How shareholders’ activism ensures accountability, protects listed firms

Acting Director-General, SEC, Ms Mary Uduk

Shareholders are the owners of companies whether listed or not. They have claim on a portion of the assets owned by the company.

As these assets generate profits, which are ploughed back for further growth, shareholder value increases which capital markets reward through rise in stock price.
 
The 21st Century has seen a rapid increase in shareholders’ activism, resulting in general awareness, involvement and influence of corporate shareholders on corporate governance.

Markets in North America and Europe have seen more turnovers with boards of directors, whose members are subject to shareholder votes, solicitation of votes and legal action.
 
Individual shareholders who do not possess large share price influence or less than one per cent of outstanding shares for example, must mobilise others to have real strategic influence.

However, the collective of shareholders can exert significant influence to bring about desired changes in the direction of the firm in both the short and long terms.
 
In 2012, the Harvard Law School Corporate Governance Symposium (HLS), reported that markets continued to see shareholders making their voices heard, and that there was a potentially fundamental shift in the balance of authority between boards of directors and shareholders.
   
These owners of business take on the greatest risk in enterprises; as residual risk bearers, they may receive nothing if the company winds up. If the company grows its profit on consistent basis, a long-term shareholder value is maximised.      
   
This is the fundamental objective of good corporate governance. Hence, as principals, shareholders define the objectives of companies, which management as agents pursue. Though it is presumed that management may discharge these responsibilities, in practice, the objectives of management may differ from those of shareholders. 

   
Regrettably, many investors are unaware of their rights as shareholders and the privileges that come with being a shareholder. These rights are crucial for their protection against poor management, corporate governance failure and safety of their investments. To foster accountability and good corporate governance in companies, shareholders must embrace constructive activism and desist from sleeping over their rights.

Accountability and corporate governance
If shareholders actively exercise their numerous rights, accountability and quality of corporate governance can be remarkably enhanced.

Similarly, a lack of goals congruence could lead to agency cost that may ultimately rob shareholders of the reward for their risk hence, the need for accountability.
   
Furthermore, agency cost can be reduced, and long-term shareholder value enhanced through corporate disclosure of financial and non-financial information, and independent oversight of management by directors and audit committee. 
   
For instance, Nigerian shareholders had in 2011, found themselves on the horns of a dilemma with over N83 billion losses arising from the nationalisation of three banks, namely Bank PHB, Afribank, and Spring Bank by the Central Bank of Nigeria (CBN), in conjunction with Nigeria Deposit Insurance Corporation (NDIC). These banks were renamed as Keystone Bank, Mainstreet Bank, and Enterprise Bank respectively, and were generally referred to as ‘Bridge Banks’.
 
While retail investors were still grappling with the N83 billion loss of investment, they were faced with another predicament from the sale of Skye Bank, following the inability of its owners to shore up the needed capital for the distressed bank in 2018, where an estimated N10.69 billion, being the value of the shareholders’ fund was eroded.

 
The shareholders blamed the former directors of the banks for their current predicament, insisting that they failed to carry them along even when it became obvious that the bank needed to be recapitalised.
 
They also bemoaned the failure of the Securities and Exchange Commission (SEC) to protect the interest of investors, noting that this is a disincentive to market growth.
   
But capital market regulators had blamed shareholders for their various investment losses, urging them to report cases of corporate governance lapses perpetrated by boards of listed firms and ensure collaboration with management in creating sustainable wealth through profitability.
 
Specifically, the SEC and NSE indicted the shareholders for failure to monitor cases of corporate governance lapses of board members of banks and listed firms.
   
According to them, when such cases are reported, the regulators must carry out appropriate investigations while sanctions would subsequently be applied where necessary to correct the anomalies.

CSCS Chairman, Oscar Onyema

   
The regulators argued that the issues that led to the collapse of most banks and quoted companies in the country were occasioned by lapses in corporate governance.
 
Therefore, they urged shareholders to engage the boards of these listed firms and financial institutions in achieving the objectives of the company and hold them accountable for corporate failures.
 
Specifically, the Chief Executive Officer, the Nigerian Stock Exchange (NSE), Oscar Onyema, said: “One of the things we pride ourselves in doing at the exchange is the protection of investors. We know that when something goes wrong, the first person you want to shoot is the exchange, and possibly the SEC because we are in the front lines.
 
