African Investor Relations

The presentations made around Africa this year to listed companies highlighted an excellent look into the future by IR Web Report which provided a “past, present and future” overview of the web in investor relations.

Web 1.0 involved the publication of data on the web through intermediaries, Web 2.0 through people and Web 3.0, predicted by Dominic Jones IR Web’s leading IR strategist, through machines or databases. Web 3.0 means that peoples’ role in the distribution of data will be seriously eroded. The majority of information people want will be obtained through programmes and databases.

A link with people is what business is all about. You see it everywhere. The latest trends around the world involve the creation of online communities. You see it in Facebook, Google, Twitter e.t.c. and it’s not different for businesses in Africa. Create a community, a secure two-way link, offer what people want and nurture the relationship. Enjoy the returns.

To executives in Africa this is common sense and they shake their heads in agreement when I present to them. But in their minds there is no pressing need to adopt these strategies. These executives are busy. Subconsciously, negative conditioning about anything to do with websites kicks in. It’s easier to maintain the status quo. So what’s the catalyst for an executive to say “OK let’s do it”?

Vision.

It’s personal.

Knowing the long-term value and having the strength to make the decision is what it’s about. Using the web effectively cannot be done in-house anymore so trusting the right partner to achieve your goals is also important. This takes courage. Yes, the majority of executives are miffed with their website managers but why go create more problems all over again?

As I said, it’s about vision.

African Is Cool’s 11-client investment community is just over 8,000 investor contacts and this is growing daily. We have over 12,000 visits to our websites monthly and visitors view over 19,000 pages of information. They come from over 100 countries, mostly from the UK, USA and South Africa and India, the latter country where many of the wholesale investment data vendors e.g. ThompsonReuters process information into their databases for onward sale to subscribers around the globe.

Our clients, visionaries in their own right, are seeing the benefits of the online community strategy. In many cases the commercial return has exceeded the cost of investment in the first year. This image below shows the categories of feedback we receive through our client websites.

What are some of the results from this feedback? New deals, lower cost of doing business, hiring better staff, identifying shareholder administration problems sooner and better informed investors. We have the evidence. This was not an expected benefit of our service when we started, but the communications channel that we set up online works and sources feedback related to areas other than investor relations.

In a broader sense, our community of investors knows what African is Cool is about now and each new client is looked upon with excitement. For new clients, it’s an immediate introduction to a previously unidentified investor community.

In 2010 my mission will be to continue to increase the awareness of the value of online communities. We will also ensure that for our clients, if there is increased interest in Africa from the 2010 World Cup, we take advantage of it.

The comfort of knowing that a core governance activity is being carried out reliably, and in a way that benefits brand, corporate reputation and governance, is the KEY factor that justifies the long-term vision of the executive in the short-term.

But it’s only the executive that can make the decision.

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Nine Botswana companies attended our investor relations presentation on “How to integrate investor relations into corporate strategy profitably”. Three other professionals kindly presented their perspectives on investor relations:-

• Hiran Mendis, CEO of the Botswana Stock Exchange (BSE)
• Alun Thomas, CEO of Imara Africa Securities
• Steve Pezarro, founder of Corpserve Botswana

Click on the names above to access the presentations given where applicable.

My presentation follows:

(Please note that the embedded links within my presentation cannot be viewed - email me here if you want the full presentation)

Hiran outlined the BSE’s strategies toward trading, clearing and settlement automation in the future, the exchange’s efforts to broaden share ownership, and the imminent new listing rules. Electronic communications are supported by Botswana legislation and rules, but have yet to take off. I like the Botswana Stock Exchange website – it is one of the more progressive websites in Africa.

Steve Pezarro spoke about the current challenges of being at the coal face of investor feedback, pointing out that in many instances, registrars were asked to be the providers of information that should come from other sources. Many investors visited or called Corpserve just to ask for investor information. The absence of a single source of data for investors was an obstacle to efficient shareholder administration.

Alun Thomas reiterated what many of the other pan African analysts have said in our other presentations: that the distribution of the annual report is paramount to the investment decision. Less than 30% of the annual reports of African listed companies that should be online are online and Botswana statistics were similar.

The statistics below, a crude but effective measure of shareholder communication practices, show how Botswana fares in the use of websites to communicate investor information.

Botswana has a robust democracy, a strong economy and a lot going for it. This message should be included in the investment proposition of many, if not all listed companies in Botswana – something that can be achieved effectively using the internet.

