THE DOWNTURN IN THE CAPITAL MARKET: LESSONS IN CORPORATE GOVERNANCE

BY

DR. SULEYMAN A. NDANUSA (OON) PRINCIPAL PARTNER, SULEYMAN CONSULTING (LEGAL AND FINANCIAL CONSULTANTS)

BEING A PAPER PRESENTED AT THE 33RD ICSAN ANNUAL CONFERENCE HELD ON WEDNESDAY OCTOBER 21, 2009 AT ABUJA SHERATON HOTEL AND TOWERS (LADI KWALI HALL), ABUJA

1.00 PREAMBLE
The Chairman of this occasion,
The Special Guest of Honour,
Distinguished Guest of Honour,
President of ICSAN,
Other Distinguished Guest,
Gentlemen of the Press,
Ladies and Gentlemen,
I feel highly honoured by the Institute of Chartered Secretaries and Administrators of Nigeria for giving me this unique opportunity to speak on the Downturn in the Capital Market “Lessons in Corporate Governance”. I consider it also appropriate to commend the President, Chief Registrar and other Council members of the Institute for their dynamic leadership. More grease to your elbows as you continue to help in shaping best Corporate Governance practices in Nigeria.

2.00 INTRODUCTION
In this paper we will attempt to address the topic in six sections. The first section contains the preamble followed by the introduction section which deals with clarification of concepts such as Investor, return on Investment, Stakeholders, Capital Market, Corporate Governance, Regulatory Framework, Operating environment and Economic Recession. In section three we examine how the downturn in the Capital Market started, the cost of the crisis and the Intervention process. Section four looks at the Regulatory framework, Enforcement and Compliance, while section five reviews Corporate Governance challenges, lessons and emerging trends. In section six, which is the concluding part, we look at imperatives going forward.
(a) An Investor has been defined as the “party who puts money at risk; may be an individual or an institutional investor” (Dict. P. 355). The risk being referred to here is the possibility of loosing money invested in the Capital Market.
(b) The Capital Market is that market where corporate entities in need of funds (equity or debt) attract investors to provide the needed funds by way of investments.
(c) The term return as used in finance and investment refers to “profit on a securities or capital investment”1. It is the income or capital gains relative to an Investment2.
(d) The term Stakeholders in a very general sense refer to those persons or institutions that have some form of interest or other in companies and in the capital market. These would include the investors, regulators, capital market operators, quoted companies, the financial press and shareholders’ associations which all play critical roles in what I will call the Investment-return matrix.
(e) Corporate governance has been defined as: The set of process, customs, policies, laws and institutions affecting the way in which a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many players involved (the stakeholders) and the goals for which the corporation is governed. The principal players are the shareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large3.
(f) The Regulatory Framework of the Nigerian capital market consists but not limited to the following general and specific laws;
i. Companies and Allied Matters Act (CAMA)
ii. Investment and Securities Act (ISA) 2007
iii. Securities and Exchange Commission Rules and Regulations
(g) Operating environment relates to both the internal and external environment under which the companies in the capital market operate. The internal operating environment includes the vision, purpose, values and strategy of the organization; its leadership competence as well as ethics and governance issues. The external environment on the other hand relates to the adequacy of capital market institutions (defined as the rules, laws, practices and norms that regulate conduct in the capital market.
(h) Economic Recession is broadly defined as a decline in economic activities spread across the economy lasting more than a few months normally visible in Gross Domestic Product (GDP), real income, employment, industrial production, wholesale and rental sales. Where a recession persists, it may result in a depression.

3.00 CAPITAL MARKET CRASH
As the developed economies struggle with the persistent financial crisis, the Nigerian economy is not immune to the meltdown. Though, our banking sector is weakly linked with the global financial system because of its comparative low exposure to it. Many of our banks with off-shore credit lines were affected by the cancellation or reduction of such lines by their foreign counterparts deeply entangled in the crisis. Similarly, some banks involved in joint venture financing with their foreign counterparts of projects in the oil, telecoms, gas, transportation, power and aviation etc were also affected.
The bearish run in our capital market which started before the global financial crisis became obvious was further exacerbated by it. The current crisis in the Nigerian capital market is traceable largely to the banks aggressive activities in the market.
The banking consolidation led to 21 out of 24 banks listed on the Nigerian Stock Exchange. The race for higher capitalization led to unprecedented Initial Public Offers (IPOs) and a consequential boost to the market capitalization of Nigerian Stock Exchange. Banks as a result became the dominant factor (65% of market capitalization) at the Nigerian Stock Exchange. In addition to the foregoing, the following factors further escalated the meltdown of the Nigeria capital market:
• Unprecedented trading activity in the banking stocks fuelling the greed and connivance of some banks and stockbrokers to exploit higher returns through market making.
• Influx of foreign hedge and Diaspora funds lured by the prospect for huge returns also fuelled the stock market price rise.
• Portfolio realignment from Secondary Market to Primary Market to further exploit greater returns.
• Portfolio shift from the CBN pronouncement of the uniform year end for banks which was later postponed and eventually cancelled due to exposing and the consequential bubble burst effect the new policy had brought to the banks.
• Market correction as a result of earlier price gains not commensurate with the economic and financial fundamentals of the companies whose stocks are traded in.
• Misconceptions about margin facilities offered by banks to capital market operators fuelled by conflicting and reckless regulatory pronouncements.
All these factors were responsible for the bearish run in the capital market. The situation no doubt is seriously of concern not only to regulators but to investors and policy makers. It is evident that investor confidence is at the lowest especially as the market so far has failed to respond to various rescue plans being implemented. Such plans include:
• 50% reduction in Cash Reserve Ratio (CRR) 4% to 2%.
• 25% reduction in Liquidity Ratio (LR) 40% to 30%.
• Allowing repurchase transactions against bank’s eligible securities for 90 days, 180 days and 365 days.
• Injection of N150 billion by the CBN to maintain liquidity in the system.
• 500 basis points reduction in Monetary Policy Rate (MPR) – (10.25%-9.75%)
• 50% cut in capital market transaction fees.
• Pegging maximum downward limit of 1% and upward limit of 5% of daily stock price at the Nigerian Stock Exchange.
• Introduction of market makers to create activities in the stock market.
• Suspension of new listing to give a boost to the existing listed securities.
• Delisting of 19 moribund companies.
• 1%downward limit on prices (circuit breaker was reversed to the original 5% rule on the 28/10/08).
• Downward review of fees by 50%.
• Market operators reduced transaction fee by various percentages.
Activity in the equity market, which was upbeat in the first quarter of the year (2008) with most performance indicators on the rise, has been on a consistent decline. The bullish trend was very pronounced in the first two months of the 2008 and reached its peak in the first week of March when All the Share Index (ASI) hit its year high of 66,121.93. The market turned bearish afterwards and the trend has persisted. The Index, which rose to 63,015.56 at the end of the first quarter 2008 from 57,990.02 by year end 2007 (about 9%), has fallen to 44,057.02 (about 30%) as at October 10, 2008. Market capitalization also shed 29% from N13.27 trillion on December 31, 2007 to N9.38 trillion on October 10, 2008. In the second quarter of the year, the equity market recorded a negative return of 122%. The market capitalization fell to less than N4.5 trillion in the corresponding period of 2009. Other costs of the downturn in the capital market include:
- General loss of confidence in the economy encouraging capital flight.
- Huge loses by investors in the region of 2/3 and above of their initial investment.
- Unsaleable stocks as a result of lack of interest by investors, loss of collateral value of the stocks and general credit crunch partly due to over exposure of Banks to the market. Banks are estimated to be exposed to the capital market in excess of N1 trillion.
- Loss of value of Pension Assets casting doubts on the ability of PFA to fulfill their obligations to retirees in form of pension and gratuities.
- Inability of stock-broking firms to meet their financial obligations to their clients and Bankers. This has worsened the problem of general repayment defaults in the Banking system.
- Loss of confidence in the regulatory bodies like Nigerian Stock Exchange, Securities and Exchange Commission, CBN and Nigerian Deposit Insurance under whose watch the market was thrown into unprecedented turmoil.

