African Investor Relations

An article in the Zimbabwe press today (01 June 2011) announces Board changes to the ZSE listed Afre Corporation. Afre is significantly financially exposed and the problem appears to be related to bad corporate governance in related party transactions.  This is what the Afre 2008 annual report said about their commitment to corporate governance:-

“The group is committee to the principles of good corporate governance based on the King II report. The Directors recognise the need to conduct business of the Group with integrity and in accordance with generally accepted corporate practices in order to safeguard stakeholder interests”.

This is  part of the wording relating to the announcement of the corporate governance restructure (director changes were also announced):-

As part of the Board’s undertaking to ensure that corporate governance matters relating to the Group are reviewed and enhanced as necessary, the Board has set up a Related Party Transactions Committee consisting of independent non-executive directors…….This initiative is part of various measures taken by the Board to uphold shareholder and policy interests in all of the Group’s related business activities. The Board acknowledges its appreciation to all stakeholder for the support received to date.

I am a strong proponent of the IODSA’s online corporate governance appraisal tool for listed companies. This tool enables directors to check the substance and form of their corporate governance conformance to the King III Code on Corporate Governance in South Africa. The programme can be used by companies outside of SA as an immediate checklist and what is and what is not happening and provide a basis for directors to decide what they should do with regard to their corporate governance. The ZSE should make it mandatory for all listed companies to complete this and negotiate a bulk discount with the IODSA. But the ZSE has its own isssues at the moment…..so its up to listed company directors to decide……

In the post-dollarisation Zimbabwe economy listed company directors should be thinking seriously about providing substance to support the cliche commitments to corporate governance in their annual reports. Give shareholders facts. The wording in annual reports to describe corporate governance activities is passive, non-committal and vague. With so many Zimbabwe companies being in such a flimsy state financially don’t be surprised to hear of more instances where corporate governance fails investors. This at a time when Zimbabwe needs foreign investors. This at a time when corporate governance is added to other uncertainties such as indigenisation legislation etc. These things are simple and low cost and all they need is a decision from the Chairman of the Board.

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“The web has the potential to bring millions more people into the capital markets as productive and engaged participants, but only if companies are there to welcome them.”

Dominic Jones is the founder of IRWebReport.com and President of IR Web Reporting International Inc. He has more than 20 years of experience in journalism, investor education and online investor relations communications. He’s a World leader in IR and is spreading the message above to First World markets.

In Africa we have yet to get past First Base, which is a basic acknowledgement that the Internet can change the manner in which companies and regulators can communicate with and educate capital markets participants. The level of awareness amongst regulators, investors and listed company investors is very low. So it is low too with corporate governance practitioners, with the King III Code on Corporate Governance mentioning wishy washy

Everyone’s so excited about “Africa” being the last emerging market frontier – we heard this back in 1996 and again and again in between. Nothing has changed in the manner in which “African” companies are communicating with the rest of the World.

There are a few companies in Africa that are trying to step up to First Base. They are the pioneers in responsible online reporting by communicating directly with stakeholders online. The benefits? Corporate reputation and commercial feedback oh and yes, almost forgot, a more informed investor and potential investor base than their peers. Oh, also a good night’s sleep for executives.

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Do executives of listed companies actually care about what they say to whom and when? Standards of regulation and oversight in African markets are lower than in international markets so why should listed companies in Africa care?

If they want to build a reputation with foreign investors they should. Show that they understand and regulate the dissemination of information internally. Does your company have an insider trading policy to regulate trading in your shares and information on your shares? If not, a sample policy appears below. If you do, compare it to this. Also check what your stock exchange rules say.

If this does not apply to you then think about what the policy is trying to achieve and see if there is something that can be added that is relevant to your company.

It shall be in violation of Group Policy to trade The Group Shares based on possession of Material Non-public Information.

Application of Insider Trading Policy

The Policy applies to all Directors, Management and employees of The Group who are in possession of Material Non-public Information (as defined below). In addition, the Policy applies to any person who may have Material Non-public Information of The Group, including consultants, contractors, and family members of The Group employees. These groups of people are sometimes referred to in this Policy as “Insiders”.

Any person who possesses Material Non-public Information regarding The Group is an Insider for so long as the information is not publicly known. Any such person can be an Insider from time-to-time based on his/her possession of Material Non-public Information, and would at those times be subject to this Policy.

Definition of Material Non-public Information

Material Non-public Information is information that has not been publicly released by The Group and which is material to The Group’s business. Information is material if there is a reasonable likelihood that it would be considered important by an investor when making an investment decision about The Group. The Group’s half year financial results are one example of potentially material information. Thus, if an Insider is in possession of any such financial information at or near the end of a fiscal reporting period, and prior to public announcement, they should not trade in The Group’s Shares.