As for my message: It’s possible to ensure that the cost of enhanced communications is integrated seamlessly with your corporate strategy in a way that is hassle free and pays for itself many times over.

Ask for a proposal to grow your business using shareholder communications here ».

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Zimbabwe Leadership Forum (ZIMLEF)’s new website launch is imminent. I have just been informed by Cynthia at ZIMLEF of imminent launch of their new corporate governance interactive website to be used for the solicitation of views from stakeholders on the new Zimbabwe corporate governance code.

The website will come online around 24 November 2009. We will provide more details when the site is launched and what listed companies should do thereafter. African Is Cool feels that unless listed companies take an active interest in the new code their long term interests and those of their investors may be prejudiced.

The IOD and Zimlef are attempting to facilitate participation which hopefully will be well structured and efficient. If not its not going to gain the participation of listed companies.

Cynthia may be contacted at:

6th Floor Goldbridge

North Wing, Eastgate Complex

Sam Nujoma Street / Robert Mugabe Road

Harare

Zimbabwe

Telephone (04) 795961, (04) 795974

Email Cynthia on cynthia@zimlef.co.zw, or Cuthbert on cfdube@ecoweb.co.zw

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My recent blog posting shows how the MIT CDS system has added cost and inconvenienced investors and listed companies in other regional markets in sub-Saharan Africa. We do not want the same situation in Zimbabwe. We cannot afford it at this stage.

Using my blog as a guideline I urge your company secretary or FD (or CEO, but no junior staff) to attend the meeting advertised and ask the questions I raise in my blog in addition to any additional issues you raise. Three key questions to ask:-

• have the costs of the functionality been calculated up front and who will bear those costs in the short, medium and, most importantly, long term?
• how will this impact investors positively in the short and long run?
• will the CDS be an organisation that is jointly owned by all interested stakeholders (banks, registrars, stock exchange etc.) or will it be a monopoly in competition with registrars?

Failure to add your voice to the process of a CDS system in Zimbabwe may result in inconvenience to your valuable management time, your company, your investors and your reputation, forever. Inconveniently structured systems have been forced on listed companies elsewhere and Zimbabwe has a unique opportunity to get this right. But it needs your involvement.

We have no financial interest in this project or in you attending. Our focus is investor relations. The CDS is about investor relations.

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I am a father of three, with my eldest 15 years old, and so the battlecry of “do your homework!!” is often heard throughout our house and echoing through our neighbourhood and beyond.

I felt inclined to shout the same command today after reading the news that the Zimbabwe Stock Exchange (ZSE) has entered into a deal worth about US$1,2 million with a Sri Lankan information technology firm, Millennium IT Software Ltd (MIT), to establish a central securities depository (CDS) in Zimbabwe. Has the ZSE done its homework?

The London Stock Exchange has just purchased MIT which is, in principle, good news: the LSE is a world leader. And the MIT software is pretty robust, with lots and lots of features, even if they are very costly features that need clever people to run them. But a review of how the MIT software has worked in regional markets does not bode well for Zimbabwe’s market.

