Asset stripping: manipulated truth

land and livestock. Critical assets correlated with higher incomes in rural Zimbabwe include cattle, scotch carts, ploughs and wheelbarrows. Cattle provide crucial draught power.

Lack of a herd causes serious constraints in rural agricultural production for a family unit. Cattle are just not for food, but for social standing, including traditional ceremonies such as marriages, divorce, or death.
Cattle offer a currency to trade and pay for fees and bills. Buying a cow is a sign of socio-economic maturity and increases the net wealth of an individual.
As we move into industrialised societies, assets are represented by land, buildings, plant and machinery, vehicles, implements, furniture, fittings computers etc.
The sum total of these assets minus liabilities, are the net worth of a company. Acquisition of assets increases net worth. A society’s productive base is the source of its economic wellbeing. Productive base is a

diverse collection of durable objects, some tangible and transferable.
Productive base also involves human capital and mutual expectations, which are institutions and social capital. Assets form an important part of this productive base. Removal of assets through sale, transfer or depletion, impacts negatively on ownership and productive capacity of an entity.

Asset stripping is a practice of acquiring a company, then selling part of it, in the hope that the cash realised from these sales will match the entire acquisition cost, meaning that the asset stripper is left with remaining parts of the company at nil cost.
The pursuit of higher profits is what motivates asset strippers. Instead of realising profits over time through normal business activities of the firm, asset strippers, in search for a quick buck, individually sell off assets.

The wickedness of this business activity is that it has total disregard for other stakeholders, such as minority shareholders, workers, creditors and the societal economic well being. It is motivated by greed and it is against values of good governance.
Asset strippers are usually within the leadership of the company, the shareholders and senior executives.
This practice therefore falls squarely within corporate governance parameters. Higher incidences of asset stripping are recorded during restructuring of companies, such as privatisations, mergers and acquisitions.

Majority shareholders and company management exercise their power as well as insider information to strip a company of its assets. Company directors transfer only the assets of one company to another and not the liabilities. The result is a dormant company with large liabilities that cannot be met and it has to be put into liquidation.
Stripping a company of its assets is normally done in two main ways:

Asset strippers deliberately target a company or companies to take ownership, move the assets and then put the stripped entity into liquidation

Through “phoenixing” – directors move assets from one limited company to another to “secure” the benefits of their business and avoid the liabilities. Most or all the directors will usually be the same in both companies.

Asset stripping was rife in Russia during the massive privatisation following national transition from a socialist to a market economy. For instance, as a result of insider abuse and self-dealing, one bank transferred all of its good assets to a new corporate structure, with the same owners, leaving the minority shareholders and creditors with a liability-filled shell.
In Zimbabwe, there are many examples of asset stripping. Many parastatals and state owned enterprises are reeling under the effects of this business vice. The likes of National Railways of Zimbabwe and Air

Zimbabwe including what used to be known as Affrettair, the cargo division of the national airline, come to mind.
There are some who think that asset stripping is a valuable economic activity. They argue that when economic resources are tied up in activities with an insufficient economic future, it makes sense for someone to unbundle them and release them into the wild, separately.

It is also argued that there are people who specialise in doing this, who are always on the look-out to ply their trade, and that asset striping infuse massive vitality into the economy of the world. Asset strippers say they ensure that existing resource uses are always questioned, and that the future, when it does emerge, clearly is not smothered by the past.
Truth, if manipulated becomes a lie.

Ed Milliband, the British Labour Party leader, declared war against asset strippers. In his speech at a recent Labour conference, Milliband said that Britain should not longer be neutral about companies’ behaviour, and should discriminate between “wealth creators” and “asset strippers”.
In the pretext of unbundling assets for better economic use, asset strippers leave companies, incapacitated and unable to employ or produce. A private equity firm in the UK bought care home company Southern

Cross and was said to have stripped assets for a quick buck and left tens of thousands of elderly people to resemble commodities to be bought or sold.
Why is asset stripping attracting attention?
It is clear that the whole world is desperate to recover from the economic crises. It is also evident that for a long time now, the world watched a quick buck and celebrity culture, take over the socio-economic space.

