CORPORATE GOVERNANCE
AND THE NIGERIAN CAPITAL MARKET DEVELOPMENT
The Introduction
The
question is has the Nigerian Capital Market lived its dreams so far? It is very
evident that the Nigerian capital market currently lives below expectation,
even though it is common knowledge that the as the U.S capital market
competitiveness remains less of a corporate governance issue, being now a
corporate governance regulations point. However, the same cannot be said of the
Nigerian Capital Market, as the crash of it was unprecedented, following the
sudden drop of market capitalization from 13.5Trillion in May, 2008 to
4.5Trillion by 2nd week of Jan.2009, and about 8Trillion as at the
writing of this essay. More so, the all share index (measure of the magnitude
and direction of general price movement) dropped from 660 basis points to less
than 220, which is its current position.
The Background
Going
down memory lane, the recommendations of the Financial System Review Committee
in 1976, that led to the establishment of the Securities and Exchange
Commission was borne out of the need of developing the modern market to cope
with emerging challenges then.
For
this to produce any meaningful result, the report of the Financial System
Review Committee which was set up to review the capital market, the Securities
and Exchange Commission Decree No. 71 of 1979 was promulgated to supersede the
Capital Issues Commission in 1979. The decree which was not until January 1,
1980 was strategically empowered to regulate and develop the Nigerian Capital
Market, with such responsibilities as price determination and setting the basis
for allotment of securities.
Prior
to the establishment of the commission there existed a functional ad-hoc
consultative and advisory body known as the Capital Issue Committee,
established under the aegis of the Central Bank of Nigeria (CBN). The committee
was mandated to examine applications from companies seeking to raise capital
from the capital market and recommend the timing of such request to avoid
clustering issues capable of overstretching the market’s capacity. The
committee remained under the CBN until the promulgation of the Nigerian
enterprises promotion decree in 1972.
Furthermore,
following the rising level of economic activities, the need to establish a more
legally empowered body with regulating capacities, necessitated the creation of
the capital issues commission to take over the activities of the Capital Issues
Committee in 1973 by the Decree Capital Issues Commission Decree in March 1973.
In-spite
of the 1979 Decree, Capital Market Issues, corporate governance was
repositioned to meet global compliant by all standards and the pursuit of
growth set the part for further review and empowerment of the capital market to
meet its new emerging issues. Beyond that, in pursuit of investors’ protection,
a review of the capital market was carried out in 1996 by the chief Dernis
Odife led panel leading to the enactment of the investment and securities act
No. 45 of 1999, promulgated on May 26. In 1999, the act repeated the SEC Act of
1998. The new acts were expected to promote a more efficient and virile capital
market, pivotal to meeting the nation’s economic and developmental aspirations.
Today the SEC currently derives its powers from the investment and securities
Act (ISA) 29 of 2007.
As
all these events unfolded, stock movement experienced a free for all downward
movement regime with more than 60% of slightly above 300 quoted securities on
constant offer, (Supply exceeding demand) on a continuous basis. There was
little or no liquidity by most quoted companies as their holders are trapped,
not being able to convert them to cash to meet their domestic and other
investment needs. On the other hand, “fresh investors became cautious of
jumping into a vehicle that does not seem to have a brake, should they wish to
disembark” reports one of the financial analyst on a national daily.
Tentative
efforts towards deregulation largely fell by the wayside in the wake of the
financial crises of 2007. Instead massive new regulations came into being
especially in the ISA Act 29 of 2007. The growth and development of Nigeria
capital markets, however, continues to decline at a fast rate and most
companies cannot access the market for fund any longer. While it is normal for
the capital market to swing in different direction, as a result of the market
forces of demand, that of the Nigeria capital market seems to be following a
path of hopelessness, thereby doing untold damages the little trust the Nigeria
investors built during the boom.
While
some school of thought argue that the global economic meltdown phenomenon,
which led to the pull out of most foreign investors amongst other things stands
out as the primary reason for the sharp decline in the stock prices. If this
argument were to be considered, a well thought out and tested parameter by
which global stock decline had been subjected to and therefore proves as a
standard for judgment in cases of their magnitude.
I
beg to disagree with this school of thought, as I believe and think otherwise.
For it is only rational to opine that issues such as litigations and regulatory
actions remain essentials if the Nigerian capital markets are to return to its
part of glory in taking and maintaining the continental leadership position. It
is therefore not wise to conclude that corporate governance regulation follows
a ratchet effect, in which the regulatory scheme becomes more complex with each
financial area, because, if so, significant reforms may be difficult to
achieve.
The
growing concern surrounding these developments raised the need for questions
which seeks to confirm that the Nigerian capital market have a clear direction
with regards to the capital market development and corporate governance issues.
