Eze Nwagbaraji
In an altruistic world, markets should function in near efficient pathways. Market regulators would be vigilant and protect the interests of those who have been invited to participate in the build up to robust markets.

The primary focus of the market regulator would be to use sound economic and market principles to advance the interests of all participants and those who lose money in the markets, will at its minimum be confident that they lost money in a fair market, where success and failure are based purely on their abilities and knowledge to understand the principles of risks and reward.

Altruism is not a term that is associated with the rough and tumble world of investing. This is the primary reason for the creation of market umpires, known as regulators, whose primary function is to supervise all market activities, protect those who come to participate in the market, deter those who come to markets to game the system and its participants, and punish those caught in sharp practices and market manipulation.

The lead umpire in securities and equity markets is the Securities and Exchange Commission, set up as a government structure to referee the workings of the market. The Nigerian Securities and Exchange Commission (SEC) represent our decisive attempt to put in place the proper structure to lead the workings of our markets and assist in the advancement of a coordinated functional securities and equities system that assures the investing world that ours is a market worth trusting.

Markets go through economic (investment) cycles and market participants have come to expect these cycles as normal. However, regulation induced cycles borne out of the failure or inability of the SEC to properly understand or engage the market in a constructive way is a burden that investors must internalize as they draw up strategies for engaging the market.

The inability of the Nigerian SEC to decisively pursue corporations and corporate entities implicated in numerous unsound market activities, fraud on investors, self dealings, etc. point to a failed regulatory regime. However, shareholders are not without rights or powers to be part of a system of corporate oversight and supervisory mechanisms channeled to protecting their invested capital.

Shareholders have various rights and these include the right to vote on various issues that affect the corporation, the right to sell their shares, and Nigeria’s corporation laws provide that shareholders have the power to vote to elect directors, they must approve certain fundamental matters affecting the corporation, such as mergers, acquisitions, and amendments to the corporate charters.

It is within these shareholder rights that investors must look to participate in the governance of their corporation and protect their investments. The investing public may be savvy and more proactive than the regulatory institutions and may have better understanding of the markets.

The Right to Vote
Corporate law clearly grants shareholders the right to vote in the election of directors and the right in certain cases to identify the limits of the powers of the directors. The universal rule is that shareholder mandate requires majority vote. In some instances, such as the election of directors, election may be by a plurality of votes, i.e. affirmative votes cast for a nominee or nominees than for other nominees without regard to votes against such nominee.

A plurality voting requirement has the advantage of making sure that the candidates with the most votes win, as opposed to a majority vote requirement that could result in a failed election, if there are more candidates than positions because of the possibility that no candidate would receive a majority of the votes. At no time has the right of a shareholder been more important than now. The power to project this right in defense of your investment interests may indeed determine success and failure in the market place.

Directors recruit and maintain management on behalf of a company’s shareholders. It is management that is responsible for the day to day operation, even shareholder operational mandates for the corporation. Rarely in corporate history do shareholders originate major policy positions or changes in a corporation. Directors and management do. They may seek shareholder backing for such positions, but it is fundamentally their prerogative to initiate such management, policy, and market positions.

Shareholders are only provided with blanket explanations for such positions to earn their supports or rejections of such positions. Even in major shifts or changes in a corporation’s charter, it is the directors and management that directs the changes.

The undeniable hard business lesson of the past decade in Nigeria and across leading economies of the world is that failure of shareholders to diligently appoint those who represent their interests as directors may lead to the demise of the corporate entity. Or at its minimum create sufficient confusion within corporations and industries that jeopardize shareholder invested capital.

Classic examples of this in Nigeria include the current crisis that have rocked Intercontinental Bank, Afribank, Union Bank, Oceanic Bank, Spring Bank, etc. Overseas, corporations such as American International Group (AIG), Enron, Fannie Mae, Freddie Mack, General Motors, etc. have either gone bankrupt or are remnants of their original entities.

To attract and sustain internal and external capital inflows, market regulatory institutions in Nigeria need serious overhaul. The status quo is a grand excuse for incompetence and will not sustain capital market expansion.

In the interim, current investors need to be proactive in the selection of directors. The crisis that have continued to trail our financial sectors while a regulatory failure, is also a management failure. How else can one explain the mess at Transnational Corporation of Nigeria, where billions of Naira of investor funds raised through our capital markets was “successfully” mismanaged, while the SEC watched idly like a paralyzed duck.

The entire crisis was preventable. Reckless corporate executives in concert with nebulous board of directors inflicted wounds that may take decades to heal in our financial markets. Market injuries that involve investor loss of confidence last longer than physical injuries, because investors in capital markets have sustained alternative uses for investible funds.

Shareholder apathy in the management of the affairs of a corporation leads to inefficient allocation of investable assets and may indeed lead to portfolio collapse. Even if the investment portfolio does not collapse, it will lead to diminished return on invested assets. Those who invested in Transnational Corporation of Nigeria, Afribank, Oceanic Bank, etc. definitely over the next few years will continue to suffer from diminished returns on those assets.

Even in markets with better regulatory regimes, shareholder apathy leave indelible wounds when management and directors are not checkmated. Goldman Sachs, the American investment banking behemoth was this summer fined US$550 million by the US Securities and Exchange Commission for underhanded conduct in the markets.

Goldman Sachs is undeniably one of America’s most successful investment banking outfits, whose history date back to nearly a century. It is largely an institutional advisor to high net worth individuals and corporate clients, financier, market maker, asset manager and co-investor with its clients on a menu of investible assets. The corporation has an unrivalled history of delivering quarter after quarter command and superior returns on shareholder funds. Its motto has always been:

“Our clients interests always come first. Our experience shows that if we serve our clients well, our success will follow.”

When the SEC slammed Goldman with securities violation law suit, the corporation’s executives responded in various news releases that everything they did was to serve their clients’ interest The SEC’s case against the company was very vivid.

The case against Goldman was that at the behest of one client, Paulson and Company, Goldman put together a Collateralized Debt Obligation (CDO) in this case a collection of mortgages that it then sold to other customers. Paulson without pretention asked Goldman to create the CDO to enable him bet against the obligations and when they did, he bet that the obligations will fail.

Paulson believed that the mortgages in the CDO will default at a higher rate, rendering large chunks of the obligations, worthless.

To understand what was going on at Goldman (one of the world’s best managed firms with 1,100 institutional investors owning nearly eighty percent of the outstanding shares), think of a construction company knowingly building an apartment complex with defective and sub-par building materials. The company buys an insurance that will pay off in case the building collapses. While Goldman was the construction company, Paulson & Company was the supplier of the materials. They both made sure that the building was erected with defective materials. Goldman sold the houses (slices of the CDOs) to other Goldman clients, without telling them of the inherent hazards in design and construction.

The entire scam worked out as intended. Paulson for his part collected huge fees and when the buildings collapsed he won the bet and ran away with his loot like a bandit. Goldman collected its fees for constructing and selling the buildings.

Though Goldman has agreed to a settlement with the SEC, it is facing numerous shareholder derivative lawsuits and class action suits from those who invested in the CDOs. Shareholders have considerable powers derived from their inherent rights as owners of a corporation. In markets with relatively ineffective regulatory regimes, proactive shareholders are the vanguards of their own investment destinies.