DUAL LANGUAGE REPORTING BY NAIROBI STOCK EXCHANGE LISTED COMPANIES

1. DUAL LANGUAGE REPORTING BY NAIROBI STOCK EXCHANGE LISTED COMPANIES BAA ACCOUNTING IN LESS DEVELOPING AND EMERGING ECONOMIES SPECIAL INTEREST GROUP Venancio Tauringana and Musa Mangena BIRMINGHAM BUSINESS SCHOOL UNIVERSITY OF BIRMINGHAM 9th JANUARY 2009

2. Structure of the Presentation 1. Introduction • Objectives of the Study • Importance of Dual Reporting • Foreign Corporate Ownership in Kenya 5. Corporate Reporting in Kenya 6. Literature Review & Hypotheses Development

3. Structure of the Presentation (Cont) 7. Data and methodology Results and Discussion 9. Summary and Concluding Remarks 10. Further Research

4. Introduction A unique feature of corporate reporting on the Nairobi Stock Exchange (NSE) is dual language reporting. This takes the form of some companies presenting the narrative information (and in some cases financial statements) in both English and Swahili languages side by side (see Tauringana, Kyeyune and Opio, 2008).

5. 1. Introduction Nature of dual reporting (Example): Kenya Airways 2006

6. Introduction But what is the status of dual reporting in Kenya? Company law Kenyan Companies Act (1978, Chapter 486) states that: “communication between the company and its members should be in a manner acceptable to both parties but financial accounts should be kept in English”.

7. 1. Introduction What is the status of dual reporting in Kenya? (Cont) Nairobi Stock Exchange “Where any of the documents ..… are not in the English language, translations into English must also be available for inspection” NSE Listing Manual (Third Schedule Part A) 2002

8. 1. Introduction (cont) Since dual reporting is voluntary on the NSE : (1) what motivates companies to report using dual language ? (objectives of the study) (2) What are the potential benefits of dual reporting? (Importance of the study)

9. 2. Objectives of the Study (1) To investigate the extent of dual language reporting on the Nairobi Stock Exchange (2) To determine whether foreign owned companies are more likely to use dual languages in their annual reports. (3) In addition, investigate whether substantial institutional investment, proportion of non-executive directors, audit committee finance expertise, company size, company age, gearing are associated with dual language reporting.

10. 3. The potential benefits of dual reporting (1) Dual reporting is likely to increase understandability of the annual report (therefore usefulness of the annual report in Kenya) (2) This may enable a wide range of stakeholders to engage with the company (3) This includes private individual investors (existing & potential). Due to low levels of education attainment, the private investors are more likely to comprehend annual report messages in Swahili than English.

11. 3. The potential benefits of dual reporting • Companies on the NSE are required to reserve 25% of any Initial Public Offers (IPOs) for local investors (The Capital Markets Authority 2002). (5) Understandability of the annual report message can lead to economic growth as existing private individual investors buy more shares and potential private investors buy shares in the companies for the first time. • Share ownership by more private individuals means that the wealth generated in the country is equitably distributed. Equitable distribution of wealth is a key indicator of poverty reduction. 

12. Foreign Corporate Ownership in Kenya Kenya: Country's wealth in foreign hands “If Kenya were a cake to be shared out, Kenyans would only lay claim to 31 per cent of the country’s total wealth. The rest would go to foreigners”. In 2004, tea, tourism, flowers and coffee earned the country Sh140 billion, nearly half of the annual national budget. Agriculture, tourism and banking, which combined to bring in the country’s largest earnings, are in foreign hands. http://www.kimmediagroup.com/content/view/53/668/

13. 4. Foreign Corporate Ownership in Kenya (cont) Tea Sector EearnedSh43.5 billion in 2006 but is in hands of six companies largely foreign The Big Six in the tea sector are : Unilever Tea Kenya, Kakuzi Ltd, Williamson Tea Company, Kapchorua Tea, Limuru Tea Company and Sasini Coffee and Tea. http://www.kimmediagroup.com/content/view/53/668/

14. 4. Foreign Corporate Ownership in Kenya Tea Sector (Cont) The British-owned Brooke Bond Group holds: 43.1 million shares of the total 48.8 million shares issued in Univeler Tea Kenya. 54 per cent of the total 3.9 million shares issued in Limuru Tea Company In Kakuzi Ltd, foreigners have a total shareholding of 68.3 per cent of the total 19.6 million shares issued. http://www.kimmediagroup.com/content/view/53/668/

15. 4. Foreign Corporate Ownership in Kenya Tourism Earned Sh42 billion in 2005 that came from tourism ( Hotels, airlines, and travel/booking agents) Of Kenya’s 290,000-plus tourist hotel bed spaces, foreign hoteliers own 74.3 per cent Tour flights to Kenya are entirely in the hands of foreign airlines.

