OWNERS RESPONSIBILITIES IN PROMOTING CORPORATE GOVERNANCE-Perspective of Shareholders

1
OWNERS RESPONSIBILITIES IN PROMOTING CORPORATE
GOVERNANCE-Perspective of Shareholders
Associations

• Being a paper presented at the Pan African
  consultative Forum on Corporate Governance Third
  meeting , Dakar, Senegal 8-10, Nov. 2005
• By
• Hon. Sola Ephraim- Oluwanuga

2
INTRODUCTION

• Corporate Governance according to Cadbury Report,
  UK (December, 1992) is simply the system by
  which companies are directed and controlled the
  responsibilities of the board include ..
  reporting to shareholders on their stewardship.
• To J. Wolfesohn, Financial times 1997 it is
  about promoting corporate fairness, transparency
  and accountability.

3
CHARACTERISTICS OF EFFECTIVE CORPORATE GOVERNANCE

• accountability,
• transparency,
• protection and enforceability of the rights and
  privileges of all shareholders and directors
• as well as existence of control systems and
  reporting procedures (Fola Adeola 2003).

4
Instances of Corporate governance failure in
Nigeria

• In the Bonkolans case capital market operators
  were charged, accused of sale of forged
  certificates and were required to buy back.
• A number of publicly quoted companies have gone
  into oblivion for reasons bordering on
  ineffective-non existent systems e.g. NASCOM Plc.
• Falsification of accounts by the then
  directors/management of Lever Brothers Plc,
  where over-valuation of stocks running into
  millions of naira was discovered and

5
Instances of Corporate governance failure in
Nigeria

• African Petroleum Plc where about N24billion
  credit facilities were not disclosed, in spite of
  due diligence review carried out by the core
  investors and reporting accountants. It is
  noteworthy that a the last AGM before
  privatization AP still paid N3 as dividend and A
  section of shareholders Association praised them
  to high heavens.

6
Road Map.

• Historical Development of shareholders
  Associations
• What are the responsibilities of shareholders
  Associations in the promotion of good corporate
  governance
• Challenges facing Shareholders' Associations in
  fulfilling its responsibilities and in positively
  engaging the Board and Management
• Effective engagement of the Board and Management

7
Road Map.

• Further Assistance of Capital Market authorities
  to investors
• The Nigerian Code of Corporate Governance
• ETC

8
Development of Shareholders Associations in
Nigeria

• Pre privatisation period
• IST offering of privatisation i.e early
  1990s.-Federal Government transfered its
  shareholdings in publicly quoted companies to
  Nigerians. Birthed about 800,000 shareholders who
  were largely voiceless
• Features of this period included setting up 7
  zonal shareholders Association in Nigeria. These
  are like community based Associations.

9
Development of Shareholders Associations in
Nigeria

• Other Private Non- Profit shareholders
  Associations have since been formed since then
  particularly in the late 90s and early 2000
• The situation is beginning to boarder on
  proliferation.
• Nigeria currently has about 4 million
  shareholders. Estimated that after the
  pivatisatistion of a great number ofSOEs we shall
  have about 12 million shareholders.

10
Aims Objectives Of zonal Shareholders
Associations

• To undertake the education and enlightenment of
  shareholders on their rights and responsibilities
  as co-owners of public companies.
• To promote solidarity among the different
  individual shareholders and to stimulate their
  interest in the affairs of their companies.
• To facilitate the participation of shareholders
  in corporate decision making, through regular
  attendance at AGMs and other Meetings.
• To nominate its representative on the board or
  audit committees of public-quoted companies

11
Aims Objectives Of zonal Shareholders
Associations

• To nominate their representatives to serve on the
  board of Directors of public-quoted companies
• To facilitate easy access to individuals for the
  purpose of claiming their dividends and scrip
  share certificates, a considerable part of which
  remain unclaimed due to lack of knowledge of
  their whereabouts.

