The first thing a company should do when the last thing it needs happens: Suggestions on how TransCorp should respond to the recent arrest on fraud related charges of Tom Iseghohi, its CEO
Perhaps no other company in Nigerian history has had a more chequered history than Transnational Corporation. Since its formation in 2005, the company has attracted a lot of controversial attention. At its launch its sponsors announced that the vision of TransCorp was 'to create a globally competitive conglomerate, which will supply world class products and services to local and global markets'. Fashioned on the chaebols of South Korea, TransCorp's mission was 'to serve the global markets with premier products and services from world class facilities based in Nigeria and managed by Nigerians'. To the disappointment of its shareholders, four years after the declaration of these lofty aspirations, the company is yet to live up to them.
When Tom Iseghohi was appointed as the company's third CEO in 2007, he was introduced as 'an experienced executive with more than 18 years of corporate business experience with leadership roles in finance, strategy, purchasing, sales, marketing and operations' gained from leading corporations in the United States including Pepsi-Cola Company, American Express and Ford Motor Company. Shortly after his appointment, the new CEO announced the signing of a technical agreement between the company and two global leaders in the telecommunications space, Cisco and Dimension Data, to rehabilitate the SAT-3 cable owned by NITEL, TransCorp's telecoms subsidiary. According to Iseghohi, the partnership would generate revenues of over N35 billion over five years. After months of uncertainty about the fate of NITEL, in which TransCorp acquired a 51% stake for $700m in 2006, it appeared that things were falling finally in place. Investors in its 2006 initial public offering cheered. Unfortunately, those were false hopes. From its November 2006 listing price of N7.50, the company's shares now trade at less than N0.60.
The arrest of the CEO on charges of fraud has brought the company to the limelight for all the wrong reasons once again. Like all companies faced with a crisis, TransCorp needs to fill the vacuum with credible and timely information. For a company that has a reputation for opacity, this may be crucial point where disclosure and engagement can mean the difference between life-and-death, not in the sense of its sustenance as a going concern in the short-term, but as an entity that can easily tap capital markets for its funding needs and long-term growth. Without that level of confidence, any company is doomed to a slow but sure death.
When the Securities and Exchange Commission ordered the board of TransCorp to hold a shareholder meeting, investors in the company breathed a sigh of relief at the opportunity it would present for them to hear from the company about its performance. The meeting which was fixed for February 25, 2009 would be its first shareholder meeting since it went public in 2006. In anticipation of the meeting, some shareholders vented their frustration at the veil over the company’s operations.
According to Olufemi Timothy, president of the Renaissance Shareholders Association of Nigeria:
This communication gap that has existed between the management of Transcorp and shareholders in the past two years following its listing, has led to panic sales of shares due to loss of confidence. There has been no form of transparency and good corporate governance in the company. In fact, we are totally in the dark about what has been happening in the company. Now, they want us to pass a resolution that will allow them to do other businesses without even explaining what they had done previously. The company should adopt a better strategy and stop putting us in the dark.
John Eze, another shareholder, stated that:
Whether they made profits, or declared losses is inconsequential here, we just want to be carried along, and a lot of companies still hold annual meetings, even when they do not perform too well. It is just about being accountable to your shareholders.
At the end of the meeting, the company issued a statement on the challenges it had faced since its inception, and in particular, since its acquisition of the telecoms company.
The fanfare and explicit political support the company received at is launch thrust it into the arena. Almost immediately, the press began to scrutinize what was proclaimed as Nigeria’s own megacorporation.
In July 2006, Segun Adeniyi of ThisDay, in his widely read back page space, The Verdict according to Segun Adeniyi, wrote ‘The Transcorp Question‘ in which he raised fundamental questions about the transparency of the company, its prospects and valuation:
We have no details of business plans or strategies beyond the moves to buy Federal Government assets on the cheap. . . Transcorp had no product it either produced or would sell yet the value of the N1 per share which the shareholders in July 2005 allotted to themselves had by six months later in February this year, attracted a value of N6.00 each. And from the information at my disposal, the [Private Placement] that targeted N6 billion was over subscribed such that it was able to attract N17 billion. What this means is that without producing or selling anything, the money ‘invested’ by the shareholders (and you ask, into what?) had yielded 500 percent profit. . . I have it on good authority that by the next IPO which is only a few weeks away, the shares of this Aso Rock company will sell for N10 each!