If an Insider is in any doubt as to whether they are in possession of potentially material non-public information they are obliged to contact The Chief Executive Officer, who is responsible for STOCK EXCHANGE compliance for clearance prior to trading in The Group’s Shares.

While it may be difficult under this policy to determine whether particular non-public information is material, there are various categories of information that are particularly sensitive and, as a general rule, should always be considered potentially material. Examples of such information may include:

o Financial results

o Projections of future earnings or losses

o News of a pending or proposed merger or acquisition

o News of the disposal of a subsidiary o Impending bankruptcy or financial liquidity problems

o Gain or loss of a substantial customer or supplier

o New product announcements of a significant nature

o Significant product defects or modifications

o Significant pricing changes

o Share splits

o New equity or debt offerings

o Significant litigation exposure due to actual or threatened litigation

o Major changes in senior management.

Either positive or negative information may be material.

Trading on Material Non-public Information

Insiders are prohibited from purchasing or selling shares of The Group until the third Trading Day following the public disclosure of that information, or until the information is no longer material.

Insider Trading Liability

Any Insider, who purchases or sells The Group’s Shares based on Material Non-public Information regarding The Group, will be liable for disciplinary action and summary dismissal.

Individual Responsibility

Every director, manager, and employee has the individual responsibility to comply with this Policy. The guidelines set forth in this Policy with respect to the definition of Material Non-public Information are guidelines only, and appropriate judgment should be exercised in connection with any trade in The Group’s shares. An Insider is prohibited from purchasing or selling The Group’s shares even if he or she planned to make the transaction before learning of the Material Non-public Information and even though the Insider believes he or she may suffer an economic loss or forego an anticipated profit by waiting.

Material Non-public Information Regarding Other Companies

This Policy and the guidelines described herein also apply to Material Non-public Information relating to other companies, including The Group’s customers, vendors or suppliers. All employees should treat Material Non-public Information about The Group’s customers, vendors or suppliers with the same care as is required with respect to information related directly to The Group and should not use this Material Non-public Information to trade in the shares of The Group’s business partners.

Tipping

Insiders shall not disclose, or provide “tips” regarding Material Non-public Information concerning The Group or any of its customers, vendors or suppliers to any other person (including family members). As noted above, anyone to whom such a tip is given automatically becomes an Insider.

(B) POLICY AGAINST SHORT SALES

No Director, manager or employee of The Group, and no member of the immediate family or household of any such person, shall, directly or indirectly, (including through an entity in which they are beneficially interested) sell any shares of The Group that such individual does not own (a “Short Sale”).

(C) DIRECTORS AND MANAGERS TRADING POLICY

Pre-clearance of Trades

The Group has determined that all Directors, and Managers should refrain from trading in The Group’s shares, even during the Permitted Trading Window (see below), without first complying with The Group’s “pre-clearance” process. Each Director and manager should contact the office of the Chief Executive Officer, who is responsible for STOCK EXCHANGE Compliance, prior to any purchase or sale of The Group’s shares. The Group may find it necessary, from time to time, to require compliance with the pre-clearance process from certain employees, consultants and contractors other than, and in addition to, Directors and managers. The Chief Executive Officer will refer the application for pre-clearance together with a recommendation thereon to the appropriate approving authority which is:

• in the case of managers, the Chief Executive Officer himself

• in the case of Directors, the Chairman of the Board

• in the case of the Chairman, the Board of Directors

Permitted Trading Window for Directors and Managers

Directors and managers of The Group may only purchase or sell The Group’s shares during the Permitted Trading Window (subject to pre-clearance in accordance with section IX above).

The Permitted Trading Window is the period in any fiscal reporting period commencing at the close of business on the second “Trading Day” following the date of public disclosure of the financial results for a particular fiscal half year or year and continuing until one fiscal month prior to the end of the next fiscal reporting period. A “Trading Day” is defined as a day on which the Stock Exchange is open for trading. If public disclosure occurs on a Trading Day before the market closes, then the date of disclosure shall be the first Trading Day following the public disclosure.

If public disclosure occurs after the market closes on a Trading Day, the first Trading Day shall be the day following the date of public disclosure. It should be noted, however, that even during the Permitted Trading Window, any person possessing Material Non-public Information concerning The Group may not engage in any transactions in The Group’s shares until such information has been known publicly for at least two Trading Days, whether or not The Group has recommended a suspension of trading to that person. Trading in The Group’s shares during the Permitted Trading Window should not be considered a “safe harbor” (A provision in securities law that excuses liability if the attempt to comply in good faith can be demonstrated), and all Directors, managers and other persons should use good judgment at all times. Notwithstanding the Permitted Trading Window, Directors and managers may not trade in the company’s shares at any time when The Group is trading under a cautionary announcement. The safest period for trading in The Group’s shares, assuming the absence of Material Non-public Information or a Cautionary Announcement, is probably the first thirty days of the Permitted Trading Window. The purpose behind this suggested “Self-Imposed Trading Window” period is to help establish a diligent effort to avoid any improper transaction.

