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Regulatory Rowdiness: The Market Reform Free-For-All

This week on Street Talking in NEXT, I go against the grain by questioning the value of new regulations, as opposed to the implementation of old ones, in addressing market ills and executive malfeasance on the Nigerian Stock Exchange.

From the majestic US Capitol to the rowdy chamber of the British House of Commons to the technocrat-filled halls of the European Parliament efforts are in full gear to rewrite the rules that govern financial markets. Similar to its first cousins, freedom, democracy, free markets, and liberty, the word ‘reform’ in itself is so value-laden no one dares lift a finger against it. And like all value-loaded concepts, its vagueness makes it so easy to hijack. These days, no election campaign is complete without extensive coverage of the candidates’ manifesto points on ‘fixing the financial system,’ whatever that means in operation. In the same vein, no central banker, market regulator or stock exchange executive wants to be left behind in this latest incarnation of the White Man’s Burden to pacify the barbarians of the marketplace. Everybody wants to get a piece of the action.

No one seriously questions that reforms are needed to instill greater transparency and trust into markets. In fact, many items on the reform list have long been campaign issues among governance and investor activists. However, until the market turmoil began, they were either not considered urgent or the political will was lacking. Presently, it is at the top of the legislative agenda. Board member selection, remuneration, risk management, regulatory capital, corporate governance and market monitoring are just some of the mandates bestowed on various government- and regulator-instituted committees.

Reformania raises two questions. How much of the posturing will produce substantive and positive gains for market participants? Second, up to what point will the market bear before too much of a good thing turns bad?

The Nigerian experience is a good example of the risk of reform overload, especially when driven by a rainbow coalition of reformers. It is hard to escape the sentiment that some, not all, of these crusaders only want to be able to say ‘we are doing something about the stock market collapse and executive misconduct’ too. Of course, that may be an unfair judgment. But it is not baseless. To clear their names, they should be telling us what they were doing when these heinous crimes against capitalism were taking place.

The taint of opportunism is unmistakable, almost like artistes and thespians falling over themselves to identify with rescue efforts in the weeks after the Haiti earthquake. But there is one big difference between dilettante celebrities trying to do good by giving publicity to a humanitarian crisis and regulators agitated by a market catastrophe. When the showbiz crowd loses interest, they quietly move on with no damaging baggage left behind. With regulators, the excess luggage of new regulations, costly rules and conflicting laws will weigh down on the necks of companies and investors for years to come. Just ask Mayor Bloomberg how much New York City lost to London in its competitiveness as a harbor of global capital after the passage of Sarbanes-Oxley.

In the past year, different committees have been set up to review the functioning of the country’s capital markets and governance codes. Motivated by occasionally overlapping agendas, each group has set out to work on generic terms of reference such as improving transparency, enhancing disclosure and protecting investors. Only last year, the Dotun Suleiman-led Technical Committee for the Review of the Capital Market Structure and Processes in Nigeria, which was created by the Securities & Exchange Commission, released its report which called for wide-ranging changes in the market.

Before the ink on that document was dry, other inquiries were set up by the Honorable Aliyu Ahmed Wadada-led House Committee on Capital Markets and the Senator Ganiyu Solomon-chaired Senate Committee on Capital Markets. These investigations were in addition to the sweeping changes introduced by Lamido Sanusi, the governor of the Central Bank of Nigeria, aimed at sanitizing the banking sector and Arunma Oteh, the director-general of the Securities and Exchange Commission.

More recently, in May 2010, Remi Babalola, the Minister of State for Finance inaugurated two high powered committees chaired by Fola Adeola, the universally respected former banker and venture capitalist, and Konyinsola Ajayi, a charter member of the Establishment, to review the country’s capital markets and corporate governance rules.

With so much activity going on investors are now beginning to wonder if these groups may not be duplicating each other, or worse, unintentionally working at cross-purposes, creating room for reform arbitrage among participants looking for the lowest cost rules regime. The current re-regulation frenzy may lead to equally high costs for investors in the long run.

At this rate, investors could soon grow weary of new reform initiatives and rather insist on a report card on the implementation of existing rules like the 2003 Atedo Peterside Code of Corporate Governance. Piling on new reforms on top of old ones without showing why the existing ones are congenitally flawed is a waste of time. Reforms are not garments in the wardrobe of a clothes horse where new ones are carelessly heaped on top of older ones. It is blatantly absurd to imagine that merely passing more laws will make a society more law abiding.

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

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