12
Responsibilities of shareholders, Associations in
the promotion of good corporate governance

• To seek to be sufficiently informed about the
  company
• To collect and study the Memo and articles of
  Association
• To be aware of the operating environment of the
  company
• To exercise authority at AGMs without any
  intimidation

13
Responsibilities of shareholders Associations in
the promotion of good corporate governance

• Convey meetings where board or management fails
  to do so
• Ensure appropriate notices are given
• Ensure decorum at meetings and avoid unnecessary
  interruptions
• Participate at meetings
• Appoint good quality directors

14
Responsibilities of shareholders Associations in
the promotion of good corporate governance

• Insist on strict accountability and disclosure
  standards
• Appoint competent auditors
• Ask questions where management proposes removal
  of auditors
• Insist on timely receipt of auditors report and
  study same
• Seek clarification on the social responsibility
  policies of the company e.g. the Ashaka Plc and
  Wapco Plc example

15
Responsibilities of shareholders Associations in
the promotion of good corporate governance

• Request the authority for the appointment of
  inspectors to investigate the company if
  necessary

16
Challenges faced by Shareholders Associations in
fulfilling its roles (1)

• Funding challenges. Who funds the Association?
• He who pays the piper dictates the tune.
• Lack of proper education as an instrument of
  monitoring Corporate Governance.
• Discordant voices of Shareholders Association
  arising from several factors.
• Proliferation of shareholders Associations

17
Challenges faced by Shareholders Associations in
fulfilling its roles (2)

• Lack of good Corporate Governance in their
  operation a case of physician heal thyself.
• Shareholders Associations, working hard or
  hardly working AGM induced activism. How many
  motions or resolutions have been sponsored by
  Associations?.

18
Challenges faced by Shareholders Associations in
fulfilling its roles (3)

• A case of, the hand of Esau, the voice of Jacob.
  Associations as tool in the hands of management.
• e.g. tenure on the Board speaking with both
  sides of the mouth,
• a case of unnecessary praising of management,
  even when they have done badly
• lobbying for people to be on the board
• No visible and appreciable activism yet
  demonstrated by institutional investors. This
  may change with PRA 2004. This will bring new
  PFA (institutional investors).
• The new bank consolidation should make for
  re-strategizing of Shareholders Associations.
  But how prepared are they?

19
Challenges faced by Shareholders Associations in
fulfilling its roles (4)

• Venue of AGMs usually are fixed where you do not
  have majority of shareholders. This fact is
  changing.
• Balancing the interest of community based
  shareholders vis-à-vis the generality of other
  shareholders.
• Rented crowd as proxies.
• Management, hoarding information.

20
Effective engagement of the Board and Management

• PRE AGM meetings/visits
• Some Shareholders Associations make it their duty
  to review the various reports quarterly, half
  yearly and annual report and to pay regular
  visits to the company to seek clarifications and
  make suggestions.
• Some Shareholders Associations make industrial
  visits to plcs to see the facts on the ground and
  ask penetrating questions.

21
Effective engagement of the Board and Management

• AGM
• AUDIT COMMITTEE
• MEDIA PRESSURE BY Associations
• Name and shame.
• Comments in the papers.
• OTHERS CHOOSE TO CLOSE RANKS WITH REGULATORS AND
  SROs
• Where goals are the same e.g. protection of
  investors there are challenges though

22
Effective engagement of the Board and Management

• MANAGEMENT PENETRATION
• Independent source of information to highlight
  weaknesses
• Always on look out for poor management especially
  through accounting errors or poor performance.
• THROUGH THE COURTS
• Agip Petroleum/OANDO - where Agip Petroleum, an
  Italian company, tried to divest its interest to
  another core investor, Unipetrol, without
  recourse to 25,000 ordinary Nigerian
  shareholders. Agip Petroleum held 60 to Nigeria
  40 gross was unilateral decision of Agip and the
  trade name of Agip. A Section of Shareholders
  Association went to court

23
Effective engagement of the Board and Management

• To some the strategy is to develop capacity by
  constantly training of investors through
  seminars, bulletin, Newsletters, shareholders
  voice magazine etc.

24
AGMs

• The chairman's conduct
• The Shareholder questions Why dividend arent
  paid? what informs the social responsibility
  policy of the company? justification for a high
  of technical fees to core investor?.
• In the case of banks why were banks penalized
  for contravention by CBN and regularity of
  penalty payments may also signify systemic
  weaknesses why several debtors? the gearing of
  a company the reasons why directors dont have
  shareholdings in the company ?or at what stage
  the shareholding position of directors changed
  with a view to determining there was no insider
  related dealing?.
• Questions relating to insider related credits.
• Corporate citizenship in case of company with its
  raw materials from specific community.
• If a company is proposing a change of its
  Auditors they may wish to know why.