4.00 WHAT WENT WRONG?
The combination of reforms embarked upon in the financial sector was aimed at strengthening the sector making it more resilient to shocks. These reforms have also exposed certain developments which form the content of what we shall be discussing under this section.
(a) MULTIPLICITY OF PUBLIC OFFERS
In the last few years as the Banking and Insurance sector reforms took effect we saw not just a multiplicity of public offers, we also saw a couple of institutions returning to the market. Investor appetite and capacity to deliver was huge and some companies, banks especially, saw an opportunity to come back for more.
This trend was viewed as worrisome and unhealthy. The argument was that these institutions hardly allowed time for the capital previously raised to deliver gains before coming for more. A company is required to provide details of the use to which it intends to put the capital raised. In many instances, the capital is used to finance activities with medium to long-term impact such as branches and information technology infrastructure. Coming to the market repeatedly in a very short while is believed to undermine the ability of the market to assess how well a company performed with the capital previously raised. It resulted in company only taking undue advantage of the bullish nature of the market and the ripe appetite of investors in the market. In situations like these, both investors and company raising capital ran preventable risks. Company on one hand escaped the discipline imposed by the market for accountability for the capital previously raised. Investors should have explicit details of how well the company has utilized the capital raised and what returns previous investors have reaped from such investment. This will ensure that companies that have utilized capital judiciously in the past are duly rewarded with patronage when next they return to the market. Such companies should ordinarily be able to raise funds from the market more easily than those who have not shown effective utilization. If regulators apply more rigor to this requirement, where companies are appropriately tasked on accounting for capital previously raised and explaining the performances recorded vis-à-vis that promised in its previous offer, investors are protected through the promotion of free information flow. Companies cannot take undue advantage of the market where these requirements are met.
On the other hand, companies can also be saved from carrying undue capital burden when subjected to such market. Companies will be prevented from just coming to raise funds because the market is bullish in this regard but will raise only what they need and have the capacity to effectively deploy. Capital comes at huge cost ultimately and too much capital is just as bad for a company as too little capital. The demands for returns by investors can become very burdensome on a company which is using more capital than it requires for operations. Some companies have been known to return capital to shareholders in the past in view of the inability of their operation to deliver returns in line with shareholders expectations. If companies must maintain a winning edge and deliver superior returns to shareholders, they must view seriously their propensity to raise capital. The true effect of too much capital came sooner than latter. As banks discovered they were carrying more capital than they truly needed. The pressure to deliver superior returns is capable of undermining the health of the institutions that have just taken undue advantage of the market since they ‘gambled’ away such capital eventually as they seek to pursue high income yielding activities. The rest is now history.
(b) THE FLURRY OF PRIVATE PLACEMENTS
As the bullish trend that characterized the Nigerian capital market in much of 2007 gave way to a more stable market with reduced opportunities for short-term profit-making, and in the face of an economy awash with liquidity, there was attendant increase in private placements undertaken by companies not quoted on the stock exchange. Although the Securities and Exchange Commission (SEC) repeatedly sought to clear the air about its responsibilities to investors in private placements, these activities still had implications for investors’ interest in the capital market as well as the companies invested in. These companies in virtually every case eventually got listed on the stock exchange. In fact, the promise of eventual listing of the company was the major attraction to investors. It was not uncommon to observe stock splits following such placements and before listing in order to position the stock to appreciate markedly post-listing. This practice became very rampant and a lot of investors benefitted by way of fresh funds and significant valuation of these companies, such would not have been if the companies had been listed.
While this trend at the time was encouraged, inevitable implications and perhaps gaps arising from using such schemes as outlets for profiteering by the key promoters became obvious. Share capital positions were bloated with share allotted to prime movers without sufficient funding backing.
As companies came into the capital market, they are expected to become better, more responsive, more accountable and even more efficient by virtue of the discipline that the market imposes. Companies can leverage the access to capital to grow the business and add much greater value. Hidden value in many small and unknown companies can be unlocked and their full potential realized. Much desired impetus for growth in the Nigerian economy can be derived from encouraging this trend. In doing so however, promoters of the company must understand and be prepared for the nature of the change that can and will result from the market quotation experience. This was an area where the SEC and NSE should have played a very good educatory and supervisory role.
Lastly, companies that went through this process to get listing on the exchange should not have been allowed to keep their closed corporate governance structures featuring only the few promoters, many of whom were family members or proxies of the major shareholders. This defect made companies listed ultimately deficient in good corporate governance.
(c) MARGIN FACILITIES AND BANKING INDUSTRY STABILITY
With increased activity in the capital market following the recapitalization, banks became more liquid. The increased liquidity was driven by growing monetization of oils receipts, consolidation of banking resources and the pension reforms. The increased liquidity and return expectations of banks prompted among others, the growth in margin facilities. Banks provided margin facilities to individual customers. Clearly, the growth of margin facilities created significant momentum in the capital market. It is arguable that the bullish nature of the market in the last Boom years was in large part attributable to the growth in margin facilities and increased appetite of the small investor. This increased interest in the market and attendant expansion then made the market very susceptible to the continued growth and sustenance of margin facilities.
Margin facilities made a lot of sense, especially in a market that was bullish. As long as the market was in an upward spiral, the stock security provided by the borrower ends up as a comfortable cushion for the facility. The challenge arises if the market or affected stocks assume a sustained downward trend, like the trend eventually became. A significant decline and withdrawal of margin facilities has threatened the market significantly. This provoked among others a major sell down in securities as banks try to recover their funds resulting to a reduction in the prices of stocks. The attempt by banks to withdraw simultaneously, made equity prices to reduce at a faster rate than existing securities can accommodate. The stability of the stock market was undermined and so was the banking industry, which was heavily exposed to the market both by way of margin facilities as well as direct and indirect holding of positions for own account. A number of banks are known to have sizeable exposure to the market, having been very active especially since consolidation. The point being made here is that the phenomenon of margin facilities as we have exploited it in recent past undermined the winning edge that companies seek to maintain and the desire to deliver superior returns to shareholders. The capital market has been undermined by unsustainable size and rate of growth of leverage which was bound to happen when the tide turned. Investors lost their wealth as a consequence and appetite for investment in the market has been significantly dampened with that experience. In essence, greed prevented the generality of people from seeing the dangers of the phenomenon and ignored caution and sensitivities before it became an albatross for the capital market. What has been of significant benefit became our undoing for lack of proper attention by regulators and other stakeholders just because the market then was on an upward spiral.
(d) INSIDER DEALINGS
Insider dealing is a very serious issue in all capital markets across the world. It is capable of undermining the efficiency of the market if not checked. It is an area that needs to be given increased attention in the Nigerian Market.
A number of developments relating to the management of different offers coming to the market in Nigeria suggest that insider dealing may be an issue in our environment. There have been issues with refund of Offer which were un-allotted. It took almost a year in some cases for such refunds to be implemented. Invariably, some operators took deliberate advantage of the situation. Imagine, offer where billions have been raised and only a fraction was successfully allotted. The outstanding funds should not have been held for more than the prescribed period before refund is effected to investors. When refunds are promptly implemented, investors can explore other opportunities in the market and activity can be driven in those markets. Other companies were also deprived of funds when they were held back by those who refused to make refunds. Unnecessary withholding of offer proceeds that should be refunded discouraged investors with a consequential backlash on the market.
Other worrisome areas associated with public offers include delayed allotments, which of course, paves the way for delayed refund of un-allotted shares. Allotments were fraught with issues. It was claimed that it took a long period to conclude because a lot of factors came into play during the exercise. Preferential allotments were given discreetly, meaning that all applicants were not given the same consideration. In fact, at some point, some key investors only filled out applications for offers upon confirmation of “preferential allotment”. A lot of insider activity happened in this area because regulators did not pay sufficient attention to it. The greater the level of over-subscription of the offer the more the tendency for questionable allotments and the longer it took to complete the offer and sent out share certificates.
There was also the problem of prompt delivery of share certificates after offers have been completed. Again, while some investors received their share certificates promptly, others, and indeed, most did not receive theirs until after long periods. The implication of this was that those who received certificates early verified such into their CSCS accounts and took advantage of upward price movements which tended to follow such offers. By the time a lot more of the investors had verified their shares and sold some or all the prices had moderated. This was a critical area. The proposed e-allotment initiative should go a long way to address this problem. However, it may be useful in the promotion of good capital market practice to examine the preponderance of such activities with regard to offers.
There are also claims that some registrars were used as instruments of price manipulation by their parent companies through delays in the verification of share certificates presented for transfer purposes as well as the late release of share certificates after the conclusion of Public Offers. Also bonus share certificates were deliberately delayed for most investors while some got theirs in time and took advantage of the market place.
Let’s take some time to properly appreciate the internal and external driving forces that create and sustain superior returns for investors in the capital market.

