Upscaling shareholders association for effective corporate governance practice

BY ANTHONY IZUAGIE

The role of shareholder activism in promoting corporate governance globally cannot be overemphasized. Activism is a process of ensuring the Board of Directors acts ethically as stewards for shareholders by implementing decisions that will increase company value.

Technically, activism helps to illuminate the level of transparency of governance. Globally, this role is played by individual shareholders, shareholders associations, and institutional investors.

Studies by Adegbite et al (2012) reveal that Institutional shareholder activism in Nigeria has been passive. Shareholder activism in Nigeria would have been more credible and effective if institutional shareholders had participated actively by using their robust investment processes and analysis to achieve effective engagements with management.

The study noted that with the involvement of pension funds and mutual funds organizations, activism is weak because these organizations prefer to maintain and sustain their business interests and don’t want to take on the costs of active engagement.

As for individual shareholders, they have naturally been free riders who lack the knowledge and experience to provide quality activism and they cannot afford the running costs. Presently, shareholders’ associations dominate activism through participation at annual general meetings and registration with the SEC.

The growth of shareholder associations in Nigeria is commendable. As of 2000, Registered Shareholder associations were less than 30. In 20 years, the associations registered with the Securities and Exchange Commission of Nigeria (SEC, Nigeria) were 111 associations. At this level, we have at least one shareholder association to one listed company on the Nigerian Stock Exchange. The ubiquity of these associations does not demonstrate the impact of these organizations in promoting effective activism.

In an article credited to Chris Ugwu of Nairametrics published on July 8, 2023, he lamented the state of shareholder activism in Nigeria stating that annual general meetings are gradually becoming an ineffective way to hold management accountable on behalf of minority shareholders.

One would expect that the growing number of these associations will boost the achievements made in the corporate governance process rather, they are institutions bargaining with management over what they can get for their cooperation.

Some of these associations are facing internal governance problems coupled with other issues that have contributed to their ineffectiveness including members’ unethical behaviors, inadequate supervision of association activities, low membership education, and insufficient financing to build a credible and functional association.

Beyond attending annual general meetings, other forms of activism include meeting with management to discuss policies and decisions, writing letters to management, media campaigns, voting at AGMs, and asking questions during conference calls. From these, only attendance at AGMs has been well explored by shareholders associations as a means for activism.

Having observed this, it is necessary to upscale shareholders association for effective corporate governance practices. The following suggestions can help build better shareholders’ associations in Nigeria.

Improve supervision and monitoring by regulators- Presently, the SEC has instituted a code of conduct for shareholder associations however the effectiveness of this code depends on the supervision and monitoring for compliance. The SEC relies on shareholders’ activism as an avenue to promote transparency and accountability.

Some association members have complained in public about the violation of this code of conduct by others yet no formal investigation or sanctions have been imposed on erring association. We expect the CAC and SEC to do more by enforcing associations to render reports of their activities promptly for scrutiny.

Build a transparent governance system for the shareholders’ association- The internal democracy of most shareholder’s associations is laid on weak foundations that permit conflicts of interest among members. Some of these associations are family-owned running as a one-man show.

Shareholders’ associations are advised to develop fair and credible institutional structures and processes that promote the continuity and growth of the association. Officers of the association should be creditably elected and with adequate checks and balances.

Equip members through education- Like most membership organizations whose members’ education has improved through continuous training, shareholder associations can build the competence of their members through regular training programs. Training can focus on the investment management process, management engagement, financial statement and reporting analysis, proxy voting education, writing press releases, and managing media communications including the use of social media.

Building institutional structures- Shareholder associations can build credibility through their visibility. The existence of physical offices and online presence reflects the functionality of an association. Associations without a functional office or online presence can be assumed not to be functional therefore setting up such structures and managing them provides insurance against the key-man risk. Certainly, a physical office is a place where the public can inspect the association’s books of account and verify the association’s existence.

Concentration of activism efforts- Most shareholder associations endeavour to participate in all annual meetings of listed companies in Nigeria. The stress of participating in all meetings can cause exhaustion for participating members resulting in ineffective participation in the meetings. Some associations involved in activism participate to earn a higher benefit or return above the cost of AGM participation. Well-planned investment in activism can be concentrated on a select number of listed companies for effective coverage and dissemination of activism.

There have been challenges building institutions in Nigeria especially when such an institution needs to be privately sustained. As the Nigerian government ramps up plans to build a one trillion-dollar economy, which is expected to have a significant impact on the performance of the capital market and listed companies, shareholders’ associations are encouraged to reassess their strategies for activism.

Anthony Izuagie is an MBA candidate and CFA level 3 candidate. He is at Dillard College of Business Administration. He can be contacted at [email protected]