CORPORATE MISGOVERNANCE AND MANAGEMENT RECKLESSNESS IN CORPORATE NIGERIA
Good corporate governance is an important factor for investors’ confidence to return to the stock market. Lack of good corporate and its enforcement on the part of our Companies managers and the regulators e.g. Nigerian Stock Exchange and the Securities and Exchange Commission is one of the factors that led to the collapse of our Capital Market in 2008.
According to Wikipedia, Corporate governance is the system by which companies are directed and controlled. It involves regulatory and market mechanism, and the roles and relationship between a company’s management, its board, its shareholders and other stakeholders, and the goals for which the corporation is governed.
Much of the contemporary interest in corporate governance is concerned with mitigation of interest between stakeholders. Ways of preventing these conflicts of interest include the processes, customs, policies, laws and Institutions which have impact on the way a company is controlled. An important theme of corporate governance is the nature and extent of accountability of people in business.
Happenings in some of our quoted companies will be a good case study for graduate students of Business policy and strategy researching on “ Emergent issues in Corporate misgovernance and management recklessness in Corporate Nigeria”. Please permit me to you the word ‘misgovernance”
Many organisations in the country have issues with corporate governance, be it Banks, Insurance companies, Oil and Gas firms, Manufacturers, Regulators and recently Religious organisations.
If I really want to do justice to this topic, it will involve writing a book. Since this is an expository essay, I will only focus on corporate misgovernance and management recklessness, a case study of a Petroleum Marketing company quoted on the Nigerian Stock Exchange.
This company was fully privatised in 2001, but the problem with the privatisation of this company is that the core investor did not have an enviable track record in Petroleum marketing, which should be a pre-requisite for any organisation that wants to manage a company of such magnitude. The capital base of the core investor which is a group of lawyers and politicians was less than 20% of the company they acquired. How they became the core investor? Is a question for another day. Late Chief Asalu the foremost stock market investor and activist advised investors to sell their shares in the company because he doubted the competence and sincerity of the new management and core investor of this company.
The core investor in our company did not stop here, when the foreign investor in an Italian Oil Marketing company wanted to divest their investment in their own company, the new core investors in our company became the new majority shareholder in the Italian company. Although people like the late Chief Asalu, and other shareholders challenged this acquisition in the court but they lost.
A merger between the two Petroleum Marketing companies was completed in 2003. Projections regarding the performance of the enlarged entity were made, but the management and the core investor have never been able to achieve their profit forecasts.
The company had a successful public offer in 2005, and an over-subscribed right offer in 2010, they are equally planning another right issue in the last quarter of 2012.. The problem is that shareholders have not seen any meaningful return on their investment due to management recklessness, unorthodox practices and greed.
How can the management or core investor of a company, use the funds from the company they are managing to set up a subsidiary which is owned by both the company and the core investor or management. Is this not a glaring case of conflict of interest. This anomaly went on for about five years, before it was corrected in 2007. This abnormality in corporate governance was not observed by the authorities of the Nigerian Stock Exchange or the Securities and Exchange Commission, but by authorities of Johannesburg Stock Exchange because the company is quoted in Johannesburg and a subsidiary was just quoted in Toronto Stock Exchange. While this anomaly lasted the company won Nigerian Stock Exchange Awards for performance and corporate governance, what an irony? Correction of this anomaly led to dilution of our share holding, because over60 million new shares were allocated to the core investors in our company.
During the right offer in 2010, the management of the company made the following turnover forecasts for 2010, 2011 and 2012 respectively, 600 billion Naira, 780 billion Naira and 980 billion Naira. Profit after Tax forecasts for 2010, 2011 and 2012 were 18 billion Naira, 41 billion Naira and 58 billion Naira respectively. Shareholders invested based on the deceptive projections made by management, whereas the performances of the company is far below the forecasts. They planned to make a profit after tax of 41 billion Naira in 2011, but that was the year investors never received any dividend.
The core investors signed on behalf of our company and their own company a Technical and Management service agreement. The terms of the agreement include payment of Technical and Management Service fees of 4% and 3% respectively of our company’s net profit before tax, where net profit before tax is under 2 billion Naira, and Technical and Management service fees of 5% and 4% respectively of our company’s net profit before tax, where net profit is over 2billion Naira. The company received these fees for many years before they decided to waive it in 2010 and terminate it 2011. If this was done they would have received 1.7 billion Naira in 2010 and 1.3 billion Naira in 2011.