16. 4. Foreign Corporate Ownership in Kenya Tourism (Cont) Internal travel foreigners own 7 of the 11 leading local tour travel firms. “At the end of the day, tourism in Kenya remains a foreigners’ enclave with indigenous Kenyans left to scratch the surface on petty trades like selling curios and prostitution”. http://www.kimmediagroup.com/content/view/53/668/

17. 4. Foreign Corporate Ownership in Kenya Horticulture Earned Kenya Sh28.2 billion in 2006, is the country’s third largest foreign exchange earner. Of the 44 certified companies dealing with horticulture products, 26 are foreign-owned. But an even bigger irony is that the leading 10 players in the industry are all foreign-owned and take 83 per cent of the total income from the sector.

18. 4. Foreign Corporate Ownership in Kenya: Banks The leading two foreign banks have 71.4% market share Barclays Bank plc of London owns 68 per cent stake in Barclays Bank of Kenya. Standard Bank owns 81 per cent shareholding in Standard Chartered Bank Kenya Ltd.

19. 5. Corporate Reporting in Kenya • Companies Act, 1978 (Chapter 486) is based & substantially the • same as the UK Companies Act 1948 (Ogola, 2000). • Provisions in respect of accounts and audit (Sections 147-163). • (a) duty to prepare the financial statements (section 148) • (b) Contents of group accounts (section 152)

20. 5. Corporate Reporting in Kenya • Companies Act requires appointment of auditors who must be members of the Institute of Certified Public Accountants of Kenya (ICPAK) and meet the criteria for an auditor as laid out in the Accountants Act (1977). • (2) Capital Market Authority (2002) listing rules state that every company shall prepare an annual report containing audited annual financial statements within four months of the close of its financial year.

21. 6. Literature Review & hypotheses development Explanation of (motives behind) dual reporting on NSE (1) Pursuit of legitimacy (Stanton and Stanton, 2002). (2) Impression management (Leventis and Weetman, 2004, & Beattie and Jones, 2001)

22. Literature Review & hypotheses development Legitimacy “ … A condition or status which exists when the entity’s value system is congruent with the value system of the larger social system of which the entity is part.. When a disparity, actual or potential, exists between the two value systems, there is a threat to the entity’s legitimacy”. (Lindbolm, 1994).

23. Literature Review & hypotheses development Legitimacy (Cont) Dowling and Pfeffer (1975,p. 125) suggest companies adopt some of the following to become or appear legitimate: (1) alter definition of legitimacy through communication so that it conforms to the organisation’s present practices, outputs and values (2) become identified through communication, with symbols, values and institutions which have strong base of social legitimacy

24. 6. Literature Review & hypotheses development Legitimacy (Cont) Information (in a language understandable to the target audience) is a major element that can be employed by organisations to manage (or manipulate) the stakeholder in order to gain their support and approval, or distract their opposition and disapproval” (De Villiers and Van Staden, 2006)

25. 6. Literature Review & hypotheses development Impression Management “refers to the study of behaviours or strategies put in place by an individual or organisations to be perceived favourably by others” “In accounting impression management theory has been adopted and applied to explain response of organisations dealing with legitimacy challenges”. (Hooghiemstra, 2000).

26. 6. Literature Review & hypotheses development Link between Legitimacy & Impression Management Theories “Because legitimacy revolves around the idea of managing societal perceptions, the impression management concept can be positioned within legitimacy theory” (Cho, 2007). “While the symbolic aspects of organisational actions have been central to legitimation researchers, textually-mediated discourses [aimed at managing impressions] have more recently been seen as fulfilling a similar function (Neu et al., 2002)

27. 6. Literature Review & hypotheses development Why would foreign owned companies want to legitimise & or manage impression in Kenya? “Hostility to foreign ownership of domestic companies is common the world over. By repatriating profits, foreign companies remove cash from a home economy. Foreign ownership is often associated with the sale of ‘national assets’, whether these are real (extracted resources) or emblematic (flagship brands)”.Smith (2009).

