DirectLine owners must not let what John Macharia built die

What you need to know:

  • DirectLine was started when everybody was running away from public service vehicle (PSV) underwriting.

  • If the dispute is not resolved quickly, the company and, indeed, the matatu industry and the PSV sector at large could face major disruptive pressures.

The battle for control of the dominant third party motor insurer DirectLine Assurance Ltd pitting its shareholders against one another in a vicious ownership battle offers a compelling lesson on how the fate and fortunes of family-owned companies flounder when the founder dies abruptly.

SOLUTION

I must declare interest before I continue commenting on this issue. John Macharia, the founding entrepreneur of DirectLine, was a personal friend of mine. We spoke almost every week because he never missed an opportunity to call to respond and comment on this column.

I had the privilege of knowing John and understanding his thinking as a young businessman fairly well. The indelible impression of his entrepreneurial spirit and the high levels of energy he exhibited in his business are etched in my memory.

DirectLine was started when everybody was running away from public service vehicle (PSV) underwriting. But this would not deter John, thanks to his sheer self-belief. He always insisted that he was offering a unique solution.

There was a time he harangued me for hours on end when, during an argument, I had criticised him by putting it to him that what he was running was not an insurance company but a liability management practice.

PRESSURE

This is after I pointed out to him the very big number of lawyers within its establishment. He pointed out to me that many people had rushed to the same conclusion as they had not taken time to understand John’s model.

John died in April last year having carved out a dominant market share in the highly risky business of PSV underwriting.

In less than 24 months after his death, DirectLine, which is the largest insurer of the matatu industry, has begun to feel pressure.

The other day, media mogul, SK Macharia tried to mount a coup by attempting not only to remove the management of the company, but also appoint a new board of directors. But his appointees did not last because the Insurance Regulatory Authority (IRA) promptly issued cease and desist orders that nullified the attempted boardroom coup.

LITIGATION

If the dispute is not resolved quickly, the company and, indeed, the matatu industry and the PSV sector at large could face major disruptive pressures.

The IRA could flex muscle to stop Mr Macharia’s moves as it has so far done. Indeed, the regulator has extensive powers, which it can bring to bear in this dispute.

In the name of protecting the interests of policyholders, the IRA has the powers to appoint managers to take control and run the company, to the exclusion of both the management and directors.

Yet fighting and flexing regulatory muscle may prove to be a risky route. Mr Macharia is a hard-nosed businessman who will not go down without a major fight, and so this dispute may spawn protracted litigation that will end up hurting the financial health of the company.

REGULATION

The IRA should navigate the conflict with a little more dexterity. I support an approach where emphasis is put on encouraging bargaining and negotiations between the shareholders.

We must convince the main shareholders to take the long-term view by ceding management to professionals and allow directors to supervise operations and strategy. Soft regulation is how we will eventually wean our investors of their owner-occupier mentality. In this country, family-owned companies frequently find themselves facing boardroom strife because we have shareholders who insist on steering and at the same time rowing the boat.

And we need to bear in mind that PSVs are a critical component of the nation’s transport infrastructure. If you disrupt PSV underwriting, the ramifications may cause systemic pressures to the macroeconomy.

POLICYMAKERS

Building strong and reliable PSV underwriters has been a major headache to our policymakers. The market is littered with the corpses of dead PSV insurers. Once upon a time, there was Blue Shield, Standard Assurance, United Insurance, Access Insurance, and Stallion Insurance Ltd.

There was a time when insurance companies formed a voluntary pool to share the risks associated with insuring PSVs. That system collapsed many years ago.

The government would resort to forcing insurance companies to give services to PSVs through a State-decreed insurance motor pool. That arrangement also collapsed.

Then in 1985, the government created yet another State-decreed motor pool. It was abolished in 1989. And between 1989 and 1992, eight PSV underwriters collapsed. Why did they collapse? Fraudulent activities by ambulance-chasing lawyers, doctors, investigators, claimants and graft within law enforcement agencies and the Judiciary. Let the shareholders of DirectLine not let what John Macharia built die.