African Investor Relations

The traditional model for the establishment of a stock exchange in Africa for smaller markets from scratch is to beef up the finances of a single private sector broker with development finance. Give them a fixed term monopoly in return for undertakings to carry out market development and shareholder education initiatives. It’s a quid pro quo.

This business relationship would also restrict the operations of the broker to that of trading in equities and directly related activities, say trading in T bills or bonds to ensure that the party was solely focused on developing the market.  Furthermore, the broker’s role would also to be to assist putting in place the regulatory framework.

Do I know what I am talking about? Yes, actually. I did this for the Malawi Stock Exchange, with the wise guidance of people that know African capital markets better than anyone: Mark Tunmer and Bill Picken.  I was the first CEO and Secretary of the Malawi Stock Exchange. The model worked well and should have been used in more start up markets.

There are no less than 7 brokers in Rwanda. There isn’t (or does not appear to be) the critical mass of prospective listings to enable these people to make a living from commissions. There isn’t the critical mass of corporate advisory work to enable these people to make a living out of fees. They are not there for free. So what is the motivation?

Rwanda has allowed too many brokers,  which dilutes their overall commitment to the market. it dilutes the resources available to investors and infrastructure.

I assume that the submission of business plans in licencing applications was done – so where is the critical mass of transactions that’s going to enable the Rwanda Stock Exchange to flourish? Membership to the trading platform on the Rwanda Stock Exchange should be restricted by some means, say capitalisation or undertakings to assist the Government with shareholder education initiatives.

As with most markets its up to Government to provide the supply of equities – this is what was responsible for the growth of the Malawi Stock Exchange and many others including Kenya – and with this comes a big responsibility to educate shareholders which most markets have failed to do. Especially Kenya. On the private sector front, the east African cross listings appear to have heralded a new era of economic and investment unity. In truth, the structure of the cross listings and the manner in which equities are traded is so inefficient and costly as to render the initiative meaningless. I challenge you to get any statistics on the value of shares that trade cross border.

The prospect of cross listing of East African equities on the Rwandan Stock Exchange is a political one and not a private sector one, for those companies that are considering it. For the same reasons I mention above, cross listings are not going to support the myriad of brokers in commissions and large bonuses. Why the depositary receipt structure was not adopted I don’t know.

So I don’t get it. But perhaps I am not in the loop on these things.  What is interesting though is Rwanda’s commitment to be a “cyber land-locked island” and have a computer on every desk. This is an ideal opportunity to permit electronic communications for listed companies and implement a comprehensive shareholder education programme. And make it available to Kenyans and Ugandans and Tanzanians. They need it.

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The duties of Directors will be set out in law when the new Kenyan Companies Bill is adopted into law (not anytime soon). In the interim, Kenyan companies are in no-man’s land with respect to how they are to communicate with shareholders. Kenyan directors are not acting in the interests of shareholders, they are not promoting the success of the company and they are not maintaining a high reputation for business conduct as a result.

Here is some text THAT WILL BE PASSED INTO LAW in the future. It states pretty clearly what directors should do. I further consider the implications of not implementing progressive shareholder communications practices in light of this legislation by way of a few questions:-

Duty to promote the success of the company

(1)        A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—

If Directors do not spend say US$10,000 a year in ensuring that their shareholder proxy materials are widely available to shareholders, is this acting in good faith? If money is an issue how does the Board determine what is a reasonable amount? Since the dropping of the requirement to distribute hard copy annual reports is it reasonable for listed companies NOT to apply any of the savings (many hundreds of thousands of US$) to alternative means of communicating with shareholders?

(a)        the likely consequences of any decision in the long term,

If for the sake of a few dollars thousands of retail shareholders (and possibly institutional investors) are alienated in their right to receive shareholder information, will this have positive or negative consequences for the company in the long term? The consequences in the short term are that shareholders are demanding their “book”  (annual report) direct from the offices of the listed companies. Disturbing management. How does a listed company “guess” how many annual reports to print? Should directors consider the commercial benefits of communicating with shareholders progressively as a means of obtaining some return on their investment?

(b)        the interests of the company’s employees,

Is it in the interests of employees to have all of the information available to investors in order that investors make educated investment decisions available to them? If employees have the same access to the information that shareholders do will this instill a sense of belonging and motivation?

(c)        the need to foster the company’s business relationships with suppliers, customers and others,

Does the manner in which a company treat its shareholders and investment community impact its overall reputation in the market?

(d)       the impact of the company’s operations on the community and the environment,

(e)        the desirability of the company maintaining a reputation for high standards of business conduct,

Could the absence of good shareholder communications affect a company’s reputation for high standards of business conduct?

