions"), which is the opposite of the committee's function.
• The saving is a few committee sittings a year; the cost is the principal control over related-party dealings, at a board where only three of nine directors are designated independent and one of those is conflicted.
• Comply or explain: the Code expects an independent chair with relevant financial literacy. An explanation that "it saves cost" would not be credible to the Capital Markets Authority, the auditor or investors, and would be read as a control weakness.

Recommendation: appoint a separate independent chair of the audit and risk committee with financial literacy, meet at least quarterly, give the committee a direct line to shareholders in the annual report, and record the chair's proposal and the board's reasons for rejecting it.