The question I want to ask is this, in whose interest was the agreement signed. This is a management that earned 880 million Naira in 2010 and 930 million Naira in 2011, even though shareholders went home empty handed at the of 2011 financial year. This is a management whose affiliate companies received over 1 billion naira in 2010 and 1.3 billion Naira in 2011 for professional services, consulting and provision of personnel, this is a management and core investor that received a total dividend of 923 million Naira in 2008, 580 million Naira in 2009 and 737 million naira in 2010.
When a fellow shareholder saw the happenings in this company, he asked me the following probing questions. What is the role of SEC? How can SEC truly protect minority shareholders? Is SEC capable of enforcing corporate governance? How can SEC prevent conflict of interest between managers’ personal companies and the companies they are managing? Did SEC verify, investigate and approve agreements and transactions that mortgage the interest of minority shareholders? I am yet to provide answers to my friend’s questions.
Although the core investor cum management have decided to terminate this obnoxious technical and management service agreement, but the termination of the agreement will be at a great cost to the shareholders. Because of the not too fair manner, the core investors want to be paid. Rather than paying off the negotiated termination fees in cash, management decided to settle the liability through convertible notes instruments and cash. Paying off in cash is in the best interest of shareholders, it is even better to borrow the cash and pay an interest of 30% or use the proceeds of the forthcoming right issue to pay the termination fee.
When will the notes be converted to shares, at what rate will they be converted to shares. We all know that the net asset per share of the company’s stock is over 40 naira, converting the notes to share at anything below 40 naira is detrimental to shareholders interest. By doing so we would have succeeded in mortgaging our future and stakes in the company. What the core investor is trying to do is for them to own majority shares in the company through the back door. If management believes strongly in our company, and they are concerned about shareholders interest, they should get the termination fees in cash and use the cash to buy more shares of the company on the floors of the stock exchange.
This company is planning an EGM which is slated for October 12th 2012, shareholders should express their minds about the negative happenings in the company because what we are experiencing in this company is not in the best interest of shareholders.
The company is now a conglomerate, as a result of this, investors and analysts do not know how to value the company and coupled with the corporate management problem which is making our company to sell at a ridiculously low price.
For us to derive better value from our investments in the company, it will be better if management can unbundle, spin-off and list the various subsidiaries of the company. Each subsidiary should be made to operate as an individual corporate entity, this will aid accountability, stop the milking of our company and improve corporate governance in each subsidiary. With this investors will be able to value each company on an individual basis, instead of the very complex structure that is in operation in our company.
Making a reckless and greedy management to sit up is not an easy task, but with focus and sincerity of purpose on the part of shareholders it is very possible. With the caliber of shareholders which we have in our company, we should be able to make management to amend their ways. As at December 2011, Pension funds owned 440 million shares, Public companies owned 61 million shares, Mutual funds owned 101 million shares, Nominees and Trust companies owned 375 million shares. Our Institutional investors should be able to organize themselves, so that they can demand and expect good corporate governance from the management and board of our company. They have the expertise and financial resources to fight this cause.
The Securities and Exchange Commission, Nigeria Stock Exchange and Pension Commission, should be please come to the aid of shareholders by making sure that Corporate governance becomes the other of the day in Corporate Nigeria. Pension Fund Administrators have invested in some of the companies that have issues with Corporate governance. PENCOM should make sure that Pension Fund Administrators have a representative on the boards of companies where they have invested workers fund in. We do not want a situation whereby workers and pensioners retirement funds will be in jeopardy.
We need a culture of good corporate governance in all the business organisations in Nigeria. Therefore individual and institutional investors should make sure that the activities of our managers and directors are guided by the principles of corporate governance, which are listed below.
• Rights of shareholders and equitable treatment of shareholders.
• Having the interests of the stakeholders e.g. employees, investors, suppliers, creditors, local communities, customers and policy makers.
• Roles and responsibilities of the board.
• Integrity and ethical behaviour by management.
• Disclosure and transparency.
When our managers and leaders are guided by these principles, things will truly change for the better in Corporate Nigeria, Stock Exchange and the nation as a whole.
Emmanuel Ewumi wrote in from Lagos Nigeria.