(f)        the need to act fairly as between members of the company.

If the information needs of the institutional investors are considered over those of retail in shareholder communication practices could this be perceived to be or actually be treating members of the company unequally?

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Everyday you come from work tired, grab a beer and sit in front of the TV. The you grab another beer and another. This goes on for 20 years. It’s what you do. You grab a beer. You’ve always done it. Everyone knows you grab a beer including your wife and kids so what’s the problem?

The problem is that it’s not right. You should be looking at the garden, playing with the kids, riding your bike, playing squash or taking the dog for a walk. At the end of 20 years you are a fat, lazy beer drinking man with health problems and a dysfunctional family. But what you do everyday seems normal.

My point is it’s not the right thing to do.

The same applies to the practice of releasing earnings during trading hours, a common practice in African markets. It happens, year after year but its not the right thing to do.

Here are some insights:-

• Analyst presentations are held during stock exchange trading hours. So what if the stock exchange doesn’t care and the market is illiquid, its wrong. Companies have a moral duty to ensure that information is disseminated equally to the market. There’s really only one time to have a presentation and that’s Friday afternoon. You’ve got the whole weekend for the media and press and brokers to disseminate the information. They need a lot of time because of the inefficiency of the regulators and companies themselves.
• The content of what is discussed in analyst presentations is strategic and more often than not, far too much information is given. The invitation from the CEO presenting to speak to any member of the management team about anything is wrong, unless they have been briefed on what can, and cannot be said. And this does not happen.  There should be a precis of what was said disseminated through the corporate website or brokers asap after the event. It is fascinating to hear what slips out in the analyst presentation, specific strategies plans, market data, but read the earnings announcement, and the bland rhetorical cliches are the only thing mentioned.

There are so many responses to why these contraventions of good corporate governance practice don’t matter (the market is illiquid, it doesn’t matter anyway…) but the practical difference between doing it, and not doing it, and doing it correctly, is so miniscule that why not just do the right thing? That’s what the stock exchange and corporate governance codes say, and there’s a reason for them to say that.

If you are to release earnings during trading hours publish the event through a conference call played live through your website – they brokers on the trading floor can hear. Still not practical, but there’s always more than one way of skinning a cat.

Just like the beer drinker who gets into bad habits, the long term implications of bad shareholder communications are unseen. Fat lazy companies that don’t look after themselves and therefore their shareholders.

It’s about doing it right. Insurance.

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Zimbabwe should have launched its new corporate governance code by now, but there were months of silence that could only mean bad news.  When Mervyn King launched the initiative no mention was made of finances but now it’s all about the money. And there’s a lot of if needed.

A brief look at the financing requirements in the attached Powerpoint presentation leaves one asking more questions about what is actually involved in spending these sums of money. Here’s a few ideas that should be considered in the way forward:-

- Zimbabwe’s private sector is tired. And busy. How can a corporate governance code for the nation be finalised when a corporate governance code for the country is in shambles? This undermines the ability for a private sector sponsor to obtain a long term return from their involvement in the formulation of a new Governance code

- Assuming the above is resolved (big ask), there is ample precedent in this sort of thing, the IODZ needs to inject some fresh ideas and get support from international parties to spearhead the initiative – high profile people, international people to assist with maintaining momentum and providing guidance as to what’s important and what’s not. The Institute of Directors in South Africa seems like an idea candidate – not to impose the usual South African arrogance associated with South African businessmen in Africa, but to provide hands on practical advice and guidance to ensure that when the process starts it finishes

- The use of technology to solicit feedback from all the stakeholders e.g. an interactive website, use of SMS etc. and the radio should be used to the maximum degree specifically to identify the emotional issues that the people of Zimbabwe want addresses – the rest is technical

- There are experts that are able to guess what the key issues are going to be – we know that 85% of the code that we finally adopt will mirror international practices – we do not need to re-invent the wheel – so what are the Zimbabwe specific aspects that touch on core governance principles? In South Africa it was BEE, in Zimbabwe its probably the relationship between the private sector and Government that is the key part and the combined representation of the private sector in the economy that is also a key part.

- There is probably a real and perceived risk that if an initiative gets off the ground Government’s involvement might be detrimental to the process. There needs to be clear guidelines on how Government is to be involved, engaged and reported to during the process

A critical part of saving costs will be to use an interactive website and outreach initiative to solicit feedback. We are prepared to guide and advise the IOD on how best to achieve this for free so long as there is certainty in the process and therein lies the rub.