5.00 THE INTERNAL OPERATING ENVIRONMENT AND INVESTOR RETURNS
5.10 VISON, PURPOSE/MISSION, VALUES AND STRATEGY
A clear appreciation of the internal operating environment of a company is crucial for understanding how such a company can position to deliver superior returns to is stakeholders.
The starting point for a company that aspires to deliver superior returns to its investors is to have a vision of what the company wants to be at some point in the future4. Vision, according to Kaplan and Norton5 “is a concise statement that defines the mid- to long-term (three- to 10-year) goals of the organization”. The task of articulating the vision of the company is that of the founders or owners. But a company need not come any where close to what it wants to be at the time its vision is being formulated. For instance, Kaplan and Norton5 cited the example of a company that set for itself the vision “to be a top-quartile specialist within 5 years” at a time it was still at the bottom of the fourth quartile. Once articulated and imbibed, a vision becomes to a company what a star is to a traveler on a dark night. It gives direction and keeps the managers of the business focused on attaining the goals set by the owners. If the owners of a business lack the vision of a company delivering superior returns in the future, then attaining such a goal will remain a mirage.
Closely linked to the importance of having a vision for a company is an understanding of the purpose, mission or reason(s) for the existence of the company. Owners of a business must be able to state in clear terms what contributions they hope to make to the lives of their customers, stakeholders and the society. The diligent pursuit of its purpose will trigger the necessary reactions and build the linkages that will guarantee superior returns.
Commenting on the importance of purpose, John Browne (one time CEO of British Petroleum) has this to say:
A business has to have a clear purpose. If the purpose is not clear, people in the business will not understand what kind of knowledge is critical and what they have to learn in order to improve performance… What do we mean by purpose? Our purpose is who we are and what makes us distinctive. It’s what we as a company exists to achieve, and what we are willing and not willing to do to achieve it6.
Purpose “defines the work that must be done”7 in order to attain the vision of the company.
Having agreed on the vision and mission of company, the next challenge for the company is to determine the core values or what Kaplan and Norton8 call “the internal compass that will guide its actions”. Questions such as – what do we believe in? What are the ethical principles that will guide our corporate and individual actions? What can we tolerate, what do we forbid? – become relevant at this stage.
Once the issues of vision, purpose and values are settled, the next challenge of a business owner is to come up with a competitive game plan that will lead to the fulfillment of the company’s vision. This takes us into the realm of strategy.
Strategy, according to Montgomery9 involves the creation of value, and “this requires bringing something new to the world, something customers want that is different from or better than what others are providing”. A company that must deliver superior returns must be one which can demonstrate by its strategy that the world would be missing something if the company were to disappear, and that it would take a very long time for another firm to take its place10.
To deliver superior returns, strategy must be dynamic and must move beyond the traditional analytical frameworks and techniques that prescribe how companies can gain competitive advantage. We all know about such competitive strategies as cost leadership and differentiation. We are also familiar with the SWOT matrix by which a company ensures that its “strategy leverages internal strengths to pursue external opportunities, while countering weaknesses and threats”11.
Beyond all these, however, a strategy succeeds largely if business leaders have a thorough understanding of the Five Competitive Forces that Shape Strategy12. For a company to succeed in a market place and deliver superior returns, therefore, its leaders must be able to successfully respond to the challenges posed by:
i. Threats of new entrants;
ii. The bargaining power of the suppliers;
iii. The bargaining power of the buyers;
iv. Threats of substitute products or services; and
v. Rivalry among existing competitors.
It must be noted at this point that the primary responsibility for formulating, driving and sustaining the strategy of an organization rests squarely on the Chief Executive Officer. In addition to analytical frameworks based on the SWOT matrix, the CEO needs creativity, insight and the ability to make sound judgements on several issues13 to succeed in this endeavour.

