Customs Street Advisors is a full service investor relations firm based in Lagos, Nigeria.

Investor communications and disclosure: It’s Broke. Let’s fix it

This week in Alrroya, the United Arab Emirates (UAE) business and financial daily, I discuss the role that robust disclosure rules can play in averting a repetition of the turmoil that has engulfed the market in the past two years. I have no doubts that the markets would pick up again, but if shareholders fail to draw the right lessons from past experience and companies refuse to change their ways accordingly, then it is only a matter of time before we have another panic season on our hands

All fingers have been burnt, but some are more charred than others. Across the world, what started as a localized US sub-prime crisis, and later snowballed into a global credit crunch, has not been good to shareholders. While business partners, customers, employees and host communities have all been hit by the turmoil, shareholders have borne the brunt of the pain. They were the first in and it is now clear that they will be the last out.

For a time, it seemed that shareholders in emerging and frontier economies would be saved from the pains of the precipitous fall in global equity markets. Distinguished economists, business leaders and regulators proclaimed that high prices for their commodity exports insulated these economies from external shocks. De-coupling was supposed to be the magic wand.

In Nigeria, for instance, shareholders were reassured that business fundamentals remained robust and foreign reserves at historically abundant levels. The Central Bank of Nigeria issued guarantees that it would defend the local currency at all costs. However, as the turbulence spread with ravaging viciousness to frontier markets, the Nigerian economy caught the cold from the sneeze in developed country markets. There is still a long way to go to regional immunity.

When the first waves of the crisis hit our shores, there were frantic calls for a government bailout of the stock market, in whatever form. Partisans of this view argued that the decimation of the market would have deleterious effects, notably the collapse of confidence in equity investing and consequently, the ability of companies to raise capital.

Another group, which was opposed to a bailout in any guise, counter-argued that the giddy valuations which most stocks on the Nigerian Stock Exchange enjoyed were not driven by sound analysis but by pure speculation. Short-termism, they explained, had fuelled the boom. They contended that the party was going to end with tears, sooner or later anyway, with or without the global credit crunch of 2007. As such, those claiming to be victims deserved their desserts. Long-term investors, they reasoned, would have the patience to ride out the storm.

Yet, more damning have been insinuations that insider manipulation and connivance with regulators had allowed the permissive culture of excess to flourish. Since most investors were too busy looking for sizzling buys and flipping stocks like pancakes, they woefully failed in their own oversight responsibilities to ensure that the companies had solid corporate governance rules and financial reporting standards were of the highest caliber.

The accusation of negligence in their role as owners of the business was a major charge against the shareholders. Nonetheless, negligence assumes that shareholders could have acted if they had wanted to avert the looming disaster.

The hard truth is that they hardly had the means to do so. One does not act if one does not know. With poor corporate disclosure practices and the governance-lite brew preferred by Nigerian boards, few shareholders could have sensed the risks the companies they were investing in were exposed to or the unsustainability of the high valuations which were driven by optimistic statements from managements, stockbrokers, analysts and regulators.

In particular, management tended to speak only when it had good news to share. Investors were hard-trained to expect only good news for fear that they would over-react negatively to bad news.

Therefore, investors and market commentators have received with mixed feelings the drastic actions of Lamido Sanusi, the Central Bank of Nigeria governor, announcing the removal of the CEOs of eight of the country’s leading banks and other sweeping changes in the financial sector.

Interestingly, rather than clamour for a long overdue review of the disclosure and investor communications practices of the banks, and indeed all public companies, as a matter of urgency, local investors remain fixated on share prices. After all this time, investors have still not recognized that the latest share price is not necessarily the truest indicator of company value or a valid test of the sustainability of earnings.

Presently, most public companies’ attention is focused on balance sheet repair. This is rightly so. However, the financial convalescence of these institutions needs to go hand in hand with a new culture of fuller disclosure and access. The sole preoccupation with balance sheet recovery distracts from the equally important need to impress upon companies on the need to improve their investor disclosure and governance practices.

The current crisis presents an historic opportunity to Nigerian regulators similar to that presented to US lawmakers at the beginning of the last decade after the collapse of Enron and revelation of incestuous ties among managements, investment bankers and analysts. These egregious abuses provoked regulatory interventions like Sarbanes-Oxley and Regulation Fair Disclosure (Reg FD). However, balancing adequate regulatory responses against excessive regulation will pose its own challenges.

Frankly, if the old practices among corporate issuers, intermediaries and regulators are not destroyed, we would have learned nothing from the crisis, and forgotten nothing. That, not the crisis itself, would be the real tragedy.

The original article may be read here on the Alrroya site.

Related posts:

1. The place to be: Why the Internet is integral to investor communications I am appalled at the failure of most companies on...
2. Disclosure by Deepthroat: Undercover Should not Blow the Cover It is a bad sign when markets are led by...
3. Where there is no RegFD: How selective disclosure hurts issuers and investors on the Nigerian Stock Exchange. In 1999, the US Securities and Exchange Commission (SEC), made...
4. SEC’s Appeal – Will the Regulator ever get its mojo back? The Securities and Exchange Commission (SEC) has been in the...
5. Two-Way Street: What are Investors Thinking? It is tempting for companies to imagine that once they...