In the short term I see no progress on this front but really wish to support the IODZ because the new corporate governance code needs to address the role of technology in shareholder communication if Zimbabwe is to be part of the “global investment village”. I hate that word.

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(l) ASEA Exeo MEETING: (sic)

In a memo dated 5 February 2009, captioned “Re ASEA Exco Meeting” the following people were proposed as delegates to attend the ASEA Exco Meeting scheduled to take place in Cairo, Egypt on 23-24 March 2009: Prof Ndi Okereke Onyuike, Mr. Musa Elakama; Mrs. Yinka Idowu and Mr. Aluko Oyebode & Co. Farooq Oreagba. The following endorsements were made on the memo as representing expenses for the trip:

DG/CEO – R/Ticket $10,500

- Estacode $10.000

- Warm clothing – $5,000

ADG – R/Ticket $10,500

- Estacode $8,000

- Warm clothing – $3,000

Rate of conversion used was N155 to $1. Total expenditure for this trip was N11, 687,000.00 (Eleven Million Six Hundred and Eighty Seven Thousand Naira).

The sum for the return ticket for the delegates appears to be high especially in view of the fact that it was in respect of a trip to Cairo, in view of this,further investigation will focus on the following :-

(I.) Requesting for evidence of attendance of this meeting – (since ASEA has achieved little over the period of these trips it is likely that the persons aforementioned attended)

(II.) Interviewing the officer in charge of NSE’s protocol/travels at the

said time (does this really matter?); and

(III.) Conducting a general survey to determine the rate of air tickets to

Cairo, Egypt for the period of this trip (A general survey?. A first year high school student could point out that the bill is a tad overstated).

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Here is an update commentary on the Zimbabwe Government Gazette relating to the tax authorities provisional general ruling on conversion of closing balances for tax purposes published by the Commissioner General of Zimra. It gives an indication as to how Zimra will exercise their discretion in “approving rates of exchange applied in converting the 2008 closing balances that were expressed in Zimbabwean dollars to US$ for taxation purposes”.

1.    Government Gazette 1 October 2010

This Gazette contained, in General Notice 274 of 2010, a “provisional general ruling on conversion of closing balances for tax purposes” published by the Commissioner General of Zimra. It gives an indication as to how Zimra will exercise their discretion in “approving rates of exchange applied in converting the 2008 closing balances that were expressed in Zimbabwean dollars to US$ for taxation purposes”. It states, inter alia:

1.1 that assets which were acquired or constructed using Z$, shall be reflected in an amount that “is approximately equivalent to the replacement value less notional wear and tear claimable to 31^st December 2008”; and

1.2 that trading stock acquired in Z$ shall be reflected at a figure in US$ that is “approximately equivalent to the replacement value”; and

1.3 that an assessed loss shall be converted at a rate which will “closely approximate the loss in foreign currency had the financial statements to which the losses is related … been prepared in foreign currency”.

Those affected by this notice are urged to study it in more detail.

2.    Government Gazette 22 October 2010

Two bills were published in this Gazette, namely:

2.1.       The Deposit Protection Corporation Bill – the Banking Act already provides for the establishment of the Deposit Protection Fund, to which financial institutions must contribute and out of which compensation is paid to people who have deposited money with failed institutions. At present the Fund is administered by a Board of Trustees. The Bill would replace the Board of Trustees with a new institution called the Deposit Protection Corporation, and goes on to deal with a variety of matters including the payment of contributions, the payment and calculation of compensation, and so on; and

2.2          The General Laws Amendment Bill – this Bill, if passed into law, would make a number of minor changes to a variety of statutes. Most of the proposed amendments are insignificant. That said, an amendment is proposed to the Copyright and Neighboring Rights Act which would make “official texts of enactments” [whatever that may mean], “official records of judicial proceedings and decisions”, matters published in the Government Gazette and “entries in, and documents that form part of any register which is kept in terms of an enactment and is open to public inspection”, all “works eligible for copyright” in terms of Section 10 of that Act.

One can only assume that this is some kind of money making venture on the part of Government, seeking to prevent publication of these items without the acquisition of a licence. The trouble is that Government is notoriously lax when it comes to carrying out its own publication duties. It has not, for example, got around to publishing its own index to legislation for many years now.

Thanks to Peter Lloyd of GGG for this post.

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Your are sitting in your office in some country in Africa wondering what the future is about. You are stuck in the same job doing the same thing. If you want a serious pick me up and some inspiration sign up to Seth’s Blog. He’s a global icon and an inspiring business blogger and visionary in the new digital age. Why this is relevant is that Africa is changing and if you have an idea to do with the Internet, then Seth would say go out and do it.