5.11 COMPETENT LEADERSHIP
Leadership competence is an indispensable for any company that aims at delivering superior returns for its stakeholders. And our focus in this regard is the leadership of the organization, particularly the Chief Executive Officer and his team of executives.
A competent leader is one who has the ability to move his followers; harness their individual energies into a creative force focused on attaining the organization’s vision and mission; and build team spirit among employees. To do this, the leader must be able to build trust; have the courage to challenge the existing order; communicate the organization’s policies and tactics clearly and in a manner that will carry his team along; manage organizational conflict constructively to advance the goals of the organization as a whole; and inspire the organization to think outside the box14.
Competent leadership is one that has thorough understanding not only of the dynamics of the market in which his organization plays, but also a sound knowledge of the wider macroeconomic environment and how developments in both spheres affect the industry in which the organization operates.
The leadership of a company that must maintain the winning edge and deliver superior returns must be able to build up a data bank of information on matters such as: what is the structure of the industry we are in? Who are the key players and what are their strategies? Who are our peers among the key players and who are we benchmarking? What are their products and services, and how are they delivering these? What is the management structure of our competitors, qualifications, experience and even personal habits of those running the affairs of our competitors?
At the macroeconomic level, it is imperative that a company has access to, and reviews on a regular basis, trends in the aggregate demand, inflation, consumer price index, sales, asset base, etc.
It is from the wealth of information available to the leader that the organization looks “for patterns, relationships and linkages that help explain things … and articulate a feasible way of achieving” the vision of the organization15.
The point to be made from the preceding two paragraphs is that knowledge-based leadership is a sine qua non for maintaining the winning edge and delivering superior returns.
To develop this point further, we must add that successful companies have leaders that can draw linkages and relationships between happenings in the global and national economies and their own strategies. It is therefore pertinent to find out how well a company’s leadership understands global economic issues and developments. Do they have access to information on past trends, from which forecasts can be made?
At the domestic level, we should be interested in knowing the level of consciousness of business leaders of various risks in their operating environment. All companies must contend with aggregate demand risk, information risk, interest rate risk, credit risk, exchange rate risk, policy risk, liquidity, policy or political risk16. But whether or not a company can avoid corporate setbacks arising from exposure to economic risks depends, according to Teriba17, on “the degree of executive awareness about the exposure of business operations to risks and the level of risk management know-how in various companies”.
The competence of leadership of a company may also be demonstrated by how the management approaches such commonplace issues as working capital management; making a choice between debt and equity as options for strategic expansion; cost management and internal controls. Thus, for instance, management must be able to relate its business cycles to its working capital requirements through informed analysis and diagnosis, forecasting and short-term planning; as well as adroit management of the various components of its assets and liabilities18. The difference between superior performance and mediocre performance lies in the ability of management of a company to successfully handle the above issues.
Other pertinent issues and challenges related to business performance include supply chain management strategy; alignment of technology and the strategy of the firm; as well as the constant review of processes to determine how best the company can improve on value creation. A company that is able to get these issues right is in a stronger position to deliver superior returns than the one that is unable to rise to the challenge posed by these issues.

