Memo to Shareholders: Wake Up!

Only five banks are healthy! Only Seven banks are healthy (Technical Director of the Nigerian Accounting Standards Board)! Only four banks are safe and sound (Nigeria Deposit Insurance Corporation)! Why Nigerian banks need bail out! Capital market has shed 33 per cent value since March 5! These are actual headlines or snippets from the newspapers and this does not include the tabloids. Apart from ‘Obama mania’ related debates, the only hotter topic has been the state of the financial system in Nigeria. However, while a lot has been said about depositors…little has been said about shareholders.

If you are a small shareholder in a bank where the value of the shares has dropped to a quarter of the purchase price and you are not sure if your bank is ‘sound’, what can you do?

The truth is, not much, but the feeling of helplessness is made worse when you have no information. You are entitled to information and as a shareholder you should be able to call the investor relations officer of the company in which you own shares and ask questions which they should be able to answer satisfactorily. Which is why, every publicly quoted company should have an investors’ relations office.

On paper, Nigerian shareholders are arguably well protected by the Companies & Allied Matters Act, with one vote per share, the right to be notified twenty one days before an annual general meeting (AGM) and directors who are under one of the widest fiduciary obligations in the world. The operative phrase is ‘on paper’. In reality, minority shareholders rarely vote, the postal system does not work so shareholders rarely get notification and shareholders, rarely try to get directors to live up to their obligations.
Last year when 300 shareholders of Cadbury Nigeria Plc. sued the board of Cadbury and its auditor for breach of duty, the case was celebrated as the first of its kind in Nigeria. Cadbury had been falsifying its financial statements for three years and the discovery led to a massive drop in share price which several years later, has still not recovered. Fortunately, in April 2008, the Securities and Exchange Commission banned the former Managing Director, Mr.Bunmi Oni and former Finance Director Mr. Ayo Akadiri, from operating in the capital market or sitting on the board of any public company in Nigeria. The company itself got fined and some of the directors and senior management were suspended from operating in the capital market.
This should be encouraging news and serve as motivation for shareholders to take charge of their investment; a responsibility which we have been guilty of abdicating. How many investors actually read the prospectus before investing? How many ask questions of their stockbrokers and how many just invest blindly hoping to make a quick turnover?
In the developed economies shareholder activism has broken new ground in fostering more progressive corporate policies such as a more independent and socially responsible board. Shareholder action and pressure on institutional investors was responsible for making multinational companies divest from South Africa until apartheid was abolished. Institutional investors, usually pension funds, are usually very powerful in terms of monitoring a board and often sit on the board to watch out for the interests of their funds. This is what is still missing from the Nigerian corporate governance scene. The Nigerian pension fund administrators (PFAs) should be leading the way in ensuring proper corporate governance –demanding seats on boards and scrutinising the activities of management and board members to ensure the life savings of their clients are secure. PFAs can change the way the companies in which they invest conduct business and they must – this is what their counterparts in other parts of the world do. The California Public Employees' Retirement System (CalPERS) is the largest public pension fund in the United States and it is virtually impossible to pick up any literature on shareholder activism and institutional investors which does not mention them. With all the discussion about the value being lost in our stock market - as much as 3 Trillion Naira to date- it is hard to explain the silence of our pension fund administrators. They need to start doing more to protect the funds under their management...unless they are conflicted about the interests of their owners and the interest of pensioners?

Special regulation could always work in Nigeria but there are arguments that the US Sarbanes-Oxley Act, enacted in response to management and board fraud in Enron, Tyco etc., is making it hard to attract good directors who are put off by the stringent disclosure requirements. It is also arguable that there are loopholes especially from the subprime lending scandal. But Sarbanes has worked, because the costs of directors’ and officers’ liability insurance in the US is dropping from the reduced risk of exposure to liability.

So where does the ultimate responsibility for corporate governance lie? While the regulators have a huge role to play, like everything in Nigeria, we cannot take it for granted that they will. What we should do is get involved: complain, lobby, campaign, stop ‘giving’ votes away to proxies and eventually, boycott the shares of companies that are not being run properly. Investors can question the composition of non executive directors, pressurize PFAs to obtain and share more information and if all else fails, head for the courts. Minority shareholders have a special place in the heart of every judicial system – everyone loves the underdog...I think.

Published November 11 2008