By Julius Galisonga
Executives and Board members of business oriented organizations must have read the conclusions of the Court of Appeal in David ChandI Jamwa Vs. DPP Criminal Appeal No. 77 of 2011, upholding the decision of the High Court, with much perturbation. In convicting Jamwa of causing financial loss, court held that;
“we are in total agreement with the learned trial Judge that the sale of the said bonds before their maturity date occasioned financial loss to NSSF. “Even if there was justification for the sale and we have found none, the sale of bonds before maturity would still have constituted a loss to the shareholder.
Circumstances may require that a bond holder sells before maturity. That in itself does not take away his/her loss. Such may be justifiable or may make business sense depending on the circumstances of each case. Nonetheless it remains a loss
From this conclusion, it appears that the court is simply inserting itself into the role of the board of directors in all respects with regard to the way corporations should conduct business. I believe, courts should not be disposed to substitute their business judgment for that of the board of directors. Because to do that is to view business decisions with legal eyes, which in my view misses the point.
To state that even if there is justification to make a business decision in itself can constitute a crime, is wrong in law, because businesses, including NSSF which under S. 30 of the NSSF act is required to invest the money not presently required, exist for that, to make investments, turn from one opportunity to another. Otherwise, soldiers at war fronts will be charged of murder for shooting and killing the enemy on the battle field.
It is apparent that the conclusion treats as one and marksdown the distinction between an “investment decision” and an “administrative decision”. The two may intersect and indeed they do all the time, but embedded within investment decisions is the burden of “risk” and “opportunity Cost” . Business decisions are made consciously knowing that there is always going to be a possibility of loss, however carefully made…and sometimes at the time they are made, the maker knows that a loss is being incurred in the immediate future but will pay off along the way, either within the organization itself, or within the industry. Yet as well, the making of one choice means that an alternative is forgone. But the court decision manacles investors from taking risk, yet every decision they make is risky business.
Which begs the question, “does selling bonds, before their maturity date, as court observed, per se, even when they are sold at a price below that at their maturity date, amount to causing financial loss? In my view, that depends on the angle in which it is viewed. If construed as an “administrative decision” certainly it can be seen as a crime, to the extent that the money expected to be earned was not earned, (if taken on the face of it, without applying other factors). Yet the same if construed as a “business decision”, cannot be seen as a crime, because embedded in any business decision are two things, “Opportunity Cost/risk” and “Benefit/profit”
Consideration here being, if the sale is to channel the proceeds into another project, then the money foregone by reason of the sale, in this case the 2.7 Bn, become one of the opportunity costs for the project now invested in. Even where the project invested in with the proceeds of the sale, is lost by reason of failure of that project, still it would be wrong to charge Directors with causing financial loss, because, in any business venture, there is always the threat of “risk”.
Business decisions can be quite intriguing, especially when contemplated with the benefit of hindsight, they don’t make sense. When they are made, to the person involved in the decision making process, they might actually make serious business sense, as they are arrived at after consideration of various scientific investment evaluation tools and factors. Some times, even gut feelings.
When they work out, certainly the decision maker is considered a genius risk taker. When they fail, then their makers are considered reckless. Only problem is that evaluation of the decision only comes after the result of the decision made and anyone reviewing it does so, with the the benefit of hindsight as already observed. With hindsight, questions are asked, should it not have been done differently? But it should be noted, if reviewed in the short run, business decisions will most likely not make sense. Only time might actually vindicate the maker.
Take the example of Yahoo’s well known story. In 1998, yahoo refused to buy Google for United States Dollars one million. Realizing its mistake, in 2002, Yahoo tried to buy Google for US dollars three billion but Google held out for US Dollars five billion, which Yahoo refused. In 2008 Microsoft refused to be bought for US dollars forty billion. In 2016, Yahoo was bought for 4.6 by Verizon. Google meanwhile as at the time of
When you look back at Yahoo’s M&A opportunities above, the going price for Yahoo’s assets today could have been in the hundreds of billions of dollars. Yet the decision by yahoo cannot be said to have been knee jack reactions but arrived at after applying the tools necessary for investment decision making. It goes without saying, yahoo lost a lot of money.