5.12 ETHICAL CONSIDERATIONS IN BUSINESS PERFORMANCE
It is becoming increasingly obvious, especially after the collapse of Eron, Worldcom, Arthur Anderson, etc, that the contemporary business leader can no longer ignore ethical considerations in conducting the affairs of the business organization. The company that maintains the winning edge and delivers superior returns in the long run is one that seeks to preserve its corporate integrity of its leaders.
A typical business organization faces several ethical challenges that must be tackled head-on if sustained performance must be guaranteed. Cases of conflict of interest, insider abuse, manipulation and falsification of records, etc abound.
To be sure, our company and investment laws contain elaborate provisions designed to deal with these challenges. Thus, section 279 of the Companies and Allied Matters Act, 1990 (CAMA) lay down what has been described as the fiduciary duty of company directors. A further elaboration of this duty is to be found in section 283 (1) (2) of CAMA as follows:
Directors are trustees of the company’s moneys, properties and their powers and as such must account for all the moneys over which they exercise control and shall refund any moneys improperly paid away, and shall exercise their powers honestly in the interest of the company and all the shareholders, and not in their own or sectional interest.
A director may when acting within his authority and the powers of the company be regarded as agent of the company…
Section 279 (3) of CAMA provides that:
A director shall act at all times in what he believes to be the best interest of the company as a whole so as to preserve its assets, further its business, and promote the purposes for which it is formed, and in such a manner as a faithful, diligent, careful and ordinarily skilful director would act in the circumstances.
What the above citations imply is that as trustees of the company’s assets, and as agents, directors should not make secret profits or use the company’s assets over which they exercise control, and must recover such assets where they are wrongly alienated. Failure to do these means that the returns that should be going to the company’s stakeholders would be lost. A direct consequence of this is the inability of the company to deliver superior returns for its stakeholders.
An important aspect of the fiduciary duties of directors is the prohibition of directors from taking bribes. Section 287 (1) of CAMA provides as follows:
A director shall not accept a bribe, a gift or commission either in cash or in kind from any person or a share in the profit of that person in respect of any transaction involving his company in order to introduce his company to deal with such a person.
What this prohibition does for a company is to seek to prevent a situation where directors, motivated by the prospects of the gains to be made by the improper use of their positions, make decisions that may result in losses to the company. The long term effect of this malady is the erosion of value to stakeholders.
Leaders of companies that seek to maintain the winning edge and deliver superior returns must also be aware of their organizations’ responsibilities, their employees and customers. Company chief executives must never allow the pressure to perform to drive them to act unethically towards their employees and customers.
Notwithstanding the provision of section 279 (4) of CAMA that “the matters to which the director of a company is to have regard in the performance of his functions include the interests of the company’s employees in general … “, many companies still regard their employees as mere tools and resources to be deployed to make money. This is not enough for a company whose goal is to deliver superior performance. Employees should be seen as human beings who have their own needs and aspirations, and should therefore be treated with dignity. Just as the employee is driven to peak performance to meet targets, the organization must in turn create conducive working environment where employees are treated with fairness and respect. Empower employees by devolving some levels of decision making to them. Avoid cheating them out of their benefits. In this way, a loyal workforce is assured, which will work with commitment to attain the vision of the organization.
In relation to customers, business chief executives should realize that creating value for the customer should be the prime objective of a company’s products and services. A company that focuses on immediate gains by taking undue advantage of customers especially in the area of pricing is not likely to go the distance as sooner or later it will begin to reap negative returns.
The lesson to be taken from the foregoing discussion is that business managers must always act with integrity. Business integrity, according to Teal19, means:
Being responsible … communicating clearly and consistently, being an honest broker, keeping promises, knowing oneself, and avoiding hidden agendas that hang other people out to dry. It … means not telling lies to yourself … accepting the business consequences of a company’s acts, [and] for great managers, it also means taking personal responsibility.
Companies that treat their employees and customers unfairly should remember the law of harvest: you reap what you sow.

