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This is a medical exam not a striptease: Transparency and access are a must for companies and not a favour to investors

This week in Street Talking on NEXT, I review the attitude of companies on the Nigerian Stock Exchange to disclosure. I argue that cosmetic treatment of the subject are bound to be counter-productive because they will not address root causes. To avoid a repeat of 'agent impunity' that thrived at companies, transparency and access must become the new culture.

I distaste buzzwords. The ease with which they roll off the tongue obscures their gravity. All too soon, phrases that originally signaled critical leaps in innovation or timely responses to stakeholder expectations come to represent the very worst of a me-too catechismness.

At that point, it is only a matter of time before it degrades to slang. I cringe each time I hear Nigerian executives proclaim the launch of a best-in-class product, opening of a new world-class factory, and their personal favorite, adoption of global best practices.

In recent months, I have added three candidates to that list: disclosure, governance and risk management. These days, it is almost impossible to listen to a chief executive officer talking without hearing, at least, one of these three buzzwords being flashed. After all, what does it take? Only a few extra lines of text in the speech, right? Wrong. Unlike other seasonal buzzwords, these three are primarily aimed at investors. Fundamentally, they are supposed to be manifestations of a deep-veined corporate culture of transparency and access. This is why it concerns me.

Culture of openness

Transparency is a culture of openness not a token act. It would be tantamount to drivers boasting of wearing seat-belts but ignoring safe driving rules. Similarly, access, like justice, should be blind and non-discriminatory. The verdict on both is given by the entire market. Approval ratings in mercenary analyst research or privileged entrée to a select few cannot be a proxy for transparency and access.

How is it possible that the same boards that in the past hardly ever discussed these subjects in annual reports or shareholder meetings turn around within weeks of the purge in the banking sector to declare that transparency is their mantra? Does it even make sense to speak of transparency without addressing issues of access? How frank are the remonstrations when these companies still refuse to take calls from analysts preparing reports on their companies? How truthful are the proclamations if non-executive members of boards flatly deny any complicity in the ruinous exposures of companies? If directors, as gatekeepers, failed to raise an alarm how do they justify their positions? Whence transparency and access if those that ought to have known were blind-sided?

There is something revolting about executives of public companies presenting transparency and access as a grace to investors. Statements like “we have made a provision of N18 billion for margin loans in our Q3 statement as part of our commitment to full disclosure”, are indicative of sops offered to investors. The defaults are the consequence of deliberate management decisions. Therefore, management has got to accept responsibility for the catastrophic financial consequences.

However, substantial as the figures involved are, they may be no more than lip service if companies fail to entrench the new culture. Otherwise, the same monumental mistakes are guaranteed to recur. It will only be a matter of time.

Transparency and access

Transparency and access are not Corporate Social Responsibility initiatives and companies will do well to stop framing them as such. As a matter of fact, transparency and access are more than a responsibility towards shareholders or a regulatory stipulation. They will separate companies that will succeed in the new capital markets dispensation from those that will go extinct.

In the way that some musicians have an uncanny precision in picking titles for songs that go on to define a generation, Afrinvest, the securities firm, captured the current attitude among investors in its choice of the title “Disclosure is the New Valuation Benchmark”, for its seminal report on the Nigerian banking sector. In an era when prima facie investors discount the value of corporate financial results, only companies that have built a sterling reputation for transparency and access will enjoy a fair valuation. Those that fail to do so should expect the gulf between their current and fair valuation to widen. Herein lie the seeds of destruction. Investors are sick and tired of surprises.

Steep valuation haircuts, peak cost of capital and gating from capital markets are just some of the harsh sentences that will be meted on delinquent companies.

Forcing companies’ hand

Regrettably, the central bank had to force the companies’ hand. The result has been that for boards and senior management at public companies, transparency has become a formal act to comply with if they want to retain their positions. Career self-preservation seems to be the leading motive.

I am ready to wager that in the coming months the appellation “risk management professional” will be highly sought after as companies interview candidates for the roles of Chief Risk Officer, Head of Risk Management and Director of Enterprise-wide Risk Controls. Board committees on risk will become de rigueur. Taking it further, a Risk Management Institute of Nigeria will be formed, and next year, a few institutions will win awards for the Best Risk Managed Bank and the Most Risk-aware Company in Africa. Titles like Head of Corporate Disclosure and Executive Vice President of Reporting Process Integrity will proliferate. Vendors of black-box software and smooth talking organizers of training programmes to track metrics and compliance will do brisk business. Staff will be sent on courses abroad. Seminars will be attended. Foreign experts on these issues will be invited at great cost to speak at company-sponsored thought leadership events. The legislature may even enact a Nigerian version of Sarbanes-Oxley. Who knows?

At the end of the day, it would be a colossal waste if companies go through all the motions then fail to reform their practice. When it is all said and done, they must not miss the woods for the trees.

The original article may be read here on the NEXT website.

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