You MUST sign up to this blog.

When I am pitching online communications to listed companies a common question is what about those poor investors without computers? Well the answer is in Seth’s latest blog (the one you should sign up to):-

When a popular rock group comes to town, some of their fans won’t get great tickets. Not enough room in the front row. Now they’re annoyed. 2% of them are angry enough to speak up or badmouth or write an angry letter.

When Disney changes a policy and offers a great new feature or benefit to the most dedicated fans, 2% of them won’t be able to use it… timing or transport or resources or whatever. They’re angry and they let the brand know it.

Do the math. Every time Apple delights 10,000 people, they hear from 200 angry customers, people who don’t like the change or the opportunity or the risk it represents.

If you have fans or followers or customers, no matter what you do, you’ll annoy or disappoint two percent of them. And you’ll probably hear a lot more from the unhappy 2% than from the delighted 98.

It seems as though there are only two ways to deal with this: Stop innovating, just stagnate. Or go ahead and delight the vast majority.

Sure, you can try to minimize the cost of change, and you might even get the number to 1%. But if you try to delight everyone, all the time, you’ll just make yourself crazy. Or become boring.

We are going ahead and we are delighting the vast majority.

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Have a look at the SEC Forensic Report prepared by KPMG and released through my favourite Nigerian portal proshareng.com. If there is ever a wake up call for investors in African markets to demand the same levels of transparency from African stock exchanges and regulators as they demand from listed companies, then this is it.

Nigerians are perceived to be corrupt generally and this report does nothing to reverse this perception. Where were the mechanisms / “checks and balances” to discover this level of excess and abuse and corruption early?

The core issue is communication. If an organisation is not communicating, and they have an obligation to communicate then either they have something to hide or they have something to hide.

I believe that in any African market the absence of communication of “what’s right” could and should be perceived to be an indication that something is not right. It does not cost a lot to communicate. This applies to listed companies as well as stock exchanges.

Do investors in Nigeria take this into account when investing in listed companies, when considering the regulatory environment? I would love to know. There are numerous African stock exchanges that have not reported to their stakeholders for a number of years, what they are reporting is insufficient. What they are achieving for the “greater good” is not visible.

How are we to interpret this? What is their excuse? Unfortunately most of the peripheral stock exchanges are quasi-government organisations, their staff quasi-civil servants because they are not self funding. And they are not self funding because they are quasi-government organisations. It’s a vicious circle. You need private sector innovation not politicians running capital markets, otherwise this is what happens.

There is a serious need for entrenched communication obligations, in law. This flies against the “comply or explain” doctrine that is espoused by corporate governance practitioners down the south of Africa. But this is Africa and we dance to our own beat – a beat that’s doesn’t want to make you get up and dance after this KPMG report.

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The current 2010 “bill tracker” (a simple PDF file) of the Parliament of Kenya makes no mention of the Companies Bill, 2008, the piece of legislation that formalises electronic shareholder communications in Kenya. This means that the legislation is not on the agenda, and in the absence of the issuance of guidance from the Nairobi Stock Exchange, on electronic shareholder communications, the rights of shareholders are being compromised.

No-one apparently cares at the moment because no-one is giving the issue any thought. The parties at the most risk are the listed companies because at some point in the future a grumpy shareholder or two may not receive their proxy material and they will incur financial loss.

Without being a shareholder in every company it’s difficult to tell what measures listed companies are taking to protect themselves. Probably none. Kenyan directors’ awareness of these issues appears to be non-existent and where there is an awareness the

The attitude of Kenyan directors is that they will comply with the minimum. That’s just not enough because currently there is no minimum. Kenya’s regulators have said that it is up to the companies themselves to set guidelines – there are no minimum standards to guide or support these companies. The majority of listed companies passing resolutions on shareholder communications are doing so without informing their retail or minority shareholders of the full implications. And they have the casting vote.

There are also corporate governance codes to consider, best practices and the intention of the new act. I am not aware of any body that is engaging Kenyan companies on the implications of the Bill. The IOD Kenya needs something to do…..this is it.

I am not privy to whether any professional shareholders are engaging the companies in which they have invested about the efficient receipt of shareholder communications. I can tell you what’s happening though: listed companies are looking after their bigger shareholders by sending them all material directly probably in hard copy. All shareholders have the same rights to this and shareholders should be treated equally. In the absence of a disciplined online shareholder communications practice can listed companies treat one set of shareholders differently to another? They obviously can, but its not right unless these initiatives are carried out within an overall corporate governance framework that is progressive and disciplined.

I think it’s just a matter of time before there’s a dispute.

