Another article from my favourite Nigerian portal Proshareng.com. Do Nigerians have the integrity to save their stock exchange? Probably not. Forgive me I am a cynic. It’s going to take years to get over this.
NSE – Throwing a Dice between what we have and what we seek
Tuesday, October 26, 2010, 2000hrs
“On a long enough timeline, the survival rate for everyone drops to zero”
A stock exchange is an entity which provides “trading” facilities for stock brokers and traders, to trade stocks and other securities, not internal politics.
The Nigerian Stock Exchange (NSE) has unfortunately found itself doing more of the latter lately than the former. This ought to be expected and accepted as a consequence of the way we choose to conduct business in our clime; yet it does not make it an acceptable practice.
Emmanuel Ikazoboh, the Interim Administrator of the NSE must have therefore found a unique formula to combine the two – politics and professionalism; and along the way found an uncommon way to thrive in uncertainty and ambiguity.
Not only is the indeterminate tenure as an ‘interim’ administrator without a clear time-bound date indicative of the hand he was dealt with, he literally must be counting down the days.
He has the responsibility to follow through on the agenda of SEC, his principals, not the members of the exchange – whom, it appears, was left with little choice than to intervene in the crisis that threatened to stall the recovery of the market (since the members showed they were incapable of managing conflicts internally leading to an absence of decorum and civility from the legally emasculated council).
The now maligned ‘stock exchange press corps’ should take credit for creating the conditions precedent to justify action. This was before Ikazoboh came into the picture.
Upon take over, much to the relief of everyone else except those affected, the SEC presented Emmanuel Ikhazoboh’s task as a simple one – to hold forth during a short transition period and deliver on specifics.
These specifics, according to SEC are – the conduct of a financial audit of the accounts of the NSE, the reconstitution of a council for the stock exchange pending the determination of the court case that created the lacuna, the recruitment of a substantive CEO and Executive Directors for the NSE, submission of a report/recommendations on key issues, chief of which is the demutualisation plan; and lastly, to oversee the day to day management of the affairs of the exchange during the intervening period.
Given the background to the take-over and the subsequent fallout therefrom, one can only imagine the sleepless nights he has had in steadying the ship and maintaining a modicum of decorum, in the light of intrigues which continue to play out.
In this season of change – rumours and deliberate misrepresentations from all sides often rise quickly to the top of the information matrix, givingwell-intentioned actions colours painted by ‘the insider’ sharing the information.
The notion of a market populated by ‘insiders’ conjures in the mind an economic centre dominated by an unnatural distrust of intent, motives and purpose.
Events in the last few weeks reinforced this unfortunate consequence and have conspired to distort the interventionist role being played by the ‘sole administrator’ of the NSE. Taken together, it would suggest a shifting of the goal post, albeit one focused on a rear view mirror approach – to the obvious disaffection of stakeholders uninterested in the politics of the fight for the control of the stock exchange.
Chasing Shadows at the Stock Exchange
Concerned investors, operators and analyst desire for a market that is able to recover steadily and help them build up their engagements in the market, recover losses and re-establish the NSE as the most veritable source of wealth creation in the country. To this group of people, this change period represents a unique opportunity to learn from the past and herald in the much touted market reform and development phase required.
Matters which do not promote these ideals therefore, it is reasoned, should not be made a front and centre issue, especially when the NSE can make use of the law courts (given that the perception of SEC as an independent arbitrator has now been impaired by virtue of its take-over of the NSE – it cannot indict itself).
The NSE today, functions in effect, under a sole administratorship of the SEC without a determinate date/timeline/milestone for delivering on its mandate.
These has its downsides and it is believed that the administrator may find himself bugged down with issues not concomitant with the rationale for the changes that took place, no matter how lofty and altruistic the natural intentions are/were.
