Customs Street Advisors

At a time when investors need its protection the most, the Securities and Exchange Commission (SEC) seems to have gone AWOL.  This week in Street Talking on NEXT, I point out the contradiction in the government’s attempt to rescue the market, albeit sincere, which has put investors at extreme risk of  losing their investment completely. Until now, only the value of their shares were eroded. But with the Central Bank of Nigeria marshaled rescue, investors are now likely to lose the vote which their ownership entitles them to in determining the future of the companies. To stay relevant, the SEC needs to rediscover its primary mission and stand up for investors.

The Securities and Exchange Commission (SEC) has been in the spotlight a lot this year. It has not all been for glowing reasons. Justly or otherwise, the SEC, like other market regulatory agencies across the globe, has received a good dose of blame for what initially began as an economic problem, but has snowballed into a chorus of indictment over inadequate regulatory oversight. The metaphor ‘asleep at the switch,’ has been used by more than one commentator. Read More…

This week in Street Talking on NEXT, I review the attitude of companies on the Nigerian Stock Exchange to disclosure. I argue that cosmetic treatment of the subject are bound to be counter-productive because they will not address root causes. To avoid a repeat of ‘agent impunity’ that thrived at companies, transparency and access must become the new culture.

I distaste buzzwords. The ease with which they roll off the tongue obscures their gravity. All too soon, phrases that originally signaled critical leaps in innovation or timely responses to stakeholder expectations come to represent the very worst of a me-too catechismness. Read More…

In the past year, there have been calls from several quarters for the Nigerian Securities and Exchange Commission (SEC) to carry out an overhaul of the regulations guiding the country’s securities market. In June 2009, the SEC, as part of its response to the challenges of regulating participant relationships on the Nigerian Stock Exchange released a set of proposed draft rules and amendments. Among these, draft rule B4(3) would require securities issuers to provide  investors with earnings guidance. Oddly, there has been little public debate on the draft proposals, while comments, inputs and submissions on the proposals were limited to less than three weeks from the date of publication. This contrasts sharply with the lively exchanges in developed country markets over the utility and costs of earnings guidance. The SEC’s draft proposal is a curious one considering that even in the United States, securities law does not require companies to provide earnings guidance. In this post, we briefly examine the key arguments of both sides of the debate, and proffer suggestions and safeguards Nigerian companies can adopt to limit the risks and meet the demands of makings these types of anticipatory business performance statements.

In his 2000 annual letter to Berkshire Hathaway shareholders, Warren Buffett came down hard on the practice of providing earnings guidance. In his view, the expectations that these projections created were clearly unsustainable, at best, and viciously misleading, at its worst. In addition, it created a perverse incentive for CEOs to manage earnings so that they could always beat the Street.

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With less than seventeen months to go to the Central Bank of Nigeria mandated deadline for the adoption of the International Financial Reporting Standards (IFRS) by Nigerian banks, and twenty-seven months to its obligatory adoption by all companies listed on the Nigerian Stock Exchange,  it is curious that no institution has made an effort to sensitize investors and analysts on the significance of the new accounting standards. Instead, those institutions that have adopted IFRS have presented the move as one of adherence to global best practices without seeding awareness about what the change means for the way they prepare financial statements. In fact, there seems to be a tendency to communicate the act of adoption as a commitment to the enhancement of shareholder value and corporate governance. While improved transparency, relevance, reliability and comprehensibility are among the anticipated goods of IFRS, it is a misnomer, or worse, misleading, to imply that an accounting standard  change can, by itself, create value. Value is created when firms increase their cash-generating ability, not when they change methods of reporting business performance. In this post, we discuss the importance of communicating the effects of IFRS adoption by companies on the Nigerian Stock Exchange. We use illustrative cases of companies in the EU which placed a priority on preparing the market for the new order.

On April Fool’s Day, First Bank, a foremost Nigerian bank, issued a press release stating that it had adopted the International Financial Reporting Standards (IFRS). Without prior notice, the bank stated that the change to IFRS would take immediate effect and will apply to the bank’s financial report for the year ended March 31, 2009.

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As the Nigerian stock market convulsed in the past year analysts  have come to be regarded as shamans with the powers to conjure or calm the animal spirits at will. One day reassuring investors that the patient is making a full recovery and the next minute pouring the oil for Extreme Unction. Under circumstances of fear and loathing that have characterized investor sentiment over severe losses suffered, the pronouncements and prescriptions of analysts can and do have  significant effects on the share price of companies. In some cases, the very sustainability of the firm has been called into question. With this kind of power one only wonders how soon it will be before abuses start to appear. As history teaches with countless examples, power corrupts and absolute power corrupts even the best of men absolutely. Those responsible for good order in the market need not wait till then. In this post we discuss the vital role that analysts play in the market and why such influence as they have so clearly enjoyed in recent times is critical to their investment filtering function as well as the efficiency of markets. Next we discuss with a number of marquee  examples, cases where such powers have been applied to perverted ends. Recent allegations of purported analyst research used as a cover to de-market sector competitors accentuates the relevance of the subject.  Finally, we examine ways to ensure that such power is not misused for ends contrary to those for which they were originally intended.

Speaking in an November 2007 interview with the Times of London just a few days after downgrading Citigroup from Strongly Perform (SP) to Strongly Underperform (SU), Meredith Whitney, former executive director of equity research at CIBC World Markets, stated without mincing words: ‘People are scared to be negative, especially when a company has such a wide holding. Clients are not pleased with my call and I have had several death threats. But it was the most straightforward call I’ve made in my career and I am surprised my peer analysts have been resistant. It’s so straightforward, it’s indisputable.’ Read More…

The recommendations of the Dotun Suleiman Committee for the Review of Capital Market Structures and Processes have received a lot of attention in the press. As a result of public concerns over certain perceived abuses and improprieties on the Nigerian Stock Exchange, those  recommendations which  touch on the oversight functions of the Securities and Exchange Commission (SEC) over the exchange have been in the spotlight. However, one recommendation, so far adopted, that has received far less attention, is the introduction of book-building method in securities sales transactions. Known as Rule 78(c) it will have significant long-term impact on the Nigerian capital market through its potential to fundamentally change the content of public offering communications, structure of ownership of companies, surveillance of corporate governance, review of corporate performance and the quality of issuer-investor relations. In this post, we examine the trends that have led to the rise of institutional investors in Nigeria and why issuers may actually prefer them at first countenance. Then we discuss the likely implications of their established dominance on share registers and its implications for  companies planning to raise capital.

In a recent critical essay on the dereliction of duty by US money managers in the supervision of public companies  whose securities they buy and hold on behalf of private citizens, John Bogle, founder of the Vanguard Group, the giant fund manager, underlines the risks to the financial system as markets have gradually but surely transformed from owner-governed to agent-dominated systems. However, beyond his criticism of the ineluctable trend to greater ownership of corporations by fiduciaries, Bogle identifies their central role in contemporary capital markets, not simply as conduits of capital, but as watchmen of corporate governance and performance. Read More…