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Disclosure by Deepthroat: Undercover Should not Blow the Cover

This week on Street Talking in NEXT, I point out that good corporate disclosure culture is about far more than what companies reveal on their financial statements.

It is a bad sign when markets are led by rumour. For the prudent investor, simply staying up to date with the array of overland information sources on public companies can be a full-time job. To add subterranean and back alley news filtering to that workload is an unwelcome prospect. Yet sometimes, it almost seems as if that is where we are. In the last two months, I have received material information about two major companies which are yet to issue any official statement on the events long after they surfaced in the public domain. While companies are within their prerogative in declining to respond to rumours, that is a poor excuse and unforgiveable disservice to the trust that shareholders place in them for transparency. Evasiveness will not cut it.

The first piece of news had to do with the departure of the chief executive of a leading conglomerate and the second with a case of massive fraud at a leading bank. Both companies have been studiously silent on these events leaving investors to grope in the dark for the true situation. Such deliberate disdain for disclosure inclines the hasty to believe the rumours. Worse, it besmirches the reputation of the boards at these companies as unaccountable, implicated and haughty.

On March 8, 2010, an acquaintance informed me that Nosike Agokei, the chief executive officer of John Holt, one of the oldest company’s on the Nigerian Stock Exchange, who was only appointed to that position in August 2009, may have resigned from the company in unclear circumstances. Still unconfirmed are stories that Agokei resigned over the overbearing interference of non-executive board members and the disfavourable terms of partnership with its UK-based parent. Whatever the reasons for his departure, if indeed it is true, the company ought to have made a formal statement notifying the public of the change at the top and which officer will fill that office till a substantive appointment is made.

The company’s failure to do so is indicative of malfunctional corporate communications and governance mechanisms. Right now, the link to Agokei’s profile page on the John Holt website, http://www.jhplc.com/corporate/directors/board-nagokei.php, returns a 404 error page, while the Management Page at http://www.jhplc.com/corporate/management.php is blank. Similarly, Nosike Agokei’s name has been removed from http://www.jhplc.com/corporate/main-board.php , which lists the names of board directors. I am unwilling to believe that the erasures are down to accidental deletions by the website administrator.

Five weeks later, on April 13, 2010, I received a Google alert for Zenith Bank with the title, ‘Board Room Crises Rocks Zenith Bank as Zenith Manager Defrauds Bank of N4.5Billion.’ The link, which led to a story on the Sahara Reports website, exposed a mind boggling fraud of several billions at one of the bank’s Abuja branches. Five days after that email alert, The Punch, a national daily, carried the headline ‘N7.4bn fraud rocks Zenith Bank’, inflating the original sum by close to N3 billion.

Although both reports say that the bank’s management has reported the matter to the police, its refusal to issue a statement on the situation, no matter how terse, has left room for speculation. Currently, customers and investors are asking several questions about Zenith Bank’s internal controls, branch supervision and risk management. When did the bank become aware? Was the fraud committed over a single transaction or over a series? This crescendo will not die down so easily.

Generally, agent-principal dissonance is most pronounced in the sphere of information. However, while developed jurisdictions have taken bold steps to ensure that the asymmetry is flattened, Nigerian companies and regulators continue to act like it is all good. In fact, several ex-developed markets’ exchanges, for example, Brazil’s Bolsa de Valores de São Paulo (Bovespa), have taken major steps at improving disclosure among quoted companies.

As it is, because they have been kept in the dark for so long, investors do not even know that they should hold companies responsible to update them on certain types of information. Disclosure is not a favour. It is not at companies’ discretion. It is not a ‘dash’. It is a duty and the mark of responsibility.

Disclosure has real world implications on the cost of a company’s capital and valuation. Good disclosure practices benefit both companies and their investors, while bad disclosure culture hurts both, leading investors to price risk wrongly thus misallocating assets, and hamstringing companies from accessing the funds they need at attractive rates to fund their operations and growth. In the end, the market suffers and everyone is worse off.

In the past year, there has been a lot of auditioning about the need for greater disclosure among companies. Sadly, it appears that while the regulators and boards may have crammed the lyrics, they have not learnt the melody. Even if both companies issue statements today, they would still have fallen short because disclosure is nothing if it is not timely. Peer exchanges like the London Stock Exchange recognize this need by providing services like the Regulatory News Service (RNS) for prompt dissemination.

Our rejoicing at the first wave of disclosure that swept through the banking sector should not blind us to the fact that transparency is not limited to financial statement matters or toxic assets alone. Admittedly, while the journey has started, it is not yet uhuru. We still have many rivers to cross. Let us hope we can find our way home.

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

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