A few months later, in December 2006, barely a week after its shares were listed on the Nigerian Stock Exchange, Ijeoma Nwogwugwu, the influential former Group Business Editor of ThisDay newspaper wrote ‘TransCorp: A Questionable IPO’, a searing critique of the company and its business model. Essentially, her main arguments were:
The nebulous ownership structure of the company especially the holding of its sponsors and indirect holdings of political backers
Controversial privileges accorded the company especially during the sale of lucrative government assets in the privatization process
Blatant disregard for laid down procedure in the listing of its shares, governance, and operations history
Uncompetitive business and revenue model
Unsustainable investor interest.
Although the company could have issued an immediate rebuttal of each point raised by Ms Nwogwugwu with evidence and counter-proofs, a single one-off missive would still have been inadequate to restore confidence in its future prospects. The point is that if someone as informed as the former group business editor of Nigeria’s leading newspaper held and expressed such views, the onus of credibility would weigh heavily on the company in its post-IPO life.
Shortly after it won the bid for NITEL, Femi Adeagbo, a respected commentator on telecoms issues, wrote ‘TransCorp Acquisition of NITEL – Issues of Cash’ questioning the company’s ability to fund the turn-around of the cash-strapped company which had been sheltered from competition for so long and had seen its market share drop at a dizzying rate since the entry of GSM service providers into its once guarded turf.
The only way that the company could have comprehensively addressed these issues was by a committed and on-going communications program that matched achievable objectives with a responsible disclosure program. But it failed to do so.
Our conjecture is that there was not a deliberate or devious attempt to deny the public of information. Rather, those very ambitions which had endeared the company to investors had now become an albatross around its neck. In the simplest terms: since the company had presented itself as extraordinary, only extraordinary results would do. So instead of disclosing the typical J-curve performance of a start-up, the company chose to wait until it had outstanding good news to share. Alas! That never came.
The board’s decision to change chief executives twice in as many years did not help matters. On each occasion, the manner of removal was abrupt. Instead of focusing the rationale for the change in leadership on unsatisfactory performance or other substantive issues that impaired the CEO’s ability to discharge his duties, the company allowed the press to speculate on the reasons for dismissal. To add to concerns, the company had not one, but two rounds of board changes in the same period, neither of which was sanctioned by a proxy vote at a shareholder meeting.
Finally, in July 2007, Tom Iseghohi was invited to take the reins at the company. His professional pedigree was inspiring, and for a brief moment, it inspired critics to give him the benefit of doubt. The new chief executive assured the markets that he had a clear view of the journey ahead. All the while his emphasis was on picking the low hanging fruit and quick wins as if they were right there for all to see. Suddenly, it seemed that the board of the company had found the Harry Houdini that would resolve the intractable problems at NITEL.
Less than a year after his resumption, with worsening labour problems, funding problems and its failure to revive the company, the government threatened to revoke the sale of the telecoms company to TransCorp. Close to two years since his appointment, shareholders are still waiting for results. None seems forthcoming after specific guarantees, repeated promises and raised hopes.
For a company which is faced with the herculean challenges described by its chairman at the February shareholder meeting, a scandal would not simply be an expensive distraction, it would pose a major threat to what little credibility it still enjoys, and perhaps its future as a going concern.
On May 15, 2009, the papers carried news of the arrest of Tom Iseghohi, Mike Okoli, the head of shared services and Mohammed Buba, the company secretary. Very quickly, the company issued a statement challenging the legality of their detention, while the family of the chief executive accused Kevin Caruso, a US national, who served briefly as the NITEL CEO before his removal of a black PR campaign. When the charges were eventually disclosed, the sums involved were staggering.