6.00 THE EXTERNAL ENVIRONMENT AND THE REGULATORY FRAMEWORK
The nature of the external environment where businesses operate plays a significant role in determining how far companies can go in delivering superior returns.
The external environment comprises of institutions (which we define as the rules, laws, practices and norms that regulate conduct) which define the boundaries of action in the economy generally and in the particular market or industry where companies operate. The stronger the institutions, the more respect they command from the players and the more effective they are likely to be guaranteeing superior performance by companies.
The rules, laws, practices and norms that regulate the conduct of players in the capital market emanate mainly from the Securities and Exchange Commission (SEC), the Nigerian Stock Exchange (NSE) and the Corporate Affairs Commission (CAC), as well as from the customs and conventions of the players in that market. It is these agencies that apply and enforce laws like the Investment and Securities Act, 2007, the Post-listing Rules, the Companies and Allied Matters Act, 1990, to mention just a few.
Two major challenges face every stakeholder who is concerned about superior returns in the capital market. The first is whether or not our investment laws offer adequate investor protection guarantees as to encourage the inflow of badly needed capital into the market, which in turn will assure liquidity and vibrancy of the market. The second is whether the regulators of the market have the capacity to enforce the rules that govern operations in the market.
Of particular interest to our discussion at this point is the provision in our laws that deal with disclosure issues. Investors need accurate, truthful and timely information about a firm’s performance to make informed investment decisions. But because the information required is in possession of the managers (and perhaps, major owners) of the firm, the danger exists that such information may be manipulated in order to mislead investors. If the information is untrue or contains material omissions, then investors are misled into making bad investment decisions. The disclosure provisions therefore constitute the first institutional safeguards against tendencies that undermine the goal of delivering superior returns.
Sections 331-341 of the Companies and Allied Matters Act 1990 (CAMA) deal with the duty of companies to keep accounting records; duty of directors to prepare annual accounts; form and content of company financial statements; disclosure on related parties, directors and employees’ emoluments as well as loans in favour of directors and connected persons, among others.
To further strengthen the financial reporting obligation of companies, CAMA in part XI, Chapter 2 makes provisions on the appointment of auditors, guaranteeing their independence, and protecting them against manipulation and blackmail. Section 369 establishes liability for making false, misleading or defective statements to auditors.
The essence of these legal provisions is that companies have ethical and contractual responsibilities to their stakeholders to make accurate and honest disclosures about their operations, in order to sustain their confidence. It would appear, from the provisions of section 359 (3) CAMA that the audit committee in a public company is supposed to act as a check on the company’s auditors. However, while the law direct auditors to make a report of their findings to the audit committee, all that the committee is empowered to do is to review and make recommendations to the annual general meeting.
Section 359 (6) CAMA lists the functions of the audit committee thus:
(a) Ascertain whether the accounting and reporting policies of the company are in accordance with legal requirements and agreed ethical practices;
(b) Review the scope and planning of audit requirements;
(c) Review the findings on management matters in conjunction with the external auditor and departmental responses thereon;
(d) Keep under review the effectiveness of the company’s system of accounting and internal control;
(e) Make recommendations to the board in regard to the appointment, removal and remuneration of the external auditors of the company; and
(f) Authorize the internal auditor to carry out investigations into any activities of the company which may be of interest or concern to the committee.
Elaborate as these provisions seem, the law does not attach any liability for breach.
The Investments and Securities Act, 2007 (ISA) has taken investor protection some steps higher than CAMA. The Act makes provisions regulating the activities of capital market operators (sections 38 – 53), as well as control of public offer and sale of securities (sections 67 – 96), among others.
In a further bid to protect investors, sections 105 – 112 of ISA make elaborate provisions on false trading and market rigging transaction; fraudulently inducing persons to deal in securities; dissemination of illegal information; prohibition of fraudulent means; prohibition of dealing in securities by insiders; and abuse of information obtained in official capacity.
The more revolutionary of the disclosure requirements for public quoted companies are now to found in sections 60 – 64 of ISA. Thus public quoted companies are now expected to:
• File with SEC on a periodic or annual basis, their audited financial statements and other returns as may be prescribed by SEC from time to time.
• The Chief executive officer and Chief financial officer must certify in each annual or periodic report that:
- The signing officer has reviewed the report;
- Based on the knowledge of the signing officer, the report does not contain any untrue statement of a material fact or omit to state a material fact which would make the statement misleading;
- Based on the knowledge of the officer, the financial statements included in the report fairly present in al material respects the financial condition and results of operations of the company for the period covered by the report;
- The signing officers are responsible for establishing and maintaining internal controls; and
- Have designed such internal controls to ensure that material information relating to the company and its consolidated subsidiaries is made known to such officers;
- Have evaluated the effectiveness of the company’s internal controls as of date within 90 days prior to the report;
- Have presented in the report their conclusions about the effectiveness of their internal controls based on their evaluation as of that date;
• The signing officers have disclosed to the Auditors of the company and audit committee:
- All significant deficiencies in the design or operation of internal controls which would adversely affect the company’s ability to record, process, summarize and report financial data and have identified for the company’s Auditors any material weaknesses in internal controls; and
- Any signing officers have identified in the report whether or not there were significant changes in internal controls or other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
• Also:
- The board of a public company has a duty to establish a system of internal controls over the company’s financial reporting and security of its assets to ensure the integrity of the company’ financial controls and reporting, and report on the effectiveness of the company’s internal control system in its annual report.
- An auditor of a public company must comment on the existence, adequacy and effectiveness or otherwise of the internal control system of the public company.
- A listed public company must now within 20 working days prior to the commencement of a quarter disclose to the relevant securities exchange its quarterly forecast.

• The effect of these ISA provisions is to show, by going through the annual report and financial statements of public quoted companies, the level of risk each of them is exposed to. The benefit of this is two fold: to the investor, it helps him to make a preliminary judgement of where he wants to invest his capita. To the company, it raises the bar of legal and ethical compliance, and if diligently sustained, should earn investors’ confidence and in the long run, translate into superior returns.

7.00 CORPORATE GOVERNANCE CONSIDERATIONS IN BUSINESS PERFORMANCE
Corporate governance considerations in business performance have become a global concern; especially following the multimillion dollar liabilities that resulted from misappropriate corporate practices in companies like Citigroup, JPMorgan Chase, Adelphia, Computer Associates, WorldCom, Parmalat; and the collapse of Enron and Arthur Andersen.
Corporate governance focuses on a number of issues, which include, inter alia, accountability and fiduciary duty to shareholders, as well as economic efficiency, meaning the optimization of economic results for the welfare of shareholders20.
The following are some of the generally accepted principles of corporate governance:

7.10 THE BOARD OF DIRECTORS
The major responsibility for the success or failure of any company must be located in the board of directors, because they are the directing mind and will of the company. It is imperative, therefore, that the board be composed of directors who are knowledgeable on the business of the company and its operating environment.
To improve the process and quality of decision making, serious minded companies should make a distinction between matters exclusively reserved for the board and those on which management may act without recourse to the board. Such matters are usually spelt out in the company’s articles of association. Thus, matters like committing the company to a contract above certain defined limits; disposal of assets other than in the normal course of business; divestments, mergers, acquisitions; capital structure and indebtedness; etc may be reserved for the board’s final decision. But matters should not just end there. According to Useem21:
Decisions entailing even relatively modest resources should be taken to the board if they are of strategic significance, because they touch on the company’s core values. In addition, when directors have the opportunity and resources to carefully vet the underlying issues, the board can bring invaluable insight and analysis to bear that is not otherwise available, resulting in a better company decision than management would have made on its own.
A company that must deliver superior returns to its stakeholders must avoid the mortal antagonism between board and management that has become the hallmark of some organizations. Working in partnership with a committed management, the board can successfully combine its oversight and compliance functions with its role as shaper of the company’s strategy. According to Lorsch and Clark22:
From their places around the table, directors must steer themselves and the company’s management team toward farsighted strategic and financial thinking and succession planning. Certainly it is management’s responsibility to develop and implement strategy, but the board must use a long-range lens when requesting and vetting senior leaders’ proposals – encouraging the top team to raise its game even when things are going well and challenging it to respond creatively when threats or problems emerge.
A crucial ingredient for the success of any strategy is execution, Bossidy and Charan23 have described as “a system of getting things done through questioning, analysis, and follow-through. A discipline of meshing strategy with reality, aligning people with goals, and achieving the results promised”. Directors have an important role to play in execution. According to Useem24,
…directors must remain vigilant after making their decisions, following up with management to ensure that they are effectively implemented and that the many secondary decisions stemming from the primary decisions are dealt with as well.
Company directors must therefore appreciate the central role they play in ensuring that their companies perform creditably.