Some decision downsides which have manifested in the last few days to reveal this chasm include:
1. The management of the qualified 2009 management accounts and the ‘process’ for demanding refunds for 2006 to 2008 payments to council members;
2. The handling of the Accenture managed executive recruitment where no one was found suitable after numerous media announcements of a high volume of responses, leading to a rerun of the advertisement for the job (previously globally advertised); and
3. The recent retrogressive decision on the media/press involvement in the NSE building.
We would begin our review from the latter.
NSE bars journalists from Live Coverage, Shuts Press Centre
If the natural intent of the reform promised by SEC was to enthrone a regime founded on the very best ideals of transparency and full-disclosure in a public entity for which the take-over was premised on the wider public interest, then the disclosure made by The Guardian Newspapers (not formally refuted by the NSE and reproduced here) makes quite a disturbing reading.
Recall that the media obtained validated and published exposes on sensitive council activities, SEC planned decisions, NSE actions on company – even before those affected knew about it – much to the satisfaction and approval of the SEC/NSE.
Immediately after August 6, 2010 – the SEC/NSE actively engaged business journalists to communicate developments on the Accenture recruitment drive, changes in the council, new listings and explanations of developments at the exchange, staff changes, and actually issued a press release of the schedule of council members who were alleged to have received productivity bonuses.
What has changed in a matter of days?
Well, the news cycle can be an albatross for any institution when it crosses a particular threshold. The capital market is an ultra sensitive institution that thrives on conservatism – not sensationalism. We ought to have learnt from the bankers.
Negative news will normally cause individuals to sell stocks. Bad earnings reports, poor corporate governance, economic and political uncertainty, going concern issues, bad press through scandals and unexpected, unfortunate occurrences will translate to selling pressure and a decrease in stock price/market cap. Conversely, positive news will translate into buying pressure and an increase in stock price/market cap.
It is however, if not impossible, to capitalize on news.
The impact of new information on a stock or the market itself, depends on how unexpected the news is. This is because the market is always building future expectations into prices.
Thus, it is unexpected news – and not just any news – that helps drive prices/market cap.
The AMCON and the ‘Dangote effect’ appear to be the two key drivers in a market that has crowed out retail investors.
The management of information and the consistent/sustained ‘negative’ news cycle by the regulators have proven to be a crucial factor in the market downturn.
The days before and after the take over was sustained by a cycle of negative news that suggested wrongly to the public that the finances being questioned by SEC/NSE was ‘stolen’ from investors – this was not only wrong but misleading; yet it went uncorrected.
If the SEC/NSE has now decided to arrest this development, turning the bourse into a ‘secret cult’ is not the way to go. It would only succeed in creating two tiers of groups that can access information & disseminate such to the public based on preferential access – that can only further damage the market.
It is a known fact that most credible journalists/platforms do not need to be on the floor of the market to access both ‘sensational’ news items as well as credible market facts & developments. Everyone in this day and age, can get information from and about any subject if he or she tries hard enough – so this decision must be a knee jerk reaction to a development and perhaps, was not well thought through.
The general notion that, for whatever reason and under whatever guise – the words ban and seek approval is used in an institution that represents the heartbeat of capitalism, one founded on enterprise, is wrong. It is CENSURE by another name.
If this action stands – be it the closure of the ‘press centre’ or the banning of ‘field officers’ from reporting activities from the bourse; it directly undermines the principle of market efficiency – one that thrives on the existence of an unhindered flow of information from and to the market.
The SEC/NSE needs to be reminded that – anybody whose interest can and will be affected by any information from and about the market – should have access to it.
The unfortunate elevation of the politics of the exchange over and above the principles of free access to information is not only disheartening but ill-informed; and should be reversed.
The SEC initiated this roadmap and therefore cannot change the rules of the game midway without unintended consequences – taking us back to the dark ages. They must realize that the run-down Press Centre was not created as a luxury space at the NSE but appreciate that the decision was informed by a recognition of the critical role the media (not only those favourably disposed to the administration) plays in ensuring a seamless exchange of information between participants in the market.
