Last month's announcement by Professor Soludo, the Central Bank governor, imposing stringent rules on the format of financial results ads has generated a lot of debate from all corners. Shortly after the announcement, Festus Odoko, the Central Bank spokesperson, went on air to clarify the regulator's position on the matter. Speaking of a 'deliberate attempt at distorting the decision taken at the last Bankers' Committee Meeting . . . taken by the bankers themselves to moderate excessive competition and propaganda in the media,' he assured stakeholders that 'this is not a decision or directive of the CBN.' Not satisfied, critics of the new policy have raised four main questions: first, about intent of the policy (can the simple change of colour tone reduce unhealthy competition in the banking sector, and, by the way, how is 'unhealthy' to be defined?); second, about the soundness of the logic (what proof is there that 'excessive advertising' is responsible for the inordinate rivalry in the sector or the de-marketing menace of anonymous text messages warning of the imminent failure of certain banks); third, the real causes of the phenomenon (is the negligence of regulators not to blame for the distrust of reported results); fourth and finally, the substance of the arguments (should the attention not be on the content of the advertized results and not on its format, so long as these are not intended to mislead, deceive or an invitation to transact in the securities of the institution). In this post, we provide a background to the new policy, cover each of the counter-arguments to the policy briefly, then we examine the opportunities the restrictions open for banks in using the web to communicate even more effectively with the investment community and finally, we show that the new rules may be just the shot-in-the-arm that the practice of investor relations has been waiting for to take off in Nigeria.
Depending on whom one is asking, the post-banking consolidation era, up until the crash of 2008, was either the golden age of banking in Nigeria or the prodigal years. Certainly, nothing quite like it had been seen before. Banking which used to be known for its dullness, suddenly assumed such bright attraction that it became impossible to open a newspaper, watch a TV program, listen to the radio or browse most Nigerian websites without coming across an advertisement, promotion or sponsorship of one of the local banks. No doubt, all this publicity was aimed at supporting the business goals of the banks which were to win mind share, grow the customer base and secure new deposits. No quarrel there. It all made perfect sense.
In a business where it is near impossible to patent products, services commoditized and staff poaching a fact-of-life, it was a no-brainer that the institution that had the most mind share would win in the contest for customers, talent and investors. The most obvious means to guarantee attention was to use every possible opportunity to push the brand of the institution. In this landscape, it was only natural that banks would use the publication of their financial results to push their attractiveness as the preferred financial institution for investors, by direct implication, and customers, by extended relevance. And here lay two less noticeable motivations.
A popular brand could charge customers a premium for its services because it was perceived to be better, more reliable and stronger. Further, a popular brand was perceived as less risky among investors, thus lowering the cost of its equity capital for new issues of stock and the returns it needed to produce for investors to remain an attractive destination of capital in future. Either way, it was good for business. There was a cold logic in the warm ambiance of brand ubiquity. Two birds were killed with one stone.
To be clear, this practice was not unique to Nigerian banks. Oando, the energy solutions group, has used strong brand elements in the announcement of its financial results in newspapers. Likewise, in India, institutions like the Punjab National Bank and Bank of Baroda have used innovative ways of pushing their brands in the announcement of financial results. Known as combination ads, these announcements use the visual elements of the brand campaign to enhance the announcement of otherwise dry financial figures.
Speaking with the press at the end of the breakfast meeting with leading bankers, Professor Soludo said:
We are moving against the banks to stop the form of propaganda in relation to their annual accounts. It is not good for the industry and the competition that is necessary to grow the economy.
We have discussed it with them today and we have agreed that there is need to moderate these excesses. Though size is important but size is not everything. Size is very important in today’s world but excessive competition in the pursuit of size can bring problems. We have pointed out to the banks the potential danger in this practice.
The CBN has passed this message to the banks and they would be meeting under the auspices of the Chartered Institute of Bankers of Nigeria (CIBN) to discuss moderating some of the excess we find today in the banking industry.
The way banks compete among themselves by way of propaganda in the media, especially in respect to the publications of their annual accounts, with pomp and ceremony that follows such publications is virtually not in a good light.