7.20 THE ROLE OF SHAREHOLDERS
We must point out that shareholders have an important role to play in ensuring that they reap superior returns on their investment. We have different classifications of shareholders – the institutional shareholder and individual shareholder; majority shareholder or minority shareholder; etc.
No matter the type of shareholder we are looking at, the point must be made that until they begin to hold their company leadership accountable for their promises and actions, they are not likely to enjoy superior returns. The institutional shareholder and majority shareholder may have an edge in terms of possessing the capacity to influence company policy. But the minority shareholders also have legal and institutional guarantees (see Part X, sections 299 – 329 CAMA on the protection of Minority against Illegal and Oppressive Conduct) that give them the leverage to influence company policy.
Shareholders, particularly those with small holdings, can also form associations with the aim of protecting the company. The phenomenon of shareholders’ associations is not new in this jurisdiction. Indeed, the release by SEC in December 2007 of the Code of Conduct for Shareholders’ Associations in Nigeria is a mark of official recognition of the importance of these bodies.
However, shareholders activism must go beyond present system where the associations appear to be vigorous only during company general meetings. The associations of shareholders should be vigilant at all the times. They should have as their leaders persons who have deep knowledge of the economy (both global and domestics), finance and market dynamics. They should have research departments staffed by skilled professionals who should be tracking developments and trends in the economy with a view to offering informed opinions which company management would find helpful in formulating or executing strategy. In this way, shareholders would have fulfilled their own obligations in ensuring that their companies deliver superior returns.

7.30 INTERESTS OF OTHER STAKEHOLDERS
Organizations should recognize that they have legal and other obligations to all legitimate stakeholders.

7.40 INTEGRITY AND ETHICAL BEHAVIOUR
Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making.

7.50 DISCLOSURE AND TRANSPARENCY
Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. They should implement procedures to independently verify and safeguard the integrity of the company’s financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.
Nigerian company law has provisions that encourage transparency among directors in their dealings with the company. For instance, section 284 (1) of CAMA prohibits a company from entering into arrangement:
(a) Whereby a director of the company or its holding company, or a person connected with such a director, acquires or is to acquire one or more non-cash assets of the requisite value from the company; or
(b) Whereby the company acquires or is to acquire one or more non-cash assets of the requisite value from such as director or a person connected;
Unless the arrangement is first approved by a resolution of the company in general meeting and if the director or connected person is a director of its holding company or a person connected with such a director, by a resolution in general meeting of the holding company.
The author played a pioneering role in codifying the first Code of Corporate Governance in Nigeria in October 2003. This code made:
Provisions for the best practices to be followed by public quoted companies and for all other companies with multiple stakeholders registered in Nigeria in the exercise of power over the direction of the enterprise, the supervision of executive actions, [and] the transparency and accountability in governance of these companies with the regulatory framework and market.
This was followed by the Central Bank of Nigeria Code of Corporate Governance for the Banks in Nigeria Post Consolidation, which came into effect on April 3, 2006. I am aware of an exposure draft for the Amendment of the code in circulation. Take a look at the following statistics25 (IFC “The Irresistible Case for Corporate Governance” Sept. 2005):
• A study by Korean and US researchers has found that well-governed firms in Korea traded at a premium of 160 percent to poorly governed firms.

• An ABN/AMRO study showed that Brazil-based firms with the best corporate governance ratings garnered 2004 P/E ratios that were 20% higher than firms with the worst governance ratings. It was also found out that Brazilian firms with above-average corporate governance had ROEs that were 45% higher and net margins that were 76% higher than those with below-average governance practices.

• A study of S & P 500 firms by Deutsche bank showed that companies with strong or improving corporate governance practices by about 19% over a two-year period.

• In a 2002 McKinsley survey, institutional investors said they would pay average premiums of between 22% and 30% to own well-governed companies in Asia/Latin America and Eastern Europe/Africa respectively.

• A Harvard/Wharton team also found that U.S-based firms with better governance have faster sales growth and were more profitable than their peers.

8.00 THE IMPERATIVES GOING FORWARD
8.10 REGULATORY EFFECTIVENESS
The regulatory framework that is in place for the monitoring of market activities seems sufficient. However, the framework alone without effective supervision and enforcement will render a market prone to manipulation and lack of transparency. As the market grows, especially in terms of the nature and variety of players as well as in transactions size and activity, regulatory vigilance must grow. The bigger the market gets, the more real the scope for efficiency but at the same time, the greater the tendency for sharp practices and downside market risk. Regulatory strength must therefore be continually reviewed and beefed up to match growth. Failure to do that will undermine the attractiveness of the Nigerian capital market and dampen its return prospects.

8.20 CAPITAL ADEQUACY
While the capital market is a veritable source of capital for big and small companies, the access to capital must not be abused. Capital comes at a cost which would undermine the company itself and ultimately, adversely affect investors as well as the larger capital market. Accountability is required to ensure that companies only raise what they require and can effectively utilize.