“If I take Skye Bank specifically, the Exchange has done a lot to protect the interest of shareholders, but please let us understand that we are operating in the market place where shareholders themselves have some responsibilities. 

“We force companies to disclose, when they put out their financials, you go to the AGM, and you have rights to ask questions. If the management is doing something, you have to hold them accountable; you cannot wait after things to be blown up before you start looking for the Stock Exchange.”  
 
He continued: “We operate within legal boundaries and if you take banks, the primary regulator for banks is the CBN, and their own limits are different from ours, and we cannot stop the CBN from taking regulatory actions against the bank. We cannot, but we can encourage shareholders to make sure they keep their eyes on the board, and make sure that they ask the pertinent questions, and hold the board and their management accountable. 
 
“We will make sure that disclosures are done and we would not allow companies that are not disclosing to continue to be in the market. We will work with other regulators to make sure that if there is any way we can protect and preserve value for shareholders, that would be done.”    

Also commenting, the Head, Registration Exchanges and Market Infrastructure Department, SEC, Emomotimi Agama, said: “Corporate governance is important for every institution. The monitors of corporate governance incidentally are the shareholders. So if the shareholders do not monitor the corporate governance of the institutions where they are investing or have invested, it is as good as throwing their money into the well.
   
“Of course shareholders should be active in finding out and following up with the managers of the companies they have invested in, if they find anything faulty, it is their responsibility to inform the regulators or the SEC. If the SEC does not know, they cannot take an action but once the SEC is aware; they cannot lose sight of taking an action immediately to save any situation that will be untold or unwanted in future.
   
He continued: “The private placement are limited liability companies that do not fall within the regulation of SEC, and that is why investors must make inquiry because they did not look at the companies they were investing; they were just following the flurry and everybody came to collect money from them. They must take their time to find out the nature of these companies, what it does, what is the future of these companies, and find advisers to do that for them.
   
“Once they do that, no adviser worth its salt will review an account or a company and the company is bad and would tell the investor to invest in it. Shareholders must learn to find out the nature of the company, which often times they do not have the technical knowledge of, and that is why you have an advisory clause in any prospectus.

     
A stockbroker and Managing Director, Sofunix Investment Limited, Sola Oni, described shareholders as the highest risk takers, noting that investors must stay ahead of events in listed companies. 
 
The shareholders are the highest risk takers; they have the obligation to know what is going on in the company that is one of the fundamentals of corporate governance in Nigeria. Over the year, we have recorded an era where shareholders were extremely active. 
   
“The trend we are facing today is a challenge to shareholders that they should not be docile. They have the duty to know what is going on where they put their money and for quoted companies, shareholders are suppose to be very close to stockbrokers who suppose to be their advisers.
   
He added: “In order words, ahead of challenges, shareholders are supposed to know what is going on, and keep the board members on check. They have that obligation, but what do we notice; people will buy shares, they do not even know what is going on in the company.”

Keeping board and management on check
Shareholder activism is derived from their level of ownership rights. Every company has a hierarchical structure of rights and privileges that accompany the different classes of the stock.

In addition to the general rights provided for in law, the Articles of Association of the company may further confer special rights on certain classes of shareholders. 

 
This may be in form of priority in voting, receipt of dividends and seniority of settlement in event of liquidation. The Companies & Allied Matters Act 1990 (CAMA), protects the rights of various classes of shares. It prohibits varying these rights except with the consent, in writing of the holders of three quarters of the issued shares of that class. 
 
Exercise of various shareholder rights can foster accountability and good corporate governance. Key among these is the voting right. Through their voting power at general meetings, shareholders exercise control over companies. A shareholder who cannot attend can do so by proxy. A proxy is a legal document giving one person the authority to cast vote and represent another.
 
Shareholders control their companies through the right to elect Directors who in turn appoints the management. Their voting power also enable them, through resolutions, to decide on fundamental changes affecting the company, such as strategic plans, mergers, acquisitions, liquidations etc.
 
Shareholders have the right to be regularly updated with information on the financial state of the company. They are also entitled to receiving price sensitive non-financial information that will enable them to determine the level of accountability and corporate governance in their companies.
 
