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

Not Guilty as Charged: Spare Shareholders the Blame

This week on Street Talking in NEXT, I argue that it is patently unfair to excoriate shareholders for the risks companies took in the pre-crisis era; they hardly knew of them and when they did, there was little they could do.

Michel Barnier, the new European Union Commissioner of the Internal Market and Services, is set on a mission to gore oxen. In his first press interview, the Commissioner bluntly declared his intention to review shareholder engagement and specifically the responsibility that shareholders must bear for the morass that has threatened the future of several companies.

‘Many shareholders acted with a short-term perspective rather than acting with the long-term viability of the institutions they own in mind . . . We need to reconsider the role and responsibilities of shareholders, how risk committees work, whether internal and external audits are working as they should, and the compensation of executive boards,’ said Barnier without mincing words.

Until now, no senior official on either side of the Atlantic has dared point an accusing finger at shareowners for failing to hold companies to account as they took on more risk and greater leverage.

Closer to home, in Nigeria, the familiar villains have been the fat cat bank executives who allegedly misled naïve shareholders with their smooth assurance. The shareholders should have known better. Or should they? To answer that question, there are two sides worth considering.

On the one hand, those who are sympathetic to Barnier’s views would argue that it would have been impossible for these popularly maligned CEOs to indulge in malfeasance of historic proportions without any suspicion by shareholders? By allowing them to get away with these crimes for so long, the shareholders got their just desserts. Their negligence is sufficient for an indictment.

On the other hand, another group would defend shareholders with the claim that they knew very little. Companies have become so good at hiding the truth that it would have required a league of full time forensic accounting and governance experts to unearth the shenanigans. Both points-of-view have some merit but I am partial to the second.

Seductive as it is to brand shareholders as irresponsible absentee rent seekers the fact is that even if they wanted to ‘engage’, as it were with companies, the institutional framework was almost non-existent. How much scope did investors with reservations about Bank PHB’s acquisition of Spring Bank or African Petroleum’s merger with Zenon Oil & Gas have to ‘engage’ with management on the rationale of these deals?

Let me be very clear. I am not speaking about court ordered shareholder meetings where these board proposals are ratified as a matter of course. Neither am I interested in the fan-boy shareholder town-hall meetings which have become the vogue and are aimed at drowning attendees with spiel and fluff.

What I am referring to are the private efforts by shareholders to speak to management and seek explanations on the direction of the company. I am talking about the existing opportunities for interrogating governance and the competence and contributions of individual board members. I am speaking of the transparency in selecting nominees of shareholder associations to sensitive oversight committees. I am hinting at the input that shareholders make in the design of strategy without interfering with the board’s entrepreneurial liberty. My point is that if shareholders are excluded from the upstream drilling, it is a bit rich to hold them responsible for any oil spills downstream. Shareholders should not be made scapegoats. Sheep led to the slaughter, perhaps, but scapegoats, no.

However, I do not absolve shareholders completely. The near-death experience their companies underwent in the past two years should be a wakeup call. Getting their act together is not an option; it is the top priority. But they cannot do this on their own.

Like tango, engagement is a two way street. Both companies and shareholders need to work together to fashion out the way forward. If they fail to do so, then the alternative would be greater regulation, which can be costly, invasive and so politicized that they bring all the burden without any of the relief.

Lord Myners, the Financial Services Secretary to the UK Treasury, puts it eloquently:

‘The more we can rely on good governance at the level of the board of directors and shareholder engagement, the less we will have to depend on regulation. To put that the other way round, if we conclude that governance and stewardship are deficient, that vacuum will have to be filled by regulation.’

The days when the only ‘engagement’ companies cordoned was typified by black hole email addresses like investors@companyname.com, HTML tables of the financial statements and a downloadable PDF of the latest annual report should be history. Companies need to develop clear policies for treating investor queries on their business models, strategy, transactions, strategic announcements and financial performance. Similarly, investors must realize that there is more to investing than following the zoo cage fights between bulls and bears. The focus should be the company not the daily market movement.

It is ludicrous for regulators who were asleep at the switch during the go-go years to now turn around and label shareholders as culprits. If any dog deserves a bad name before it is hanged, its name is spelt R-E-G-U-L-A-T-O-R. Yes, you heard me right Monsieur Barnier, ‘c’est toi’.

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

Related posts:

1. Rebel Yodel: Shareholders’ rallying cry in 2010 As the year draws to an end, it is tempting...
2. Under-used & Under-rated: Are Corporate Websites Wasting Assets? Everybody I know remembers where they were and what they...
3. The place to be: Why the Internet is integral to investor communications I am appalled at the failure of most companies on...
4. Fending for Themselves: Who’s Looking out for Shareholders? In his immensely entertaining account of the global economic meltdown,...
5. Substance over Style: An Advanced Learners’ Guide to Communicating in the Downturn Bruce Wasserstein, the late chairman of Lazard, the storied investment...