25
AUDIT COMMITTEE MEMBERSHIP

• A veritable tool in shareholders interacting with
  Management and Board. A feature of the
  institutional frame work coming in the wake of
  lst offering of privatisation in 1990.
• Nature of Audit Committee in Nigeria i.e. a
  committee of shareholders at AGM and not of the
  board.
• It is a tool for the Association to have a say in
  the management company.
• What are the functions of the committee?
• Challenges faced by these committees?.
• How these have been helped.

26
AUDIT COMMITTEE Functions and challenges .

• Ascertain that account and reporting policies of
  the company are in accordance with legal
  requirements and agreed ethical practices
• Review the scope and planning of audit
  requirements
• Keep under review the effectiveness of the
  company system of accounting and internal control
• Make recommendation to the board in regard to the
  appointment, removal and remuneration of external
  auditors of the company

27
AUDIT COMMITTEE Functions and challenges .

• Authorize the internal auditor to carry out
  investigation in any activities of the company
  which may be of interest or concern to the
  company.
• CHALLENGES include
• Lack of financial expertise by shareholder
  members
• Late inauguration of committees
• Overbearing posture of Management
• No facility for independent expert advisory
  services.
• etc

28
How Capital Market Authorities and Stock
Exchanges can be of further assistance to
investors

• The capital market authorities in Nigeria include
  SEC, Stock Exchange, Central Bank of Nigeria
  National Insurance Commission The Senate and
  House of representatives( Capital Market
  Committees) various Professional and other self
  regulatory organizations dealing with the capital
  markets Corporate Affairs commission that
  registers the companies from the onset, the
  Investments and securities Tribunal and other
  courts etc.

29
How Capital Market Authorities and Stock
Exchanges can be of further assistance to
investors

• By enforcing their rules and regulations NSE
  recently withdrew the licences of 5 dealer /
  broker for engaging in fraudulent practises
• Ensuring appropriate sanctions in case of
  violations.
• Blowing whistle in case of suspicious insider
  wrong doing and calling for investigation or
  compelling companies to comply with the standard
  of practice required of them
• e.g. SEC in some occasions had to summon public
  companies to inaugurate their audit committees at
  the beginning of the year. In some cases it had
  to penalise them for not calling the meetings as
  and when due.

30
How Capital Market Authorities and Stock
Exchanges can be of further assistance to
investors

• Capacity Building and Public Enlightenment for
  investors.
• e.g. tour of states of the federation for public
  enlightenment on the capital market
  incorporating the Nigerian Capital Market
  Institute as a company limited by guarantee to
  cater for the capacity building needs of the
  Nigerian capital market. Working with
  organisations like Ephraim Consulting in
  trainings audit committee members.

31
How Capital Market Authorities and Stock
Exchanges can be of further assistance to
investors

• Attending AGMs as observers and or supervisors to
  engage in constructive dialogue with management
  with a view to exploring possibilities of
  affecting corporate culture.
• e.g. SEC staff attend AGMs to report back to the
  relevant department for any necessary action.
  Also NSE gives an award for the best conducted
  AGM.

32
How Capital Market Authorities and Stock
Exchanges can be of further assistance to
investors

• SEC to formulate rules and regulations to
  regulate the operations and management of
  investors Associations particularly as it relates
  to
• Formation, operation and Management of
  Associations
• Filling of Code of Conduct of Associations and
  Constitution with Commission
• Democratization of Association.
• Comportment of Association at AGMs
• How association can select representatives to
  represent minority shareholders on the Board of
  quoted companies in line with Code of Best
  Practices.

33
How Capital Market Authorities and Stock
Exchanges can be of further assistance to
investors

• SEC to put in place sufficient safeguards and
  rules against officers and directors who may
  exercise improper influence on the Conduct of
  audit
• ICAN (Institute of Chartered Accountant of
  Nigeria) to monitor their member more to ensure
  that auditors were doing the right thing and were
  independent.
• Organize bi-annual meeting with auditors.
• Strengthening of audit committee to ensure they
  perform their statutory functions.