Notification of trades in The Group’s shares by Directors and Managers

Directors and managers are required to notify The Chief Executive Officer of all transactions in The Group’s shares undertaken by them or on their behalf. Such notification should be received no later than 24 hours after the transaction has been effected and should disclose the following information:

• date on which the transaction was effected

• nature of the transaction

• number of shares transacted and the price at which transacted

• nature and extent of the director’s or manager’s interest in the transaction. Information on transactions by Directors in The Group’s shares will be disclosed to the STOCK EXCHANGE in accordance with the STOCK EXCHANGE Listing Requirements.

Definition of Manager

For the purposes of this policy “Manager” is defined to include all manager grade staff, secretaries of directors, and all finance department staff of grade Officer (or equivalent) and above.

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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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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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The SEC, IOD and CAC floated a centre for corporate governance in Nigeria recently and below I pose a few critical questions, which, if answered, will provide a good idea on whether the initiative is going to be a white elephant or not. I am not going to try to call Nigeria – I don’t think its possible to get a line to there actually:-

• - how is the initiative funded?
• - is the finance recurring or temporary?
• - what products is the centre offering to address the needs of listed companies in Nigeria?
• - what percent relies on sales to companies / third parties?
• - has any feedback been received from listed companies as to whether they find the initiative responsive to their needs?
• - is the initiative of the centre backed up by stock exchange or other legislation i.e. compelling the listed companies to use the services of the centre?
• - has the centre done any research on corporate governance in Nigeria?
• - has the centre secured any high level private sector sponsorship?
• - what external organisations has the centre spoken to to allow them to offer those external services to listed Nigerian companies?
• - has the centre contacted the IOD in South Africa with a view to using their online corporate governance appraisal platform . If not why not?

As usual, the source of my info on the launch is from www.Proshareng.com. The comments above are mine.

SEC, IoD, CAC float centre for corporate governance

By Stanley Opara Monday, 11 Oct 2010

The Nigeria Institute of Directors, Securities and Exchange Commission and Corporate Affairs Commission have set up the centre for corporate governance to promote good corporate governance practice in the country.A statement from the IoD Centre for Corporate Governance on Friday, said it was committed to addressing issues of corporate governance and international best practices in Nigeria.

Its activities, according to the centre, will create a positive and favourable image for Nigeria businesses in Africa and globally.The centre said it was committed to promoting reforms in the light of the ever changing economic terrain, as well as encouraging and strengthening the operational and monitoring mechanisms of regulatory institutions.

At its maiden high-level discourse, which attracted over 100 business leaders and captains of industries from key sectors of the economy, the Chairman of the governing board of the centre, Ms. Bennedikter Molokwu, urged Nigerian businesses to imbibe good corporate governance practices.She also advised them to take advantage of the centre‘s high quality training programmes, extensive research facilities and other consulting services, to assist them in building investor confidence, business integrity and sustainability.

”The centre is at the forefront of encouraging and monitoring compliance the code of corporate governance established to ensure that discipline, transparency and accountability thrive in organisations,” the statement noted.Molokwu urged Nigerians to support the centre and its activities, especially, at this time that some businesses were failing because of poor corporate governance.

She said supporting the centre was a sure way of making businesses in Nigeria responsible and responsive.

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In Kenya new legislation deems that once something is published on the website of a listed company it is deemed to have been delivered to the shareholder. Beem-me-up-scotty-Star-trek-type-thing. To listed companies this avoids the hassle of dealing with the ignorant masses of retail shareholders. The SEC in Kenya and the Nairobi Stock Exchange have endorsed this.

To every listed company though, there are those shareholders that are important. The ones that will have something to say when they ask why their shareholder proxy materials were not delivered to their door. For example, the institutional shareholders that actively monitor the creation of shareholder value. Companies that adopt the deemed-Dr Spock communications method only will alienate professional investors. So these investors will need looking after. You will have a trend developing in Kenya where the mailing list will come back from the dead and start to grow and this will create an uneven playing field, or the perception of an un-even playing field in the communication platform. The more priveleged “more important” shareholders will receive their shareholder proxy material by courier or by hand delivery or by post. The ignorant peasant shareholder will not. The rich and influential will get richer and influential and the ignorant and poor will stay like that. This will be supported by the law.