28. Literature Review & hypotheses development Why would foreign companies want to legitimise & or manage impression in Kenya? “Almost £100bn a year is taken out of Africa through dodgy accounting practices. Some of the Kenyan flower companies are amongst those accused of under-reporting profits in an effort to avoid tax. And there's 'transfer pricing' - undervaluing goods when they leave Kenya so as to place the profits elsewhere.” http://news.bbc.co.uk/1/hi/programmes/file_on_4/6908997.stm

29. 6. Literature Review & hypotheses development Why would foreign companies want to legitimise & or manage impression in Kenya? BBC file on 4 programme (2005) investigation revealed that: Kenya's official export statistics say almost 50 million kilos of tea left there in 2005 bound for Britain But the British import statistics showed 75 million kilos - one and a half times as much - arriving here from Kenya. http://news.bbc.co.uk/1/hi/programmes/file_on_4/6908997.stm

30. 6. Literature Review & hypotheses development Why would foreign companies want to legitimise & or manage impression in Kenya? Jack Ranguma, a former head of domestic tax for Kenya, told file on 4 programme that : The mismatch was created by customs fraud and companies shipping tea to the UK were under-reporting exports in order to avoid paying tax “We want our sisters to stop their corporate citizens who may not be paying their due taxes here”. Mukhisa Kituyi, Minister for Trade and Industry

31. Hypotheses (Based on motives discussed above, legitimacy, impression management, other theories and related prior research) H1: Companies which are foreign owned are more likely to use dual languages in their annual reports. H2: Companies with a higher percentage of institutional shareholding are more likely to use dual languages in their annual reports.

32. Hypotheses (cont) H3: Companies with a higher proportion of non-executive directors are more likely to use dual languages in their annual reports. H4: Companies with a higher proportion of finance experts on their audit committee are more likely to use dual languages in their annual reports.

33. H5:Big companies are more likely to use dual languages in their annual reports than small companies. H6:Companies which have been listed on the Nairobi Stock Exchange for a longer period are more likely to use dual languages in their annual reports. H7:Companies that are highly geared are more likely to use dual languages in their annual reports.

34. 7. Data and methodology (a) Companies listed on NSE as at 1 may 2007 = 48 Less companies listed for less than 3 years 4 44 Companies with eliminated for other reasons 5 Final sample 36 Annual reports analysed (36 X 3) = 108

35. 7. Methodology (Cont) (a) Estimation procedure Model : DULAR = 0 + 1OWNERS+ 2SUBINS+ 3PRONED + 4FINXPT + 5LNASSET + 6COMAGE + 7GEARIN + εj

37. Results and Discussion Analysis of dual and non dual reporting companies (Table 2) Descriptive statistics of dual and non-dual reporting companies (Table 3) (3) Descriptive statistics & Chi-square results of sample by dual language reporting (Table 4)

38. Results and Discussion (4) Spearman’s rho correlations among independent variables (Table 5) (5) Results of logistic regression results (Table 6)

39. Table 2: Sample of companies whose annual reports were examined in the study

40. Table 3: Descriptive statistics for dual reporting variables

41. Table 4: Descriptive statistics & Chi-square results of sample by dual language reporting

42. Table 5: Spearman’s rho Correlations Among Independent Variables

43. Table 6: Results of logistic regression results

44. 9. Summary and Concluding Remarks • Objective of the research – extent of dual language reporting and whether foreign ownership & factors determine dual reporting • Foreign ownership, substantial institutional investment, finance expertise, company size, gearing are associated with dual reporting • Foreign ownership results are consistent with legitimacy and impression management theories • Policy implication given the potential benefits of dual reporting. Should dual reporting be mandatory for all companies?

45. Further Research • Are annual report in dual language better understood by private investors? • Are private investors more likely to invest in companies that report in dual languages • Does the wider share ownership lead to economic development as private shareholders share the country’s economic wealth?