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Shareholder Interests and Market Regulation: The Case for a Systemic Risk Council in Nigeria

By A. Eze Nwagbaraji nwagbarai
Investors, market regulators, and market participants have learnt many lessons since 2007 about the relationships and interconnected nature of financial markets across the world. The near collapse of the global financial markets and the ripple effects that are still reverberating across our markets is one of the burdens that investors are still attempting to come to grips with.

The failure and inability of Nigerian market regulatory authorities – the Central Bank of Nigeria (CBN), the National Deposit Insurance Corporation (NDIC), and the Securities and Exchange Commission (SEC) to effectively respond to the recent market downturns and provide sufficient firewalls against losses in our financial markets add lasting lessons to our market realities.

The global convergence of business news and information, aided by the extensive revolutions in technology have exposed the inadequacies of markets that rely on obsolete approaches to regulation, and have created fluid market situations where official regulatory inadequacies in far away markets, inflict lasting pains in local markets.

Central to these lessons is the need to identify, monitor, and reduce the possibility that a sudden shock will lead to a market seizure or cascade of failures that puts the entire financial and market systems at risk of collapse or near collapse. Other lessons include the inability of market regulators to move at the same pace that markets move and adjust and adapt to technological innovations at the same pace as other market participants.

Efficient free markets remain the most viable avenue for increasing our national wealth. It guarantees continued employment, innovative businesses, and brings out the best in human ingenuity by encouraging those with the best ideas to approach the market for funding opportunities. There is a role for regulators, investors, and market participants in an efficient free market.

The most lasting lesson to be learnt from the first global market crisis of the 21st century is the inadequacies of existing economic and market theories and the inabilities of regulatory authorities to effectively engage the market at the same pace in an increasingly interconnected global market. These lessons will naturally lead to the establishment of enhanced market regulatory mechanisms, both at individual sovereign and international levels, because sovereign markets have national interests in protecting the continued survival of local markets.

AI regional and international levels, the drive for effective policing of markets is borne out of the need to protect and avoid the effects of local market failures, cascading into a global problem. China, for example, has intensified its call for re-addressing the supremacy of the US Dollar as a prime global currency.

Nigerian investors and the Nigerian economy as part of the West African and African regional economies require effective regulation as part of the determined efforts to enhance economic growth and sustain investors’ confidence. Further, market participants in Nigeria, at its minimum require clarity of purpose and visions of predictability from our market regulators.

Shareholders and Regulators
The primary interests of investors and shareholders are profits from invested capital and maintenance of value. Competition for investment funds from various markets creates constant re-evaluation of alternative market avenues for investors. Stable and predictable market environments provide investors with assurances to engage in predictable market
risks.

Regulators roles in the market are primarily to assure level or fair playing environments and to assist in attracting private investments that lend positive results to the national economy. No sovereign government has ever been successful at providing “full” employment alone. Successful economies are a combination of government and private partnership in investing for growth. It is the responsibility of market regulators to create the enabling environment for private investors to participate.

Inability to fashion out regimes of efficient market regulatory institutions are antithetical to economic growth and are the primary causes of market failures. When markets fail, both public and private invested capital loses value. Market failures further erode private participants’ confidence and have negative impacts on economic growth.

Several factors are regularly prescribed as causes of market failures. However, there is a near consensus among economists and market analysts that market failures in emerging economies, such as Nigeria are primarily a function of inefficient, ill-equipped and redundant regulatory institutions. Efficient emerging economies traditionally attract high inflows of private capital, due to the availability of profit opportunities. Infrastructures, service provisions, manufacturing, etc. tend to command high attention and create opportunities in these economies more than those found in developed economies.

Regulating a market requires the adoption of best practices and the ability to learn and correct identified lapses and deficiencies, thereby limiting re-occurrences. However, the most debilitating problem within the Nigerian market is the pervasive nature of corruption and the inability of both the legislative and executive arms of government to reign in sharp corrupt practices.

The penetrating cloud of corruption imposes questionable clouds on the investment climate. It inhibits the emergence of viable institutions necessary for long term investments. Services or goods provided through the market to the Nigerian consumer come at exaggerated and grossly inefficient prices,  compared to similar goods or services in more efficient markets. This is the case in
telecommunications, electricity, banking, etc.

Efficient capital allocation, as an investment principle, requires a long term approach. Efficient private capital allocation includes the ability to identify strategic long term investment interests and the potential returns. It is these long term investment interests that create lasting employment opportunities in every economy, a necessary component for any meaningful economic growth and market expansion.

Once long term private capital investment is crowded out, the economy is populated by short term investments, where investors seek quick or immediate return to their capital. Markets populated by short term capital investments are susceptible to every manipulation and gimmicks because the intent of the investor is to secure quick returns.

Nigeria has one of the world’s weakest conflict of interest laws in matters relating to the markets. Several market regulators are mired in self-dealings and insider dealings that present their work in the markets in the most unfavorable light. The Chairman of the Nigerian Stock Exchange (NSE) for example, is the Chairman and Director of Transnational Corporation (Transcorp), one of the companies that were lavishly promoted as Nigeria’s response to a global conglomerate. The company came to the markets to seek equity with the Chairman of the NSE as its frontline cheer leader. The same goes for CBN Governors and Regulators, the SEC Regulators, etc. These individuals take substantial equity interests in the companies they regulate whether directly or indirectly.

These acts, over time, penetrate investor confidence in the system and may have adverse effects on both the market and the corporations involved.

They put to question every decision taken by the regulator and cast doubt on his sincerity of purpose. Alan Greenspan, the venerable former US Federal Reserve Bank (Central Bank) Chairman for more than a decade, for example, never invested in any publicly traded company in the US throughout his tenor as Fed Chairman. Whatever investments he had before his appointment as Fed Chairman and whatever accrued as investment from his salary in that position were put into US Treasuries and Government Bonds.

Strengthened conflict of interest laws that discourage self dealing and insider transactions in the market are a necessary tool in developing and sustaining investors’ confidence. Conflicts of interest also deny the markets the opportunity to develop proper regulatory cultures and mechanisms necessary to protect against real market dislocations. Regulators are umpires (referees). They cannot officiate neutrally in the games as players and referees. The referee must be neutral.


Disclaimer

Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.