Nigeria: A 'No' Vote By Shareholders

22 May 2019

Shareholders have kicked against the proposal by the Securities and Exchange Commission to stop the distribution of gifts by listed companies during their Annual General Meetings.

Since the stock market downturn of 2018 and 2009, when investors recorded huge losses, it has been difficult for the market to witness high patronage. Regulators have been trying to restore investor confidence to the market.

The Securities and Exchange Commission (SEC) has, in recent times, introduced various strategies and policies to ensure that more investors return to the nation's capital market. Apart from ensuring that more investors return to the market, SEC believes that investors should equally enjoy significant returns on their investments. Hence, they have been introducing policies that enable shareholders receive their dividends regularly. And in line with its determination to ensure that companies deliver higher returns to shareholders, SEC, penultimate week exposed new rules and sundry amendments to some of the existing rules to the market operators before they are implemented.

The New Rule

SEC is seeking to create a new sub rule to regulate the conduct of Annual General Meetings (AGMs) and make some amendments to some existing rules. Specifically, the new sub-rule specifically seeks to reduce the cost of organising shareholder meetings, by making illegal the distribution of gifts to shareholders, observers and any other persons at AGM and extraordinary general meetings (EGMs).

Should the rule be agreed on, "public companies shall not convene any meeting with select group(s) of shareholders prior to an AGM/EGM."

Justifying the proposed rules, the SEC observed: "that some companies arrange meetings with select groups of shareholders ahead of general meetings to discuss proposed resolutions and agree on strategies which are often detrimental to the interest of other shareholders."

According to SEC companies that violate these provisions, "shall be liable to a penalty of not less than N10 million."

SEC decried the huge amount spent by such public companies on corporate gifts at AGMs/EGMs, which greatly impact their profitability.

It argued that at a time when few companies are making reasonable profits and even fewer can afford to pay dividends, the latest move would positively impact on earnings per share of many if the amount "budgeted for gifts at AGMs/EGMs can be reserved for other relevant operational or administrative expenses."

"Public companies spend a significant amount of money on corporate gifts at AGMs/EGMs and this has a great impact on their profitability. Few of the companies are making reasonable profits and even fewer can afford to pay dividends. If the amount budgeted for gifts at AGMs/EGMs can be reserved for other relevant operational or administrative expenses, it would positively impact on their earnings per share," SEC said.

Apart from the rule of the conduct of AGM/EGMs, the commission also proposed amendment to Rule 42 that will lead to the creation of Sub-rule 190 (3) which states that "public companies shall disclose some minimum corporate governance information on their websites including governance structure, composition and structure of the board, shareholding and dividend analysis among others.

Justifying this amendment, SEC said as part of the Corporate Governance Scorecard implementation strategy, companies are expected to disclose a Minimum Corporate Governance Report on their websites. The information is expected to be structured to contain reasonable corporate governance information on the public companies.

In another proposed new rule, SEC is moving to reinstate the individual sub-broker function to the market. Individual sub-broker function was removed in November 2017. However, SEC said the deletion of that rule generated a lot of comments from the Nigerian Stock Exchange (NSE) and Association of Stock Broking Houses (ASHON), who thereafter requested for the reinstatement of the function.

"The Rules Committee revisited the issue and the commission agrees that reinstatement of Individual Sub - broker function will help in enhancing financial inclusion, deepening the market, and attracting more retail investors as well as enable the Sub - brokers have more presence at the grass root level," SEC explained.

Shareholders React

While SEC may have been pushed by the rowdy nature of some AGMs during the sharing of gifts and is trying to check the situation, shareholders said rather than stop companies from providing gifts, the regulator should find a better way to manage the situation.

A legal practitioner and shareholder activist, Mrs. Oludewa Thorpe, said although it is true that some retail shareholders have become nuisance to companies, the relationship is mutually beneficial.

"Stopping distribution of gifts and pre-AGM meetings is like throwing the baby away with the bath water. The financial outlay (for gifts) is minimal compared to the benefit derived by the company. Rather than stopping it, the process should be fine-tuned," Thorpe said.

The founding National Coordinator, Independent Shareholders Association of Nigeria (ISAN), Sunny Nwosu, said shareholders could be properly managed even though some of them, sometimes, behave unruly.