Would it be right, then to charge the executives for causing financial loss? Financial loss under S.20 of the Anti-corruption Act Uganda and as defined in detail by Court includes “acts” or “omissions” implying that in failing to buy or sell, at those various times, then the Executives of Yahoo, had they been in Uganda, would be liable.
Court relied on the decision in the Ghanaian Case Republic Vs Abraham Ada and others, which in my view, beyond the definition of “Financial Loss” the same is distinguishable to charges arising out of investment decision making. That case related to proved embezzlement, abuse of office and neglect of duty. It did not relate to examining acts of business decisions.
Indeed this has been the basis of the business Judgment Rule, which is now accepted in various jurisprudence in various jurisdictions. Basically, the general idea of the business judgment rule is that when a board of directors has acted with reasonable care and in good faith, its decisions will be regarded as “business judgments,” and the directors will not be liable for damages even when a decision proves to be detrimental to the corporation
Indeed, the American Bar Association in its Corporate Director’s Guidebook, i.e. Committee on Corporate Laws, Section of Corporation, Banking and Business Law, American Bar Association, CorporateDirector’sGuidebook, 33 Bus. LAw. 1591, 1603-04 (1978), went at length to explain what the Business Judgment rule is, to wit;
Recognizing that, consistent with the business corporation’s profit orientation, business judgment inevitably involves risk evaluation and assumption, and recognizing that the office of corporate director, as such, does not require full-time commitment to the affairs of the enterprise, the corporate director frequently makes important decisions which may eventually prove to be erroneous. A director exercising his good faith judgment may be protected from liability to his corporation under the Business Judgment Rule. While not part of the statutory framework, this legal concept is well established in the case law of most jurisdictions. When viewing the decision of directors acting in the exercise of free and independent judgment, courts have been extremely reluctant to find that they acted negligently. Recognizing that business decisions may seem unrealistically simply [sic] when viewed with hindsight, and expressing reluctance to substitute their judgment for that of directors, courts have generally refrained from questioning the wisdom of board
decisions
It is for this reason that I feel, that except where there is proved fraud, an investment decision, whatever its results, whether money is lost or profits earned, there’s no crime. When an investment decision is made, there is the constant risk of loss and yet to buttress the taking of risk, is the age old adage, “the higher the risk, the higher the returns” Yet viewed as an administrative decision, any loss has legal ramifications under S. 20 of the Anti-Corruption Act…causing financial loss.
In the case of NSSF, one should consider, after the bonds were sold, what was earned as to what should have been earned if they had not been sold at the time they were sold? When the money was received where was it invested? In this case land was purchased. If we determine the net present value of the money that was forfeited at the time of sale vis-avis the current value of the land that was bought which is more? Without calculating the impact of all of these, you cannot with certainty say that selling the bonds as they were automatically caused financial loss.
Yet again in investment decision making, profit to be made on an investment may be after years of injection of resources, which is technically referred to as “pay back period”, the time it takes to recover or to earn a profit on the resources invested, meaning that it is inherently part of investment decision making to know that profit is not expected immediately.
The recent demand on government entities and bodies has been that they should perform their functions in a business like manner. This is more so for NSSF which must invest the savings to the benefit of savers. Given the instability of the economy one would ask how much risk, and all investments come with a risk, would they take when dealing with savers funds, after this decision?
“I feel strongly about that case because it was a genuine and legitimate transaction a manager is expected to make on quick notice,” Ms Ssali said.
She said managers in big organisations make financial decisions all the time and punishing Jamwa sends a wrong signal to them.
“As a Finance professional, I have never really understood his crime on this very transaction of liquidating a bond earlier than maturity. Bonds carry risks. This means they are also speculative in nature and also carry risk,” she said. “So, a manager can make a decision to exit early if they feel the opportunity cost on the remaining interest is not better than the next best alternative for that money.”
She said: “For example, if a one year lucrative fixed deposit opportunity is identified and is closing, I can choose to exit in anticipation for more income from a higher yielding fixed deposit. This is normally referred to as tactical trading. It’s therefore normal to make gains or losses in the course of trading.”
“This is the reason managers and officers liability insurance exists – to cover any losses incurred in the process of doing legitimate business as anticipated,” Ms Ssali said.
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