Yes, Banks and Other Financial Institutions Act (BOFIA) stipulates that banks and other financial institutions publish their audited accounts in two newspapers and the bankers’ committee agreed that banks would continue to publish the accounts as follows: the Annual Accounts should be published in two newspapers with a Half Page- Black and White advert and not more than that.
The whole mood was to tone down significantly the aspect of banks display which smacks of propaganda. It was agreed that the banking industry should tone down on that area.
In addition, the CBN governor directed that henceforth, banks were disallowed from issuing press releases to announce the release of financial results. However, banks were allowed to display all financial results on their websites in their preferred format.
Without demonstrating a necessary and sufficient causal relationship between on the one hand, adverts of financial results in colour, press releases announcing the release of financial results, and the number of newspapers these were announced in, and on the other hand, de-marketing, risks to the banking system or injury suffered by bank customers and investors from increased competition, the Central Bank and the Bankers’ Committee had delivered verdict. The act of publicity had become the chief villain in the looming threat of banks’ collapse.
Except in its reference to the aspirations of some banks to be the ‘biggest bank’, the CBN omitted to explain how this marketing claim posed a risk to the industry. In fact, the CBN under Professor Soludo has been responsible for the size-envy among Nigerian banks. Only a few years earlier, the governor had gone to great lengths to proclaim that size was an end-in-itself, and the bigger the better. It was the governor who popularized the term ‘mega-bank’ in Nigeria. Oddly, the same banks, which resisted the idea of consolidation when it was first muted, have since become its most passionate evangelists. Nigerian banks had discovered that size was the new mantra.
In fact, the CBN had added an incentive for bulking up by announcing in December 2005 that any bank that had a capital base of $1 billion would be allowed to manage at least $500 million of Nigeria’s fast growing foreign reserves. Until then, no local bank had had that privilege. The race was on. In October 2006, the CBN announced the first set of local managers for these funds. Undeniably, it was good to be big.
Only now, two years later, the CBN held a different view. Maybe, size was, after all, not a good-by-itself. Important still, no doubt, but only one of many things to consider.
What had made the CBN to change its mind? What led it to announce the new policy? According to its statement, ‘propaganda’ by banks was the main culprit in the inordinate competition among the banks. This was a classic case of inverse causality, that is, that what the CBN referred to as ‘excessive advertising’ was to blame for the heated rivalry among banks, rather than vice versa, that the competition in the sector made banks to hype the release of their financial results.
In short order, reactions came from the public, the press and agencies who handled the publicity for banks. Rather than issue a blanket ban, critics of the new policy suggested that the CBN should have named and shamed those banks whose publicized results were unambiguously incorrect, blatantly false or maliciously misleading in content, rather than attacking the format. For example in the UK, the Advertising Standards Authority (ASA) has received commendation for its transparency in the cases of infraction in financial advertising. It was unclear what specific claims in the adverts the CBN objects to and if the objections constitute unethical practice or criminal activity. Several observers have asked how the remedies proposed by the CBN governor would address business competition in the sector.
Since the announcement of financial results could not be done more than four times a year (each quarter), but adverts for their products could appear every day of the year in every format conceivable, it remained to be seen how this addressed the fundamental issue in the regulator’s target. Unless it planned to work with the Advertising Practitioners’ Council of Nigeria (APCON) and Advertisers’ Association of Nigeria (ADVAN) to impose strict controls on publicity, there would be no way to assure the effectiveness of the policy. In any case, it was unlikely that these bodies would lend their support to a policy that would have a negative effect on their business, since banks are among their biggest clients.
Although the CBN seemed to backtrack a little in a belated clarification, it could still have provided greater elaboration on the reasons behind the policy.
Rather than a focusing solely on the format of presentation, the CBN should have done three things:
Verify if the business performance claims in the ads were correct. If not, name those banks that have breached the rules and where they had done so.
Stress the distinction between marketing-focused communications and investor communications. While the two are not diametrically opposed, and in fact, do support each other, there is a need to maintain clear identities so that the audience for one does not get confused with the audience for the other.
Emphasize the need for banks to provide a better understanding of their businesses, including risks as well as returns, to investors. In the current economic environment, what investors need is more, not less, communications.
In spite of the restrictions imposed on newspaper notices, the CBN’s approval of company websites as an acceptable channel actually offers invaluable communication and investor engagement opportunities to Nigerian banks.