"In some cases, shareholders don't go home with any money(dividend). It is that gift that they take home. If it a souvenir, it tells them that they are shareholders of the company. The gifts also keep them happy that they are also enjoying from their company and that is very important. For SEC to be interfering, it is never by force. If the companies are capable of doing this, they should be allowed to do so. There are companies that do not come with any gift to AGM. There are so many other things that SEC ought to interfere and not gifts that cost little to the companies," Nwosu said.

On pre-AGM meetings, he said it was the prerogative of the management and not even the board because they use that to call stakeholders , agents, key distributors and others to explain to them how the business is being managed and receive advice when necessary.

"SEC should have a rethink and leave management and board to decide whether or not to distribute gifts. If SEC is asking for N10 million, indirectly they are trying to make money from the companies. I don't think that draconian rules should be introduced now," he said.

In his reaction, Chairman, Ibadan Zonal Shareholders Association, Mr. Eric Akinduro, said the move was to short change retail investors in the market.

According to him, the gifts are at the discretion of individual company, noting that the amount they spend on gifts is very small compared to what companies spend as end of year appreciation to regulators and others.

"What is the total value of gifts companies are giving to shareholders. Did the company complain? I have never seen an AGM where shareholders compelled companies to distribute gifts. It is at the discretion of the companies. Again, these gifts, particularly souvenirs, can go a long way as marketing strategy to sell the company's products," Akinduro said.

He explained that pre-AGM meetings are not bad as far discussions at such meeting will help to improve companies' performance.

"Most of the pre-AGM meetings, as far as I know, are to update leaders of shareholders group, who care to attend to keep them abreast of operations of the companies. The shareholders leaders will then pass such information to their members who are at grass root level because they may not be able to attend the AGM proper," he added.

He noted that SEC may be looking at the budget reported in annual reports, hence the assumption that huge amount is being spent on gifts at AGMs.

"AGM expenditure is not only on corporate gifts. Other expenses like printing and distribution of annual reports, payment for venue, lodging and feeding of board members in hotels, provision of security and other logistics are included. Corporate gift is just small fraction of the expenses," he said.

Also speaking, the National Chairman, Progressive Shareholders Association of Nigeria (PSAN), Mr. Boniface Okezie said he supported the banning of distribution of the gifts if it will bring sanity to the venue of AGMs.

According to him, some of shareholders come to AGM because of the gifts and not to listen to how their companies are performing or to contribute meaningfully to the progress of the company.

"This is not palatable. But pre-AGM meetings should be allowed to be handled by the companies' boards of directors and management with their shareholders. It is not the duty of regulator to decide how the companies run their affairs. SEC can only play advisory role but not to threatening to impose fine of N10 million on any company that did not comply.

"The truth is that SEC cannot regulate the conduct of AGMs. That is why we have boards made of experienced men and women who can take best decisions in that respect .SEC should look into why many companies are no longer posting annual reports with in 21days allowed by the law only to bring them at venue of the meeting. In some cases, the annual reports are not even enough for the shareholders.

"Pre-AGMs should be allowed to continue by the companies that wish to do so provided they do it orderly because on the AGM meeting we don't have enough time to ask many questions.

"l think SEC need to apply wisdom in dealing with the delicate issues like this so that the good intention would not be ruined."

On her part, the National Coordinator of PSAN, Mrs. Bisi Bakare said the gifts shared at AGMs should not be stopped by the commission, saying the gifts have created a kind of bond among shareholders who meet one every year.

"The gifts at AGM is a smile to an annual birthday which you mark in appreciation of another successful business year. Apart from the statutory requirements to approve the accounts and all others, it is a celebration between the company and its shareholders. The abuses will definitely be checked not that the shareholders should be denied their delights," she said.

Bakare said such rules and proposal from SEC show that the commission has lost focus in the capital market.

"What is the cost of the gifts being distributed at AGM to shareholders whom are owners of the companies with CSR and donations recorded by companies each year. If owners of the business cannot benefit from their hard earned money they invested, who else should do so. Again, the issue of rowdiness is caused by staff of some stockbroking firms who give names of investors to fake shareholders to attend AGMs, collect the gifts and share with the staff at the end of the meeting," she said.

On the pre-AGM special meetings, Bakare said this is part of shareholders' right which they should not be denied.

"How many hours do we spend on the floor of AGM. But pre-AGM gives enough opportunity to ask cogent questions and give advice that will enable company to move forward. There are question/ advice that cannot handled on the floor of AGM for the sake of the company image. We, at PSAN are totally against SEC's proposal and it will never work," she said.

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