Aggrieved shareholders have the right to sue the company if their rights are trampled upon or they suffer losses arising from material misstatements in the company’s financial disclosure. Suing usually comes in the form of shareholder class action lawsuit.
 
Minority shareholders can also enforce their rights against the company or other shareholders. The majority shareholders rule subject to their enormous voting power to pass ordinary and special resolutions.    
 
However, a minority shareholder can approach the court for protection against oppression and relief if the affairs of the company are being conducted by the majority in a manner inimical to accountability or unfairly prejudicial to the interest of members generally or to some parts of its members (including the applicant).
 
In addition to CAMA and the Articles of Association, which protect the rights of shareholders in private companies and the rights of shareholders in public limited liability companies are further protected by the Investment & Securities Act 2007 (ISA), to ensure accountability and transparency.    
   
Investors are entitled to compensation in the primary market if they suffer losses due to material misstatements in any prospectus. Under the ISA, there is a market-wide regulatory framework geared towards investors’ rights protection, transparency, and accountability.
   
Reacting on the issue, an ex Acting Director-General of the Securities and Exchange Commission (SEC), Daisy Ekineh, recently disclosed that there were over 100 shareholder associations in Nigeria.
 
According to her, they are perceived as often seeking pecuniary benefits from companies against ensuring good governance. She said the associations are also perceived as disruptive rather than disciplined at yearly meetings. 
   
“Besides, there are too many shareholders associations, making it difficult for regulators and others to effectively engage with them.” 
 
Ekineh maintained that effective shareholders activism would help to compliments regulators in the protection of investors in the Nigerian capital market. 
   
She noted that shareholder associations as currently exist are neither effective nor respected and therefore, not taken seriously by stakeholders including public companies.
 
“They are perceived as often seeking pecuniary benefits from companies as against ensuring good governance. The associations are also perceived as disruptive rather than disciplined at AGMs. Besides, there are too many shareholders associations, making it difficult for regulators and others to effectively engage with them.”
 
To mitigate the negative activities of the associations, SEC, according to her, issued the Code of Conduct for Shareholders Associations, which should strengthen them if properly embraced.
 
Furthermore, she pointing out that shareholder association can only ensure required governance on companies, if they act responsibly and with integrity. 
 
“Shareholder activism in Nigeria should not be synonymous with confrontation and intimidation but effective engagement, to do so requires knowledge of their companies, and understanding of the subject matter. This will promote good corporate governance and could enhance shareholder value.”
     
But the Managing Director, Highcap Securities, Imafidon Adonri, argued that the activities of these shareholder associations continue to add value and put pressure on companies and regulators to act in the best interest of investors.
   
However, he pointed out that their excesses are a cause for worry to stakeholders, as unprovoked and incessant harassment of directors and management of listed companies by some unscrupulous shareholders are among the reasons big private some enterprises in the economy have refused to be publicly quoted.    
 
“These nuisances, who masquerade as shareholder activists are indifferent to enforcement of corporate accountability. Their self-seeking mission is to extort through brigandage and blackmail. 

Their nefarious activities need to be curbed before they wreck further havoc on the capital market.  
 
‘Fortunately, there are many advocacy and activist groups formed by shareholders to foster accountability and defend themselves against oppression, and collectively protect their rights.”
 
He insisted that for shareholder activism to be effective and meaningfully enhance accountability and good corporate governance, it is imperative that all shareholders must comply with the code of conduct drawn up by the SEC. 
   
For this shareholder, Nona Awoh, argued that the essential thing is understanding the business, reading the financials, and asking the appropriate questions. 

“This is the only way, because if the man running the business knows that you do not know, how will he give you the answers. A number of us need to be knowledgeable about the business, not all the businesses but know a little about the business.

“ As much as you ask the relevant question, they will even tell you much more that will help know better about the business and that is one of the easiest way to get some of these rubbish off road.  I do not want to compare what people do with what I expect. The reason is that your background, education, and experience have a role on what you do.

“So if they do not know and think that their attitude is the best, no matter what you tell them, they do not see anything wrong in it.  But there is need for continuous education that is basically important because once you are buying shares, you are buying information and if you do not have the information, you are wasting your time.”

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