1. A process of engagement with all market stakeholders must be undertaken before proceeding with any particular CSD system to establish what CSD system, procedures, structure and process should be implemented for the specific and unique requirements of each market. I assume this has happened.
2. Since the CDS system may (will) be a monopoly, mandatory use obligations may be placed on listed companies. Against their will. At what cost? Have Zimbabwean listed companies been consulted, or are there any plans to do so, regarding the benefits and the costs?
3. Does Zimbabwe’s new securities and companies’ laws incorporate a CDS? If the CDS is not supported by legislation and broadly by the market, a tripartite alliance with listed companies, transfer secretaries and the CDS may be required. Legally this is messy. Practically this is messy.
4. Is the CDS going to be adequately capitalised? In the absence of capital and legislation it may be possible that the transfer secretaries manage the registers for the CDS on behalf of listed companies. This creates a practical merry-go-round for investors because the owner of the trading data used is not the applier of the software system. In the absence of an online solution (promised by MIT in many markets but not delivered) investors suffer as does the reputation and bank balance of listed companies.
5. Have the different components of the system’s functionality been costed properly? Promises of access to online account interrogation and other functionality by investors have failed to translate into reality in other markets. Why? They are too expensive (MIT is known to be expensive), the skills to manage changes don’t exist locally and the critical mass in each of these markets is not sufficient to support MIT’s fee structure.Zambia’s CDS system (sponsored initially by USAID I believe) has problems that only the listed companies and affected shareholders are aware of. There have been some serious behind-the-scenes spats between listed companies and the CDS and it is clear that systems are not 100% error-proof. There is no public acknowledgement of these issues and it appears that no resources are being applied to beef up the efficiency of the system. The predominance of manual self managed registers is growing. Not a good sign.
6. Who actually bears the cost of the CDS? Unless there is buy-in from all stakeholders on how costs of the CDS are to be recovered there is a risk that costs will be borne individually by listed companies.
7. What do investors think? Simple things such investors being required to receive a CSD account in hardcopy for each company in which they have invested rather than a consolidated account is important. Who suffers?: the investor, the listed company and the environment. Do investors want to pay more than they are currently paying? Absolutely not. If more costs were to be negotiated what would the basis of the motivation of this be to the listed company?
8. Will the entire project be independently project managed by professionals? There are big cost and credibility issues if we get to the end and discover we’ve missed out a few key steps along the way… I guess this is handled by the US$1.2m system cost announced.
9. The organisation that intends running/operating the CSD (invariably an “arm” of the exchange itself) needs to be appropriately staffed by well trained individuals with experience of IT and equity markets, using the correct hardware with the necessary backup and disaster recovery procedures etc. in place. This means appropriately staffed at the beginning and middle and end. Not just at the beginning. Anecdotal evidence from regional markets suggests that insufficient investment in human resources adds to costs, which brings me to the next point.
10. MIT’s rates for maintenance and upgrades are high. Had Africa’s regulators been cooperating for the past 15 years (e.g. ASEA), there would have been ample scope for the establishment of a pan-African network of systems with steep negotiated discounts, cross subsidised by Africa’s exchanges, based on critical mass, and a dash of soft funding from something like the African Investment Climate Facility. Most MIT systems used regionally are not used to full capacity due to the high costs.
11. And lastly, there is a fundamental conflict between the operations of the CDS and the manual share registrar services. In the absence of an overall agreement on the ultimate structure of the market one that is purely CDS based – conflicts will always ensure that the investor is stuck in the middle. Usually a CDS organisation is set up in which all of the market players, including banks and share transfer secretaries, exchange their interests in the businesses that they have or inject capital for an equity stake in the CDS. This aims to ensure that the overall interests of the capital markets are met. Compromises are made by each and every player for the greater good. Every player then knows that they are set to benefit from a monopoly! This co-operation is not happening in African markets. Someone should say no, and stop! Why bother if an ultimate goal cannot be defined and pursued successfully?

The inefficient application of some good ideas in some of Africa’s markets shows that no-one is regulating the regulators: the market should regulate the regulators. But in Africa it doesn’t work this way. Awareness of these issues is low amongst all players and for those that know negative public confrontation is not the way. Especially in smaller markets where established commercial relationships can be upset by any form of confrontation.

In many cases listed companies may not be aware of the risks associated with their share registrar and settlement systems. Where they are aware of the risks, I believe risk containment is handled by way of them handling their share registrars themselves. But this does not avoid bigger structural issues.

So what are a few practical pointers for Zimbabwe if the CDS system is to be effective:-

• Each investor should have ONE CDS account on which all share registrations should be recorded.
• From day one online access to the CDS account by investors should be provided. Zimbabwe has over 1million internet users. Many of them should be investors. See my blog about this.
• Qualified update of online contact details by investors should be provided. The management of contact details is one of the biggest practical problems for listed companies and investors alike.
• Service level standards for intermediaries brokers etc. should be implemented.
• Full transparency on what the actual and future costs (by way of example in other markets) are likely to be for each player.

If there is a funding gap then this should be filled in some other manner. The ZSE should not implement a system that is not wholly in the interests of the market on day one because there wasn’t the money. Starting with an incomplete system (one not addressing some of the core issues discussed herein) will lead to an incomplete less efficient system over time and make it more and more difficult for things to change as relationships (and vested interests) become more entrenched.

Investors and listed companies ultimately bear the cost. But there is a bigger picture, a national one: the efficiency of a central clearing and settlement system is ultimately reflected in the equity discount rate premium applied by investors when evaluating country risks. Raising capital in an inefficient market costs more. Investors, listed companies and economic development pay the price. The absence of publicly available appraisals of these systems means that the costs are hidden from view. For this, the equity discount premium is just that little bit higher. Caveat emptor as they say.

These issues are complex and time flies. I think that many markets realise that very little development has occurred in the past 15 years and something should be done ASAP. So there’s a rush into applying sub-optimal solutions. Which is why markets need 5 – 10 year strategies.