Some institutions and funds are required to vote their shares and in the USA the existence of nominees or share held in “street name” has been seen to have disenfranchised shareholder suffrage. The Dodd Frank act in the USA and other initiatives are actively trying to put the vote back into the hands of the retail shareholder. In Kenya regulators are taking it away.

In the absence of progressive initiatives to provide shareholder choice the new mailing list will grow only after a shareholder has been aggrieved i.e. they don’t receive their proxy material and then they complain and then they do receive it. You will have a situation where shareholders will attend meetings under very different circumstances but in the eyes of the law they will have been treated the same. For the listed company, the man in the middle, issues of corporate reputation will arise and the African conspiracy theory attitudes may start shareholder activism. In shareholder votes, where contentious issues need shareholders’ votes, it will be very easy for someone to stand up and accuse a listed company of purposely or negligently not distributing shareholder information. The law will be irrelevant. Perception will be relevant. Once negative shareholder emotion kicks in then a different side to corporate sustainability, or lack thereof, will be seen.

For between US$10,000 and US$30,000 a year a listed company can take and make all reasonable efforts to ensure that shareholder proxy material availability is communicated to shareholders or delivered to shareholders. This is effectively an insurance policy against the sort of shareholder actions that may arise from not communicating at all or “beeming” shareholder material via Dr Spock’s Star Trek Enterprise. Its about corporate reputation. Oh and its good corporate governance. Actually delivering shareholder proxy materials to the owners of a company is good corporate governance.

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The power of the press in influencing your community on issues pertinent to your industry can be negative. And listed companies can feel powerless. Unless they get out their cheque book and pay for content to be published in the hard copy press to counter the negative press or at least correct it.

Actively building an online community of online media enables you to distribute your message at any time as often as you want at no additional cost.

For example when a bank is accused of fraud in the hardcopy press, they may feel obliged to respond in the hardcopy press at a cost. The press then has the luxury of continuing publication of whatever material that they want without having to get out their cheque books. On the other hand the listed company and its cheque book is forever beholden to the hardcopy press. It eventually ends up where there is no communication from the listed company and people are left with their perceptions. Which are typically negative. Everyone thinks the fraud is larger than it actually is.

Having a targeted online community of online stakeholders levels the playing field for you. Being able to send out whatever information you need to respond to the market at any time, as often as you want, for no additional cost is a powerful tool especially where listed companies have a wide base of stakeholders, a politically important profile and a pan African presence.

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“Governance and leadership are the yin and the yang of successful organisations. If you have leadership without governance you risk tyranny, fraud and personal fiefdoms. If you have governance without leadership you risk atrophy, bureaucracy and indifference.”

Mark Goyder (Director of Tomorrow’s Company)

The Nigerian Stock Exchange is a good example of the absence of leadership and governance and the absence of governance and leadership. Who pays the price? The man in the street. They guy that can’t do anything about it.

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“King 2 emphasizes that the most powerful enforcement body in the corporate system is the shareholder body. Via pension funds, provident funds, insurance products and other group investments, the public makes up the largest owner of many publicly listed companies.”

(King Report)

If the public is ignorant of their rights and the role they play in maintaining checks and balances in economic competitiveness who checks the checkers? Whose responsibility is it?

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There is a culture of mistrust in Nigeria that has been entrenched over many years and the current disaster over the Nigerian Stock Exchange is a logical conclusion to the absence of transparency and integrity in the market. Here are some interesting statistics on the number of shareholders in Nigeria – or estimates of statistics of the number of shareholders in Nigeria. Its ball park stuff.

The figures exclude duplicates and are compared with the number of mobile phone users and the number of Internet users. These statistics could be wrong by 20% but my message would not change. What is my message?

My message is that the Internet as a communications tool has to be the core information and data dissemination platform for market data in Nigeria. The Nigerian Stock exchange should stop rent seeking market data make it readily available for free to the market. The Nigerian Stock Exchange should immediately come up with an enforce minimum standards of online disclosure AFTER consulting with listed companies. To me the simplest non-disclosure of information sends a strong message.

What evidence do I have that my message might, just might, have some substance?

There are probably around 10 million shareholders in Nigeria. There are 33 million + internet users and + 68 million mobile users

It does not take a rocket scientist to realise that it is highly likely that a significant proportion of shareholders are able to use modern means of communication to receive news, data and market data on listed companies. You may argue that there are already millions of internet users accessing investment data online. If they are they are not getting information from listed companies’ websites – and they should be. Listed companies should realise there is a huge community out there that if treated right could just be a really valuable resource to which to communicate to and from which they can receive feedback. The objective to grow the bottom line and improve corporate reputation. Its this last point that is especially pertinent in Nigeria at the moment because Nigerian investor relations is in a terrible shape.

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