CBD’s Big Fallout: Ground Zero

In 2018, Letlole La Rona was in a desperate need of a CEO and hired Chikuni Shenjere-Mutiswa, a Chartered Financial Analyst (CFA) who covered the complete investment cycle. Two years later, the board fired him amid accusations of misconduct that hoarded the headlines. The corporate governance morass ended up damning the entire board that had created it. In this first instalment of a series, KITSO DICKSON revisits the recruitment of a CEO who soon posed an existential threat to his employer.

CBD’s Big Fallout: Ground Zero
Chikuni Shenjere-Mutiswa, erstwhile CEO of Letlole

Before the conspicuous sacking of Chikuni Shenjere-Mutiswa as Letlole’s CEO before the country’s first Covid-19 induced lockdown in March last year, the Chartered Financial Analyst and the Board of Letlole had been enjoying a good relationship. Before turning his attention on the desirable job, he spent a good amount of time building a rapport with a few members of the board in the course of bargaining for his CEO contract. A select few he was in contact with included then board chair Boitumelo Mogopa, board member and Chairperson of the Audit Risk & Compliance Committee (ARAC) Tiny Kgatlwane and Bafana Molomo, board member and Member of the Investment Committee. Molomo was an employee of Botswana Development Corporation (BDC) which was the largest shareholder at 67 percent.

Sometime around January 2018, leading up to the appointment of Mutiswa, a meeting with haggling as an agenda item was convened between him, Mogopa, Kgatlwane and Molomo somewhere in Gaborone. During that meeting, Molomo, speaking from the board’s point of view, reiterated that Letlole was operating as a blank canvas. This suggested that the incoming CEO, whomsoever it would be, would be tasked with putting in place a driven “top-calibre team with the incentive to live and breathe the business”.

In other words, the board wanted Letlole to craft an incentive plan aligning the interests of management directly with that of shareholders. The directors wanted the incentive plan to take effect from 1 July 2018, immediately after the property company’s top executive post was filled.  Technically, the incentive plan was one of the conditions of Mutiswa’s contract of employment. It was also to be used an attraction that the company would adopt for recruiting for executive positions, especially the CFO position.

Further negotiations of Mutiswa’s contract were discussed between him and a certain recruiter, Stuart White, who worked for HRMC. Still during these negotiations, the issue of incentives cropped up, with the recruiter emphasing the absence of formal incentive scheme(s). Further negotiations involved medical aid and allowances building up to Mutiswa accepting Letlole’s offer.

The parties eventually agreed on a package for a five-year contract, the offer which Mutiswa signed on 24 January 2018 and tendered his resignation at his former employer, Ceres Funds. White was insisting that Letlole needed a CEO like yesterday.

The following day, a Thursday, White sent out an email to Mutiswa reneging on the terms of the contract. He informed Mutiswa that the board was now offering a three-year contract rather than five years. White explained that the board chair said the company policy was three years. Despite this sudden bombshell, and given the fact that he had tendered his resignation to his former employer, Mutiswa settled for the contract. His employment took effect from 23 May 2018.

In September 2018, the board tasked Mutiswa with crafting a comprehensive incentive policy that would include both a short-term and a long-term perspective. This followed several discussions during the ARAC meetings in June 2018 regarding the 2018 annual bonuses and salary increases.

Letlole engaged EOH Consulting to structure the incentives. EOH had been drafting all the company’s HR policies. However, it turned out that the board was not pleased with what EOH delivered. The board advised the CEO to revise the incentive scheme in order to align any proposal with the overall strategy of the business. The board also wanted a uniform incentive policy. Sometime around October 2018, Letlole put out a selective tender to three specialist HR companies upon recommendation by Kgatlwane. Two HR companies responded to the tender - Tsabadiri Consultancy and People Focus.

In November 2018, People Focus was awarded the tender. People Focus was tasked to work with the board and management to produce comprehensive HR and incentives policies. During a Letlole retreat of December 2018 held at Vic Falls, the famous town in western Zimbabwe and a gateway to the massive waterfall of the same name, the board reiterated the importance of putting in place as quickly as possible a remuneration and incentive plan. The board wanted to have the company attract and motivate a high performing executive team that would achieve Letlole’s ambitious targets.

The company’s CEO worked with Peoples Focus which produced a comprehensive set of policies around April 2019. The incentive proposal was an umbrella of envisaged incentive plans which would then culminate in binding short-term and long-term incentive agreements.

Prior to that, the human capital consultants at People Focus made a presentation to the ARAC. This was followed by another meeting two weeks later on 4 April 2019 where the committee adopted a resolution that the HR policies be recommended to the board. The board approved the HR policies and the short-term incentive policy (STIP) on 8 April 2019. The STIP was signed by the board chair on 16 April 2019.

However, what remained outstanding was the Long-Term Incentive Plan (LTIP). Over a number of meetings, the structure and formula of the LTIP took centre stage. The CEO proposed an LTIP policy which looked at “LLR staff being the equivalent of a property (asset) management company, which generated revenue from charging the client (Letlole) fees for both property and asset management”.

According to this structure, these fees would then be used to manage the properties, pay Letlole’s staff salaries and basically run and grow the business. These notional costs would be limited to 25 percent of total rental revenues, with the LTIP allocation being what remained.

According to the CEO’s proposal, such a structure would ensure that management kept costs under control while striving to grow the portfolio. Most of Letlole’s listed peers in the property industry have similar structures. However, the board was unhappy and rejected this idea, suggesting that they saw it as being complicated and merely incentivises management to grow portfolios and rentals (this could be via ultimately unsustainable borrowings) without considering the interests of shareholders.

Baalakani Nlumbile, the Property Manager, approached one of the then directors, Curtis Matobolo, to sway his support. Matobolo, who resigned in May 2020, was the MD of Knight Frank Botswana, which is part of a global property service company familiar with the real estate industry. While he understood management’s proposal which was entirely appropriate for Letlole, Matobolo explained to Nlumbile that the rest of the board were mostly finance trained individuals and it was their decisions which would hold sway regarding an incentive structure.

The board came forth with its proposal. They wanted a private equity incentive structure which they wholeheartedly embraced because, according to them, it put management’s financial interest directly in the shoes of shareholders. At its simplest, “such an incentive structure operates by giving management a very challenging annual stretch target (called hurdle rate) to achieve for shareholders and then thereafter, management would benefit a certain percentage of any return above this hurdle rate, which would constitute the LTIP carry pool”.

The hurdle rate was set at 10 percent, almost double Letlole’s history average return (approximately 6 percent) and a figure that was multiple times Botswana’s annual inflation of approximately 2.5 percent. Both parties were aware that the use the private equity incentive structure could create potential for massive bonus payments if the company performance was good, as has been the case with Letlole.

Accordingly, such an incentive ensured that management’s incentives were directly linked to the creation of an objective. The downside was that there would be no incentive due to management if that minimum target for shareholders was not achieved. Management worried that it was also very possible that the minimum target would not be attained because the stock market can be fickle, all this on top of underlying economic and business conditions themselves being volatile. So achievement was in no way guaranteed. The hurdle rate made sure of that.

In pushing for this incentive plan, the directors pointed out that these were circumstances that shareholders in Letlole found themselves in. So a LTIP based on this meant that management’s interests were now directly aligned with those of shareholders. There were no guarantees that there would be anything in the LTIP carry pool when the time arrived. It was entirely possible that one could find oneself with no bonus after the vesting period. With the benefit of hindsight, it seemed the board probably did not fully appreciate the financial implications if the set targets were exceeded.