The ZSE should do its homework (or publish the homework it has done), engage all players and ensure that any system implemented has a chance of success measured by whether it meets the interests of investors and listed companies. This should be measured by asking the investors and listed companies. Receiving feedback and then address the issues raised in turn. It’s good, sustainable corporate governance.

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Despite internet growth that is three times that of the rest of the world, Africa’s regulators and listed company executives are not adopting online strategies quickly enough. Yes, there are barriers to using the internet, but these are falling fast. The frequent complaint that rural shareholders are cut off from online communications is missing the point: Many can receive data on their mobile phone, in all likelihood there is an internet café around the corner, and in any case, if someone can make their way to a stockbroker to invest in shares, then surely they can also be expected to find an internet connection.

The figures simply tell a different story

These are the messages I hear about African telecommunications and capital markets:

• Huge increase in internet connectivity coming onstream before 2010;
• Continued strong mobile growth.
• As a consequence, mobile internet in Africa is the next big thing;
• Many thousands (millions?) of investors result in high cost of engagement; and
• The absence of retail shareholder engagement is an opportunity lost.

So where does African internet usage stand in overall world statistics? According to IWS News and the World Internet Stats website, the new total for the world population is estimated at 6.768bn persons for mid-year 2009, an increase of 91.685m, or 0.4%, over twelve months.

It is estimated that by mid-2009, 24.7% of the world population, or approximately one out of every four persons, uses the internet. And the number of internet users rose at a faster rate than world population since mid-year 2008, when internet penetration was only 21.9%. Each geographic region had a different growth pattern, but Africa’s internet growth rate far exceeds that of the rest of the World by over three times over the past 10 years and looks to accelerate even further.

In African countries with stock exchanges, one in thirteen people, or 6.7%, have access to the internet. However, this is distorted by some of the larger markets, i.e. South Africa, Nigeria and Egypt, who between them account for over 50% of the target population. The country with the highest internet penetration is Mauritius with 29.6%, followed by Egypt 15.9%, Zimbabwe 12.5%, South Africa 9.4%, Kenya 8.6%, Nigeria 7.4% and Uganda 7.7%.

The SEC in the USA commissioned a study on the demographics of the USA’s investors, how technology permeates through society and how this affects regulation and company communication in the capital markets.

Those markets in Africa whose profiles fit the points above – e.g. Nigeria and Kenya should do the same and carry out the following:

• Analyse how the investment community has access to technology and how it uses technology for communications;
• Learn from the investment community what their needs are;
• Identify how the gap between investor needs and existing technology and future technology can be bridged at the lowest cost and greatest efficiency;
• Pursue holistic solutions to market needs;
• Use the private sector to implement these solutions. The private sector has the skills and resources and innovation to apply appropriate solutions at the lowest cost. This will be the greatest challenge.
• Constantly monitor developments thereafter.

Getting regulators involved

And the message to Africa’s regulators is: You have the tools, you have the technologies, and you also now have critical mass. Get the information, assess what you have, then work out how to bring it all together to work in a manner that it specific and relevant to your market. Why?

• To strengthen the reputations of listed companies, regulators and the investment climate as a whole;
• To lower IR communications costs;
• To reach investors in new and existing markets more efficiently;
• To improve investor understanding of listed companies’ potential;
• Facilitate more accurate valuation of listed securities; and,
• Contribute to a fair and vibrant capital market.

Some ideas on how to gather information:

• Set up a national investor information appraisal to get buy in from a broad range of stakeholders. Regulators drive it, politicians endorse it, the private sector facilitates it. Investors participate in it and everyone sees it. It’s in the national interests.
• Set up an interactive website and solicit feedback at every opportunity through all information disseminated through the website and beyond.
• Engage the cell phone companies to explore whether their subscribers own shares either directly or indirectly or are able to take part in a simple cell based questionnaire – offer airtime for a prize to those that do.
• Require every share transfer form to be accompanied by a questionnaire for a fixed period of, say, six months.

As to what to ask, here are a few pointers:-

• Do they own shares directly or indirectly?
• Average income?
• What percent of shareowners use or can access the internet?
• Is access at home or at work?
• What percent have access to mobile phone?
• How often do they trade shares?
• What information would they desire from listed companies?
• Are they happy with the amount of information disseminated by listed companies?
• Are the regulators doing their job?

The information gleaned from such a broad study would provide a useful insight into what people think of investment and how their needs could be met. All it needs is some forward thinkers.

Sources: IWS News & African Is Cool & World Internet Stats

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