Is the media just a sideshow to financial markets – or do the dire pronouncements of newshounds have any real effect on share prices?
In a new study, an economist finds the tail really does wag the dog. Paul Tetlock researched how the media can affect the stock market. In a study published in the Journal of Finance, Tetlock, an associate professor of finance at the McCombs School of Business at the University of Texas – Austin, tests the daily “Abreast of the Market” column in the Wall Street Journal.
He concluded that “these findings contrast somewhat with my Wall Street Journal study, where I find that media content may predict overreactions in market prices,” Tetlock adds. “The key difference lies in the nature of the content: Some stories in the financial press convey real information, whereas other stories are written to entertain their readers.”
The NSE can take a cue from this and recognise that the media is not only relevant when you need to push an agenda. Even a compromised media (as we have) can still serve that investor education purpose, and should not be censured.
For a truly transparent regulatory environment to emerge, all shades of opinion must be allowed, leaving the market to decide who is factual, useful and relevant. That is not the job of the NSE to decide – either as a properly functioning entity or as an interim administration.
The Accenture Double Take
Enough has been said, albeit in hushed tones about this embarrassing development, that there is very little that needs be added except to bring it out into the open.
It is a burden to comment on a professional firm that has over the years represented the very best ideals of excellence in execution and thought-led engagements. This therefore leaves everyone associated with this institution concerned.
If only for professional etiquette, Accenture should issue a statement to clarify why it considered it necessary to re-publish the advertisement for the CEO and ED positions. Needless to add, the proviso requesting all those that applied before need not re-apply, suggested that they did not meet the benchmark set for the position. How is that possible given the global nature of the advertisement (local and international media including the FT), the hullabaloo about they being stopped from doing there work and the attendant media coverage of the recruitment work – something that is strange in itself.
Having basked in the euphoria created by the media – with screaming front page headlines on the huge responses received for each position – how is it possible that they could not find a candidate acceptable to SEC.
The office corridor talk now is about how some ‘eminently qualified’ refused to apply because they were not sure if the DG position was truly vacant; or the more ludicrous tale of not wanting to apply owing to the uncertainty surrounding the take-over by the SEC – cannot fly in the face of common sense and reason.
This is a first – in terms of repeat advertisement for a specific job – and undermines the logic provided by the SEC for the intervention i.e. that the NSE did not have any intentions to actively secure an independent candidate for the position.
Now this has been exposed as false and a factual untruth.
Whoever becomes the CEO of the NSE will therefore be entering the job with a burden of proof problem – to show that he or she was not ‘arranged’ for the job but actively participated in the fair process of selection. CEO Sir, which of the batches did you apply in – the first or the contrived second.
We ought to know better than this as professionals.
The NSE, Productivity Bonus and Secretary of Council
On October 05, 2010 we published a commentary about the ‘alleged’ productivity bonus collected by members of council of the exchange, in a bid to quell rumours about who took what and what took place following ‘leaked’ information about the audited accounts.
By the evening of the same day, SEC issued a press release on the subject but restricted their disclosure to 2006 to 2008, leaving out the year 2005 we had published. This raised our curiosity, not just about the cut-and-paste nature of the press release but about the unintended consequence of our action in publishing the 2005 list.
We take no joy in publishing such but it had to be done. It was a professional response to what we felt was the need for stockbrokers, members and true owners of the exchange to be aware of a practice for which they would need to collectively decide on – to support the practice or put a stop to a practice/tradition that goes back over two decades.
The reactions and counter-reactions since then from individuals whose names were published have been varied – ranging from anger to embarrassment.
Since the story broke and the SEC validated same, the management accounts of the NSE for the year ended 2009; has been pushed out in the media as a qualified accounts providing justification to the demand for the refund.