34
How Capital Market Authorities and Stock
Exchanges can be of further assistance to
investors- role of legislature

• To codify in the future some aspects of the code
  of conduct to give it enough bite.
• To make laws that will encourage investors
  protection, code of conduct and ethical value.
• Make laws that will arrest conflict of interest
  issues in the market.
• Distil self interest, vested interest in law
  making and not be beclouded by the clout and
  person of operators of the market.

35
How Capital Market Authorities and Stock
Exchanges can be of further assistance to
investors- role of legislature

• Make laws that will empower investors and ensure
  they properly police corporate governance in the
  market.
• Support initiatives by Regulators and SRO to
  amend laws relating to the capital markets e.g.
  Investments and Securities Act by ensuring it
  complies with basic tenets of Corporate
  Governance.
• Mediating on dispute in the markets among
  regulators , operators and SROs e.g Current trade
  alert dispute

36
How Capital Market Authorities and Stock
Exchanges can be of further assistance to
investors- role of the courts/Arbitral body(
Investments and securities tribunal) Bankers
Committee on Ethics

• Preventing market manipulation through its
  judgement
• Churning out decisions that will promote
  investors protection and good corporate
  governance.
• Ensuring it comes out with decisions that will
  promote transparency and accountability in the
  market.
• Ensuring decisions of the regulator is subjected
  to basic the tenets of justice and fair play to
  avoid regulatory overbearing posture/oppression.
• Developing a new form of capital market
  jurisprudence that emphasizes investors
  protection.

37
The Nigerian Code of Corporate Governance- 2003 (
Snapshot)

• That Directors ensure shareholders statutory and
  general rights are protected.
• That venue of AGMs be carefully chose in such a
  way as to make it possible and affordable (in
  terms of distance and cost) for the majority of
  shareholders to attend and vote, and not to
  disenfranchise shareholders on account of choice
  of venue, which is unreasonable or impracticable
  to reach.

38
The Nigerian Code of Corporate Governance- 2003 (
Snapshot)

• That notices of meeting to be sent at least 21
  working days before the meeting with such details
  (including reports and audited financial
  statements) and other information as will enable
  them vote properly on issue.
• The Board should ensure all shareholders are
  treated equally and that no shareholder (however
  large institutional or otherwise, vocal or
  passive) should be given preferential treatment
  or superior access to information or other
  materials.
• As far as possible, there should be at least one
  Director on the Board representing minority
  shareholders.

39
The Nigerian Code of Corporate Governance- 2003 (
Snapshot)

• The company or the board should not discourage
  shareholders activism whether by institutional
  shareholders or by organized shareholders group.
  Shareholders with large holdings (institutional
  and non institutional) should act and influence
  the standard of Corporate Governance positively
  and thereby optimize stakeholder value.

40
The Nigerian Code of Corporate Governance- 2003 (
Snapshot)

• Information made available to institutional
  shareholders should also be made available to
  other shareholders at the same time in such a
  manner as to ensure that neither group enjoys
  preferential treatment.

41
Criticism of the code Operations -

• Insufficient monitoring
• No stated format of how minority investors can
  choose directors to represent them.
• Non-ED as Chairman of the board is an importation
  of other provision on the Board without deference
  to Nigerian situation
• Consideration of auditor as secretary of
  committee is a misnomer.
• Code should have created basis for recognition
  of shareholders Association.
• No capacity building for the shareholders
  Association yet.

42
Conclusion

• The Shareholders Association as an integral
  stakeholder in corporate governance ought to take
  its responsibility seriously.
• To do so it needs help from the authorities and
  the companies alike
• For Shareholders to be able to monitor compliance
  with corporate governance it needs adequate
  funding for capacity building.

43
Conclusion

• Credible Associations like Ibadan zone
  shareholders association should be identified
  and strengthened.
• Funding agencies to work with organizations like
  Ephraim consulting whose responsibilities it is
  to build capacity in the sector.
• Creation of cross boarder relationship among
  shareholders Associations in Africa.

44
Conclusion

• Ensuring that other countries in Africa copies
  Nigeria example by creating legal frame work to
  facilitate the appointment of outside
  shareholders as Audit Committee members.
• Need For the Pan Africa corporate Governance body
  to show visible presence in Nigeria
• Thank you

45

• Sola Ephraim-Oluwanuga esq
• Honourable Member Investments Securities
  Tribunal.
• oluwanuga_at_skannet.com
• 234-8023239216234-9-2344459