What steps can a company in this position take to deal with the scandal?
Before going further, let us rehash the main points we have covered:
The company has not delivered on its promises in the past, creating a significant credibility deficit
The company’s failure to deliver goes beyond the competence or lack of it of its management. It is germane to its flawed business model, the problems of which have been compunded by the seizure in capital markets
The perceived advantages the company started with, based on its political support, have either disappeared or been eroded
The company had failed to carry its shareholders along, neglecting the investor relations function, and calling in the corporate communications function only during a crisis or to issue new promissory notes on future financial performance
The company has become known for passing the buck for its dismal performance to perceived detractors rather than devising concrete strategies for fixing them
The allegations of financial impropriety and mismanagement against the arrested executives.
From the above, we see that the two main issues are:
About messaging and communications evidenced in the mismatch between public pronouncements and actions or results
The scandal of corruption, which is the clear and present danger.
It is impossible to address one without the other.
This is not in any way to underestimate the importance of the operational challenges, labour disputes, funding difficulties or political opposition the company faces. Neither does it discount the success of the TransCorp Hilton, its other main asset, which it may be argued remains a leading brand in spite of its ownership by the company since it is managed by the Hilton Group.
Rather, precisely because of these operational challenges, labour disputes, funding difficulties and political opposition, the company should have paid more attention to the content of its value narrative and the time table for achieving same, on the one hand, and on the other, been more measured in its public statement on the arrest of the executives.
We treat each separately. First we look at what needs to be done from a value narrative perspective, and second, from a crisis communications angle after the arrest of members of its executive management.
Content of value narrative and time table for achievement
Publish financial results. Transcorp disclosed its losses for the past financial year during the extra-ordinary shareholder meeting held in February 2009. Unfortunately, the company is yet to provide a full breakdown of its financial performance for scrutiny. At no time has it been more important for TransCorp to show investors what it has been able to achieve since its initial public offering. Specifically, it needs to publish its financial results and elaborate on what has been accomplished since the IPO.
Reconceive its value thesis with a necessary shift from an emphasis on its growth being driven by its telecoms investment to other areas. The company’s plans to offload its NITEL stake, presents a unique opportunity to perform a surgical examination of its business model and future. The extreme low valuation of the company presents a further opportunity to carry out drastic changes since it has reached a price floor (N0.50k range) and it can’t drop much lower anyway. The sale of NITEL may yet turn out to be a blessing in disguise.
After the review, unencumbered by the labour disputes, operational challenges, funding difficulties and political opposition it attracted during its NITEL foray, the company can trim its vision to more manageable proportions. In fact, the TransCorp board ought to have started thinking of life after NITEL. A perfect example of one company that achieved same is UAC, a conglomerate, in the two decades since the ’80s structural adjustment program, when the company, which was once the trading giant in the country, saw its fortunes drop as import quotas, currency devaluation and cheaper imports removed its premiere position. By adapting to changed circumstances, UAC is, today, a leader in property, distribution and fast foods.
From a corporate finance perspective, the company should announce that it is plans to review its capital structure for improved shareholder returns, specifically either through a share buyback or share reconstruction: first, because of the instant effect this would have on its earnings per share, and secondly, to maintain a balanced debt-equity target since the sale of NITEL will lead to a drastic reduction in its debt-equity ratio and it has paid off its 2005 purchase of the TransCorp Hilton. The current trading discount of its shares makes this a Naturally, this level of balance sheet restructuring would require buy-in from both shareholders and regulators.
Last but not least, the company needs a robust investor relations unit that fully comprehends the company’s situation and the information requirements of the market vis-a-vis the company.
Crisis communications since the arrest
TransCorp needs to announce the appointment of an interim management committee to handle the affairs of the company until the board receives the results of the police investigation. Rather than the primary emphasis being laid on challenging the legality of the detention of its officers, the company needs to express its full co-operation with the investigators, and assure the public that the findings will be disclosed.