8.30 CORPORATE GOVERNANCE
Institution and promotion of good corporate governance practice cannot be over-emphasized. Given the level of development of our capital market, it is an appropriate time to enforce good practice. We must not shy away from enforcement and implementing sanctions where the need arises. The challenge here is how to ensure that both the stock exchange and other regulators who are saddled with enforcement responsibility are themselves well governed and accountable. With good governance, insider abuse and poor market discipline is mitigated.
Nancy Pelosi, speaker of the US House of Representatives, during her opening speech to flag off debate on the $700 billion bailout package sent to the Congress blamed the crisis on the carefree attitude of the regulators of America’s financial system. This summation by Mrs. Pelosi aptly describes the Nigerian capital market crisis which no doubt is a failure of regulation. The day of reckoning has come for the weak regulatory regime of our financial system in Nigeria. This is an opportunity once again for the government to strengthen our regulatory framework to make it more transparent and accountable.
In the final analysis, the key questions have been: Should the government intervene directly in the market in order to restore the desired normalcy? Are the numerous short-term quick fixes by the regulators enough sustainable solutions? It is our considered opinion that government direct intervention is the way to go. In the long-term, government has great responsibility in creating the necessary enabling macroeconomic conditions as well as regulatory regimes that will ensure the survival and prosperity of the financial markets. Government policies must encourage the ease with which business is done, must not be that that debases the value of the naira but one that provides relevant and adequate basic infrastructure such as electricity and roads, elimination of multiple taxation, justice system that works and a regulatory regime that works and is transparent.

8.40 MARKET DISCIPLINE
One of the greatest benefits offered by the capital market is market discipline. Market discipline is believed to be capable of bringing out the best from not just quoted companies but also other participants in the market. Companies should be encouraged to come into the market and all operators to play strictly by the rules. The discipline of corporate governance, forces of demand and supply, market valuation of stocks and companies, the requirements and encouragement of free information flow and regulatory provisions for protecting investors all add to our ability to deliver superior returns to shareholders. Full disclosure requirements must be continually pursued in furtherance of the demands of market discipline.

8.50 INSIDER ABUSE
As mentioned earlier, this comes in various forms. Outside the example mentioned previously, there also claims that some registrars are being used as instruments of price manipulation by their parent companies. As subsidiaries to their parent companies and maintaining their registers, the registrars have easily succumbed to parent company directive towards perpetration of price manipulation and insider abuses. These usually happen through delays in the verification of share certificates presented for transfer purposes by stockbrokers on behalf of their clients, as well as the late release of certificates after the conclusion of public offers. Also, bonus share certificates are deliberately delayed for most investors while some get theirs in time and take advantage of the market price.

8.60 FINANCIAL SECTOR SURVEILLANCE
There is the need to expand the perimeter of financial sector surveillance to mitigate systemic risks posed by unregulated or less regulated segments of the financial sector. For example, checking the activities of illegal fund managers and subsidiary companies.
- Need for a more coordinated regulation of the financial sector. The plan to strengthen FSRCC is a welcome idea. Cross border coordination is also very desirable.
- Need to restore investor confidence

9.00 CONCLUSION
To conclude, the Nigerian capital market like other markets around the world are faced with another rare opportunity to shape a better future in a way to be more accountable, more transparent, promote good corporate governance on a scope and scale unprecedented in our history.
To a very large degree our sustainable future success will depend on how well we are able to learn from the mistakes made resulting in the capital market crisis in particular and the economic downturn in general. For the most part, we know what needs to be done and we know how to do it. Thus, face the following critical choices:
First, whether or not we have the discipline to avoid the mistakes of the past?
Second, whether or not we have the vision to adopt and stick to policies that will produce the optimal results going forward?
Third, whether or not we have the patience to stay the course?
Fourth, whether or not we have the courage to enforce our laws, rules and regulations against those who would undermine transparency, accountability, good corporate governance and rule of law?
I for one am optimistic that the answers to all these questions can be in the affirmative. For that reason, I also believe that a more transparent, accountable, effective and coordinated vision by regulators, and good corporate governance in our capital market is within reach.
I therefore thank you all for listening.

REFERENCES
1. Downes, John and Goodman, Jordan Elliot, Dictionary of Finance and Investment Terms, 6th ed. (Hauppauge, NY: Barron’s Educational series, Inc, 1985), p.355.
2. See www.investtopedia.com
3. See Wikipedia, the Free Encyclopedia
4. See Montgomery, Cynthia A., “Putting Leadership Back into Strategy”, Harvard Business Review, January 2008, p.56; Collis David J. and Rukstad, Michael G., “Can you say what your Strategy is”? Harvard Business Review, April 2008, p.85.
5. Kaplan, Rober S. and Norton, David P., “Mastering the Management System”, Harvard Business Review, January 2008, p.66.
6. Kaplan and Norton, p.66
7. Cited in Montgomery, Cynthia A., p.58
8. See Montgomery, Cynthia A., p.58
9. Kaplan and Norton, p.64
10. Montgomery, Cynthia A., p.56
11. See Montgomery, Cynthia A., p.57
12. See Kaplan and Norton, p.66
13. See Portter, Michael E., “The Five Competitive Forces that shape Strategy”, Harvard Business Review, January 2008, pp.79-93.
14. See Montgomery, Cynthia A., p.58
15. See generally, Mai, Robert and Akerson, Alan, The Leader as Communicator (NY: American Management Association, 2003).
16. See Kotter, JohnP., “What Leaders really Do”, Harvard Business Review on Leadership (Harvard Business School Press, 1998), p.42.
17. See Teriba, Ayodele in LBS Magt. Review, 1997; Harper, Victor L., et al, The Question and Answer Book of Money and Investing (Holbrook, Massachussets: Adams Media Corporation, 1955), pp.17-21
18. Teriba, p.15
19. See generally, Faus, Joseph, “Short-Term Financial Management: Analysis and Diagnosis (1), IESE Universidad de Navarra, pp. 1-23.
20. Teal, Thomas, “The Human Side of Management” in Harvard Business review on Leadership, pp.154-156
21. See Wikipedia, the Free Encyclopedia
22. See Wikipedia, the Free Encyclopedia; see also “The OECD Principles of Corporate Governance”, Policy Review, August, 2004.
23. See IFC Publication titled “The Irresistible Case for Corporate Governance”, September 2005.
24. Useem, Michael, “How Well-Run Boards Make Decisions”, Harvard Business Review, April 2008, p.106.
25. Bossidy, Larry and Charan, Ram, Execution: The Discipline of Getting Things Done (London: Random House Business Books, 2002), the preface.
26. Useem, Michael, p.135