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Here is why you should consider your investor relations website as a key communications tool when carrying out a capital raise or rights offer:-

Rights offer documents are typically presented as legal documents, not as holistic marketing documents (dare I say that advisors purposely keep the text as short as possible in these documents). Marketing your investment story should involve providing sufficient narrative and professional presentation of your corporate identity and brand. You should target both retail and professional investors, local and foreign. They should be able to immediately visit your website to gain a complementary or a greater understanding of your company, its brands and other information. Each category of shareholder participating in your share structure adds something different to your share price and a broad mix of shareholders is generally thought of as ideal.

It’s important to be able to advertise your rights offer to a dedicated audience. Your shareholder base is one audience, but with inefficient postal services, nominee accounts hiding your true shareholders, you will not achieve truly effective outreach. Efforts to identify other audiences can complement a capital raise and this is where the value of identifying visitors to your website can be helpful. The efforts of a listed company to communicate with their shareholders are therefore two-fold:-

• BOTTOM UP – your company sends information to your shareholders in your shareholder list at a particular point in time. This is not fool proof because of nominees and inefficiencies in the postal system.
• TOP DOWN – any shareholder, whether they be registered in nominees or directly, or whether they are a prospective investor, can come to your website and make educated investment decisions and obtain timely and comprehensive information to support these decisions on an ongoing basis.

It’s important to be able to widely disseminate the opportunity to invest in your rights offer. The fact that an underwriter is required to underwrite the whole offer does NOT render meaningless all other marketing initiatives. Just because your adviser and sponsoring broker have a dedicated investor audience, it does not render an online investor marketing campaign meaningless. All these initiatives work together to allow your directors to say that all reasonable efforts were made to raise capital from different investor communities.

With respect to what we actually do in a capital raise, here is a brief checklist:-

• Launch an online investor relations website sufficiently early to procure online registrations from investors interested in your company – these typically will be from around the world and will contain global media houses e.g. Bloomberg, ThompsonReuters etc. parties that can add significant value to your capital raise PR.
• Ensure that a professional and comprehensively populated website enables investors and stakeholders to obtain all the information they need to make an educated investment decision. In an IPO situation the market hype generated can be a huge asset as investors are very willing to register online to receive news and information.
• Liaise with any PR / professional advisers regarding the release of narrative supporting the issue, as soon as the deal is unconditional. Disseminate this PR material online widely.
• Publish the rights offer document online as soon as its available and broadcast the availability of this document widely to our dedicated investment communities and distribution channels : twitter account, blog, Linkedin.com and Africansens.com. Hardcopy distribution of rights offer documents is ALWAYS LATE and or a mess up.
• Distribute broker research online, through your website, our distribution channels.
• Actively solicit feedback from the investment community and enable and ensure that all investor queries are dealt with immediately
• Target the top 50 or 100 shareholders in your company by obtaining email addresses and loading these contact details to an online communications module to enable communication at any time – this is really helpful in crisis communications or when you want to release significant news to the markets without paying massive fees for hardcopy publication.

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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

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There are three types of Directors in charge of investor relations:-

The first type. The ones that make it their personal mission to attend investor conferences wherever they are. Generous allowances can be claimed, air-miles are racked up and the opportunity to see the World is embraced whole heartedly. They are the main source of information. This can be costly, in monetary and management time terms.

The second type. The ones that do not wish to see investors. They are too busy. When they do see them investors ask the same things over and over again and they view this as a waste of time. This bears little cash cost but its bad corporate governance.

The third type. The clever ones. They have an interactive website, take queries through it and participate in conference calls. They service the needs of their investors, they save the company money and they have the time to do their jobs.

I have had some feedback from investors that their efforts to meet with managements of listed companies are fruitless. I am fully aware that executives are busy, but if they just applied their mind to the investor relations function for 5 minutes there can be a win-win situation.

The fact is that many professional investors do like to meet management face-to-face. So they can stare into their eyes to see if they are lying!!

From executives’ perspective there has to be middle-ground between having their daily management schedule interrupted by investors and managing their business. Conference calls are that middle ground. Executives can respond to all major investors’ queries in a single phone call. The transcript of this call and the audio can be available on your website within 12 hours. Plus the call can be listened to live through your website. These investors should not disturb executives for some time thereafter. If they do the standard response is go to the website!

A conference call to sort out investor queries enables executives to go back to doing what they do best. If not, they should grant their investors a meeting – after all they own the company don’t they?

Please note that I am referring here to executives looking after routine reporting initiatives. When there is a capital raise or a similar corporate action the need to engage investors becomes more focused and will demand a more proactive approach.

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