The communication should state clearly that only a competent court can pronounce any individual guilty and that the executives have full legal representation. As much as possible, the board needs to quarantine the scandal until it has more information on the substance of the allegations.
Next, TransCorp needs to offer assurances to its subsidiaries’ customers and partners that the investigation will not affect operations or obligations to them in any way.
Finally, the board of TransCorp should announce an independent audit by a new auditor.
Satyam Computer Services whose founder and chairman, Ramalinga Raju, admitted in January 2009 to defrauding the company and inflating financial results provides a best-case example of how companies should react when faced with allegation-revelations that involve its leadership.
Shortly after the chairman admitted to false accounting, the company appointed Ram Mynampati as interim CEO. In his first statement, he stressed that:
The most important thing, I believe, we need to address is the interest of the stakeholders – our associates, our customers and the suppliers. The entire senior management team has come together not only to assess the impact of the disclosures but also to take specific steps to ensure continuity of operations across geographies.
I am confident that with the senior management team with me we would be able to quickly put the issues behind us and ensure continuity of our operations and our services delivered to our customers.
I also want to mention that the events today would largely be limited to one specific organization and should no way be construed as issues relating to the broader Indian IT industry, which continues to thrive and succeed in a broader competitive landscape.
I also want to assure you that we will do everything that we can as an organization to ensure that the stakeholders’ interests are protected and addressed. I would request your understanding and cooperation as we continue to confront challenging times for us.
The following press releases and videos demonstrate the Satyam’s speedy and apt response to assure its stakeholders.
Sadly, over a week since news of the scandal broke, the company website contains no information on the events.
Worse still, the Contacts page of the company website has not been updated in over two years to provide access to the responsible spokespersons to the company. Adedayo Ojo, who left the company in April 2009 and Obi Onyeaso, who left the company in August 2007 are still listed as the corporate communications and investor relations contacts respectively.
This level of neglect exposes the issues involved to perception hijack by non-company narrators, either from the mainstream media or alternative sources including blogs, internet forums and social networks with all the attendant risks of guerrilla narratives turning viral, and future costs of dealing with same.
No doubt, this is a very difficult time for the employees of the company and its board as they are faced with hard choices and tough decisions. We are sympathetic to that. Nonetheless, it is more trying for its shareholders who have had to endure non-disclosure and poor communications from the company for over two years.
To stem the feverish slide in public confidence in the company, TransCorp needs to act fast by considering and implementing suggestions like those made here. We hope they do before it is too late.
Disclosure: Obi Onyeaso, the writer of this post, was employed by TransCorp from December 2005 – August 2007.
Addendum: On the same day this post was published, TransCorp issued a press release on the above subject. The release is reproduced below. The release makes no mention of the board’s plans to launch an independent internal investigation nor are contact details provided for a responsible officer to whom inquiries may be directed.
/media/b1799e2f-b722-4c08-9f89-dd17df478f50/TransCorp%20Plc%20website%20homepage%20-%20No%20mention%20of%20arrest%20of%20CEO%20arrest,%20investigations%20or%20steps%20being%20taken%20by%20the%20company%20to%20assure%20stakeholder%20in%20News%20box%20-%20May%2021,%202009.png){kind=spacer}
/media/32bab321-bc09-4b02-ba8c-5659d30a51e1/TransCorp%20Nigeria%20website%20-%20News%20section%20-%20No%20mention%20of%20arrest%20of%20the%20Group%20Managing%20Director%20-%20May%2014,%202009.png){kind=spacer}
/media/3f347b7c-648c-4adc-ba69-b8db0314ef7e/TransCorp%20Nigeria%20Plc%20website%20-%20Contacts%20page%20-%20Outdated%20information%20-%20Marked%20in%20red%20squares-%20May%2021,%202009.png){kind=spacer}
Twitter: CustomsStreet