We align ourselves with the belief that this matter must be addressed and resolved once and for all. Indeed, we are piqued about expenditures in the 2008 financial year when the market lost almost half its value.
Yet, it would appear that the claim that these sums paid were ‘productivity bonuses’ is open to question – serious questions that should not be ignored. Investigations by the Proshare NI team revealed the following:
1. That the NSE relied on the minutes of meeting written by Josephine Igbinosun, secretary of the council of the NSE, in concluding that a ‘productivity bonus was paid’;
2. That this disclosure guided the forensic auditors in their work;
3. That the auditors and the sole administrator have not disclosed how this item was classified in the books – notwithstanding that the minutes of meeting has traditionally held a sacred place in the work of auditors in validating actual intent;
4. That the accounting treatment of these transaction(s) was different from what the minutes represented;
5. That the same secretary of council, Mrs Josephine Igbinosun had written to those that collected sums of money that “the amounts received were meant for industrial travels to enable members acquaint themselves with the best practices and regulations of stock exchanges in other jurisdictions”
6. That this obvious inconsistency should have been resolved before an action was deemed necessary as it places unsuspecting recipients in a difficult position against all sense of natural justice;
7. That evidence abounds that the sums paid out were not required to be retired as they bore evidence of well thought out payments to members desirous of raising their game;
8. That the October 31, 2010 deadline set for council members affected (including the caveat that they would be banned from all capital market activities if they failed to make good the payment demanded for the 3 years prior to the qualified accounts) is at best an intimidation to comply – for a matter otherwise left for the courts to adjudicate over;
9. That the attempts by the administrator to indicate that key figures are willing to pay and the display of the minutes equally amount to subtle ‘nudges’ towards affirmation of the objective belies the fact that only the 2008/09 accounts was qualified and as such defines the limitations of their ‘natural’ claim for refund which is backed by purely management thesis on performance/decline in the market;
10.That the practice of paying council members an ‘industrial travel allowance’ has been ongoing since 1982 – one that led to the recruitment of the erstwhile DG of the Stock Exchange from the NYSE (reinforcing the argument that there ought to be a resolution of whether this allowances are illegal – and if so should be considered wholesale, a matter for which the auditors over the years should provide an explanation for).
It appears clear that the unresolved issue of whether a technical error by the company secretary, Mrs. Josephine Igbinosun in issuing a letter to unsuspecting council members and her letter to this set of people raises a lot of concerns for which the NSE/SEC should seek advice.
It is clear that a misrepresentation or a more sinister cover up has occurred here, should we take it to the extreme.
It is either the Secretary of Council is wrong and therefore the cause of the problem OR she knowingly mislead council members through her letter which stated a different purpose other that that for which she knew it was purposed.
This is a more serious issue that should be resolved first, to provide the basis for action that should be taken against those involved, if the basis exists. What is the drama all about?
If as most believe, that the payments to staff and council members in 2008 when the market was tanking should not have taken place – what about the years preceding that – pre and post the market boom?
Indeed what informs the cut-off date of 2006? Why not 1982 when it started? Was it because the amounts were less? Have we left out the principle guiding the argument?
If the motivation was a reversal of a trend unsupported by CAMA and the Memart, then this age-long practice must be addressed in a manner that is wholesome and not selective.
Informed reasoning suggests that those affected by this disclosure may have to step down from the about-to-be-reconstituted council; something that again colours the intent of the current action.
This is one of those situations that lend credence to the culture of distrust that has crept into the market – between operators and regulators, amongst operators and between investors and the market.
Frankly, this is needless, the NSE has a duty to determine the best practice for the exchange at this date and if certain practices have been ongoing for so long; it is imperative that the NSE/SEC be clear on how it addresses this to avoid playing into the hands of fifth columnist.
The NSE must review its handling of affairs and its rear view mirror approach to champion a new SRO regime for the NSE.
Can we get back to the business of exiting this interim business and start the proper process of applying rules, rather than making them up as we go along
