Customs Street Advisors

This week in Street Talking on NEXT, I share my views on the probable preoccupations of shareholders and boards in the coming year.

As the year draws to an end, it is tempting to make prognostications for the coming year. If I had to identify the main trends contending for top spots on the investment community agenda in the coming year, I would forecast a rise in shareholder interest in corporate governance and heightened monitoring of capital structure evolution as it impacts the stakes of antecedent shareholders. My outlook is that passive shareholder acquiescence will be replaced by active participation in strategic decision-making, particularly among holders of non-negligible blocs of stock.

The realization that a sustained misalignment can exist between manager inclinations and owner interests, even when managers are significant owners, will spark greater vigilance among non-managerial shareholders.

These breakouts have not erupted in isolation. They are natural reactions to events that burst the dam in 2009. Importantly, they will produce correspondent and permanent changes in the way boards solicit shareholder support.

Ample evidence exists to show that over the long-run, companies with robust governance systems deliver superior market returns. In a research paper, ‘Corporate Governance and Equity Prices’, Paul Gompers, Joy L. Ishii and Andrew Metrick demonstrate using a proprietary Governance Index that companies with weak shareholder rights are often associated with lower profits, lower sales growth and higher capital expenditures. Despite the strong case for adequate checks and balances in corporate administration, many companies play fast and loose because non-managerial owners have not held them to strict observance. That will change.

According to Atedo Peterside, chairman of Stanbic IBTC and the eponymous committee that prepared the 2003 Code of Corporate Governance, ‘corporate governance is one of the most abused terms in contemporary business language in Nigeria today.’ Those days may be coming to an end. Shareholders who, in the past, hardly insisted on adherence have suddenly woken up to the fact that lax governance can obliterate their ownership stakes through inept board oversight, visceral regulatory lashbacks and executive conflicts of interest.

Just this week, Federal High Courts granted leave to some aggrieved shareholders of Afribank and Union Bank to challenge the modality of their takeover and planned fire sale by the Central Bank of Nigeria. I expect more shareholders to follow suit.

On another level, a group known as the Renaissance Professionals has placed several full page ads in the papers disputing the fairness and propriety of the CBN’s decision to take over the country’s ailing banks. The group’s catchy appeals to public sentiment are rich in innuendo and frequently highlight contradictory statements by the regulator. For full effect, the ads always end with the tagline ‘Mr Central Bank Governor, Nigerians demand an answer’.

Whatever the affiliations and membership of the group, including rumoured links to a former bank chief executive, it is undisputed that the group is running a well-funded campaign to discredit the CBN and its appointees. However, the group’s failure to leverage a groundswell of anxiety and dissatisfaction among institutional and retail shareholders as well as its inability to articulate a set of detailed desirable outcomes as a credible alternative restructuring plan, that goes beyond the slogan ‘return banks to shareholders’, will constrain its effectiveness.

The opportunity cost of negative and ad hominem attacks against the regulator is engagement with other shareholders for constructive dialogue with the regulator. Having said that, the activities of the Renaissance Professionals are a forerunner of the types of skirmishes that shareholders will increasingly launch in future contests for corporate control or debate over strategic choices.

When the market makes its cautious recovery in 2010, companies will seek investors to cashfill the equity ditch. However, there are two questions companies will face here.

First, companies will need to decide between offering legacy shareholders preemption rights or giving preference to cash flush new opportunistic investors. The second question will be over the optimal capital structure with discretion over contingent securities that could dilute antecedent shareholder holdings on conversion.

Naturally, heritage owners will advocate for the pre-emption option and non-dilute alternative. Bisi Bakare, president of the Pragmatic Shareholders Association of Nigeria commenting on plans by Oando, the integrated energy provider, to raise N200 billion through a multi-tier hybrid offering said that: ‘We support the company’s bid to raise fresh funds. But what we are saying is that it should not be a convertible bond, because if they convert it to shares, it would affect the share structure by enlarging it unnecessarily.’

What appears unnecessary to some shareholders may be unavoidable to the board. Going forward these fund raisings will not be a simple recipe of ‘add water and stir’ dilutions but an esoteric brew of consensus and compromise between boards and legacy shareholders.

The Chinese proverb says, ‘may you live in interesting times’. My prediction is that 2010 will not be a boring year for boards of directors.

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

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