The sudden growth
Prior
to 2004 the Nigerian capital market remained a less important issue to an
average Nigerian, as the capital market was one of the least understood
sectors, while all stock brokers were resident in Lagos where a little hope was
near sight for their daily upkeep. The only knowledge of the market was that of
the daily stock performance published on national dailies. These never helped
in creating the level of awareness needed to enlighten the common man on any
market’s instrument in which he can invest excess cash. This also posed a major challenge as per
growth and market development.
Meanwhile,
there is less agreement as to the role corporate government played in the
declining status of the Nigerian capital market, as on the one hand; the
country’s political establishment blamed the various economic crises of the
decade in part on perceived corporate governance flaws.
It
is important to note that prior to the CBN policy of 2005 there was hardly a
time any Nigerian corporation considered the stock market as a fertile ground
for raising long term low risk funds for investment, not to talk of government
bonds until the successes of most financial banks came on board. As the courage
to approach the market increased, shabby and unprofessional practices began to
loom the market. Irregular price fixing became the order of the day as people’s
attention was diffused from other means of business investment to which short
term return on investment was possible into believing that the capital market
was a nice place for get-rich-quick fixing then came the doom.
Was corporate governance the problem?
There
is little evidence that poor corporate governance practices contributed to
either the economic turmoil of the decade in general or the declining
performance of the Nigerian capital market. The alleged corporate governance
deficiencies are considered a causal factor and with respect to the crises that
have taken place, the issues created important new corporate governance
regulations at the federal level. Experts have identified ineffective market
regulation, and supervision, unregulated merging finances as responsible for
the unsavory development in the capital market
Therefore,
corporate governance was in a way below average in the global picture, even
when the fall from the market positioning was taken into account. In general,
the trend with respect to major corporate governance practices had been towards
enhanced management efficiency and accountability.
Specifically,
it was pointed out that the general decline in investor confidence has been
heralded, among other things by ineffective market regulations and supervision,
weak institution and corporate governance; lack of regulatory pro-activity and
cohesion; unregulated merging financing; concerns over transparency;
uncompetitive cost structure and inefficient cumbersome processes. However, the
sudden surge in the capital market activities brought a challenge of capacity,
such as technology and human capital to deal with the situation by both
regulators and operators.
To
set the market on the part of growth, there is need to eliminate political
interference which puts undue pressure on regulators to professionally carryout
their duties, such as the suspension of the recapitalization of the capital
market operators by SEC and members of the national assembly which would have
strengthened the market’s capacity and eliminate fringe players and making it
internally competitive. To shareholders,
enough attention needs to be paid to regulatory anomalies within the system.
This was not as captured in the report of the national committee on the review
of capital market structure and processes. As the committee noted in the report
that the widespread market perception that NSE as a self regulatory
organization (SRO) is an entity independent of SEC and not subject to SEC’s
rules and regulation, despite unambiguous provisions of the ISA Act to the
contrary.
But
SEC, the apex regulatory body, could have had its authority undermined by its
structure and administrative profile, which throw up NSE in the perception of
shareholders, as an equal partner. According to the report, ISA provides SEC
with extensive powers that are considered sufficient, to allow effective
regulations and enforcement of rules for an ordinary fair and transparent
market in Nigeria.
However,
SEC does not appear to have adequate capacity, to implement the provisions of
the ISA and effectively exercise it authority over market operators, exchanges,
SROs and other market participants, especially as the market has grown rapidly
in size and complexity. For instance, the dependence of SEC, which currently
reports to the ministry of finance, may limit SECs’ ability to operate
autonomously, without influence from government and to act independently in the
best interest of the capital market’
Analysts
pointed out further that NSE as a precursor to SEC, operates on effective
monopoly market and its proximity to the market and prominence given to its
daily activities had given it a larger than life posture.
The Summary
A
market analyst, Mr. Johnson Abiri, in a chat with the Guardian stated: “you see
the chairman of NSE council is usually an individual of immerse business and
political statures, with other council members being people of no less profile,
unlike the situation with SEC, where its director General reports to the
minister of finance, NSE’s council chairman is usually a president and the
presidency, in a situation of conflicting interest, the two bodies NSE has the
Edge over SEC”.
Mr.
Tunji Olamore another analyst corroborated Abiri’s standpoint when he said:
“some years ago, SEC within its statutory function wanted to implement Odife’s
panel’s report the strategy and called for the sanctioning of NSE and its
officials to browbeat them into lines of SEC’s authority.
Finally,
the need for the Emergence of a non-partisan regulatory body, that has the
autonomy, independence and capacity to turn around the situation at the stock
market spared in ensuring that the stranglehold of some Oligarchs, who are
poised on bending the rules, for their self interests. Is a non-negotiable one
for a better capital market development.