Asset stripping is associated with this culture, of “take what you can” mentality. It is as if the term “stealing” no longer has the same old meaning. The Labour party announced that it was time to reward good behaviour and that reward must be linked to effort. Asset stripping rewards those with power and insider information, who effortlessly manipulate companies. This in turn creates falsified societal values, of get rich quick and idleness. In Zimbabwe, this could be likened to the “burning” era, where many people profited out of exchange rate volatilities, by just carrying a case full of notes and being at the Road port. This replaced production.

Over the past three decades, sub-Saharan Africa, with a population of more than 800 million people, is reported to have become poorer, when judged in terms of its productive base per capita. There is growing debate that the growth in Africa reported in many economic publications, is actually achieved by a depletion of capital, natural asset stripping. There is serious and urgent need for capital investment.
Inaccurate accounting systems and corruption make it difficult for African countries to ascertain, levels of capital flight, including their destinations. However, this is not new. The essence of colonialism was asset stripping. The net capital flows during the colonial era, in many African countries, remain a guess work.

Today, many still contend that there is a net capital out flow from Africa.
It would therefore seem self-contradictory when independent African countries allow the same principle of asset stripping which impoverished its people, to continue. If the economies must recover from the global crises, often referred to as crises of production, the productive base must be reinstated.

A change in a society’s productive base is measured by a change in its capital stocks and institutions, which is the sum of investment in an economy adjusted for disinvestment. At traditional African society level, can you imagine that each time a herd boy leaves your homestead they take with them an ox, which they previously used to plough your fields during their employ with you, at zero cost because the beast is old?
While I understand the concept of book value, I believe that it is self defeating for a society trying to create wealth, to dispose of assets at book value, even if they still have 10 or 15 more years to go.
Widows, who have had property confiscated from them, will understand the incapacitation which ensues asset stripping. The Ntengwe for Community Development in Victoria Falls and Hwange district, have a programme to increase capacity to fight off property stripping. The above examples show that asset stripping is an enemy of productivity. It benefits only a handful, while the rest of the society wallows in poverty.

Whether at family, company or national level, asset stripping must be discouraged.
Corporate governance interventions in asset stripping come in to protect;

Investors, who are in minority and would otherwise, have their shares unfairly diluted by controlling shareholders.

De-capitalisation of companies

Interests of creditors and workers

Insolvency proceedings as a strategic tool to avoid payment discipline.

Sustained good governance begets long term wealth.
Wealth creation must be considered in terms of generations. Generational economic leverage is a missing link in the economic well being of our people. Conflicting economic activities tend to end up being “riches” focused rather than wealth, the former being short termism.

An extreme in Africa is perhaps Mobutu Sese Seko who amassed personal wealth and externalised the funds, somehow perpetuating the colonial legacy. Thus corporate governance frameworks must deliberately target sustained productivity, versus short term gains.
The expected rise in mergers and acquisitions and restructuring following the indeginisation laws in Zimbabwe, provide temporary solutions to the capital needed to restore productivity to full capacity. The sanctions and local liquidity crunch mean that there is still a need to lure foreign investments.

Solid corporate governance frameworks are required. In an era of global financial crises, it is now more difficult to attract capital. This threatens the very existence of individual firms and can have dire consequences for the entire economy

De-capitalisation through asset stripping would deal a final blow, to the productivity base for the whole country. Following indeginisation requirements, foreign investors, will be minority shareholders. Remember that is the same foreign investment which the Zimbabwe Investment Agency must attract.

Protection of minority shareholders is more of a rule based principle. Corporate governance fundamentals will have to be anchored on trust. Trust that the majority shareholders and management will uphold the rule of law and not wake up one day to find an empty shell.

It is in the interests of all businesses in Zimbabwe to push forward the development of a national code as well as lobby the government to increase minority shareholder protection, through the company law and sectoral laws.

Given the fact that local companies are resorting to mergers and acquisition, such as through vertical integration to avert the use of cash, it seems to me that there is an urgent need to ensure that these marriages do not end up in asset stripping and liquidation.

Workers also look up to sound corporate governance to ensure that firms remain productive and workers remain employed.
The above outline, highlights the need to unclog production systems, including protecting economies from asset stripping. Though paved with good intentions, there are too many conflicting signals in the market place today.

Borrowing from information, communications and technology language, I believe that we are at that point where we need to switch off the computer and reboot.
This means that each personal computer on the network must individually reboot.