In developed markets, the internet is the primary source of information on companies. Companies commit ample resources to ensure that their websites are the primary source of information on the company by providing all information they make available offline on it, as a minimum, as well as keeping the site up-to-date. The contrary seems to be the case in Nigeria. Less than 15% of the websites of companies listed on the Nigerian stock Exchange have relevant investor-focused content. Despite the compelling case for the exploitation of the web to engage the investment community, Nigerian companies continue to neglect the medium.
The standard perception among companies is that the web is best suited as a marketing channel. This is indisputable. But the web can be much more. Companies can pull in a lot of benefits and deliver real value to investors by using their sites as an investor communications channel. Presently, only a handful of Nigerian companies have gone ahead to take advantage of the web’s advantages over paper-based communications for investor communications and engagement. In the following Leading Practices Guide, we show what companies need to do to transform their websites into valuable sources of information for investors.
The investor relations section of company websites can serve in so many ways. We list some below:
As a source of the market trading information, e.g., Texas Instruments.
Share history and share holding structure, e.g., Microsoft.
As Nigerian companies move their financial reporting to the web, it will naturally follow that they will extend the utility of their websites to more than just the display of financial results.
When companies do so, they will recognize the varied possibilities that their websites offer for much deeper relationships with the investment community. Even more, they will recognize the importance of situating online financial results reporting as part of wider investor relations objectives which would include:
A reduction of information asymmetry
An increase the liquidity of the stock
A reduction in the share price volatility
A reduction in the risk perception of the business, and by extension, its cost of capital.
To achieve these, companies would need to develop a responsive investor relations strategy that realistically matches their long-term objectives and feasible mid-term plans with targeted investor segments. This requires knowledgeable professionals with a strong background in investor relations.
Until now, most Nigerian companies have paid little attention to investor relations. Or rather, what often passed for investor relations was simply financial promotion, whereas they are not the same. During the years of the stock market boom, it was easy for stock touting to pass off as investor relations for the reason that it was never put to the critical test of verifying its value beyond hyping a company’s share price. Without much difficulty, any reporter with a column, stock-broker with a database of contacts, or PR agency could convince companies that they could present the company in the best light to investors.
At the time, it was not uncommon to read newspaper articles with titles like ‘XYZ dazzles investors with IPO plans’, ‘ABC tantalizes stock market with investment plans’, ‘Investors swoop on 123 Plc shares in private placement’ and other sensational announcements, which were not driven by any strategy whatsoever to enhance investor understanding of the business or improve disclosure but rather by an intention to achieve short-term spikes in the share price.
Importantly, they all woefully fell short of helping companies establish sustaining relationships with investors beyond collecting their funds for a stock offering or boosting the stock price before a transaction.
The following letter from the Canadian Investor Relations Institute to the Ontario Securities Commission stresses the need to make the distinction between investor relations, as a professional practice, and financial promotion.
It used to be that the company with the strongest brand was assured of customer loyalty and investor attention. This is no longer so. The efficacy of the brand has retrenched to its traditional space of communicating the value expectations to customers. It is no longer a top priority to investors.
The current economic uncertainty has thrown every thing open to question. Now investors are asking questions that they never did before. They want to know how the bank in question is managing its bad loan book, how big is the bad loan book, how much exposure it has to the stock market margin loans, and so on. In the past, banks declared a rise in revenues of 250% and they were applauded. No questions asked. Now, investors want to know just how they did it. Companies need to review what they communicate, and how.
While branding remains unchallenged as the tested and trusted way to gain visibility, it is no longer enough to spend huge sums on a campaign and then relax, assured that investors would accept brand ubiquity with business success. No more. Visibility can only get a company so far.
The new CBN rule offers an historic opportunity to banks to get it right this time. At no other time has there been a greater need for pro-active communications and engagement initiatives. Banks, like all other companies on the Nigerian Stock Exchange, need to do a critical reassessment of the methods they have used in the past to reach investors and the content of those communications. They had better do so quickly and come up with the right answer. That answer is investor relations.
One cannot help noticing how Niyi Meka Olowola, Oando's Head of Corp Comms, is nodding in approval. Maybe Goldman Sachs can learn lessons.04:47:49 PM January 25, 2012from HootSuite
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