Capital Markets Regulators across the world, and where the legal and regulatory frameworks of certain jurisdictions allows, Stock Exchanges, have being issuing Guidance Notes for listed companies on hosting of Annual General Meetings for 2020 taking into consideration the challenges faced by the Listed Entities regarding the hosting of the upcoming Annual General Meetings (AGMs) in light of the COVID-19 pandemic.
The context — Certain Listed Entities on the Dar es Salaam Stock Exchange (DSE) have expressed concerns regarding the upcoming Annual General Meetings (AGMs) of such Entities in light of the Covid-19 pandemic. Holding physical meetings comprising of large number of shareholders may add to the risk of spreading the disease.
Under these circumstances, certain listed companies have requested guidance from the Regulator as well as the DSE on possible alternative mechanisms which could be adopted in hosting AGMs with a view to circumvent the risks associated with the Covid-19 pandemic.
The Listing Rules of the DSE do not contain specific provisions relating to how or the date on which an AGM is to be hosted by listed companies. As such, companies will be required to comply with the applicable provisions set out in the Companies Act (‘Cap 212 R.E 2008’) and the Articles of Association of the Company in this regard, as well as the guidance from the Capital Markets Regulator.
In view of the aforesaid, this article is not meant to be a guidance note in any way but my own views, given my research of how other jurisdictions are handling this statutory and compliance matter, and hence possible approaches that may be adopted by companies in hosting the AGMs amidst the restrictions brought about by the Covid-19 pandemic.
And so, this is purely for information purposes and should not be construed as a guide. It is imperative that listed companies obtain appropriate legal advice in determining the most appropriate arrangement regarding the conduct of an AGM in the current context.
As I stated in my last week’s article, the coronavirus pandemic requires a rethink by listed companies, regulators and policy makers —for example, we continue to observe policy makers and regulators in some jurisdictions putting in place emergency legislation to allow virtual meetings — and by companies amending their memorandum and articles of associations to reflect the same.
But, even before such emergence legislature, some companies are already moving on and acting with what they consider to be practical approaches given the circumstances. Recently, Warren Buffett’s Berkshire Hathaway announced that it is going online this year, as have Amazon, Johnson & Johnson, Bayer, Commerzbank, BMW, etc. Same applies to some companies here at home which have announced virtual AGMs, while some have decided that for now they will just postpone their meeting, and some, like the DSE PLC have opted for a hybrid of physical and virtual AGMs. For companies which are yet to decide – the following measures/factors can be considered with regard to convening AGMs:
Postponement of the AGM — in adopting this approach a listed company should consider the following: (i) if a company has not issued its Notice convening an AGM may choose to delay its issuance of notice; (ii) for a company which has already issued an AGM Notice may still choose to postpone its AGM — in such event, a disclosure should be made to the Regulator and the DSE regarding the postponement of the AGM and preferably a notice may be published in the newspapers as well; (iii) on Dividend payments – if the AGM is postponed, the payment of dividend, if already announced by the company, and which requires the approval of the shareholders at the AGM, would also be postponed; (iv) in view of the postal disruptions (just in case there are), the listed company may choose to serve/issue communications relating to its AGM through electronic means, subject to obtaining legal advice. In such event, a notification shall be made to the Regulator and the DSE for dissemination. In addition, the company should host such communications on its website; (v) any postponement of the AGM will be subject to the timelines specified in the Companies Act; and (vi) in the event the company is unable to comply with the same, please consult the Business Registrations and Licensing Agency (BRELA), under legal advice.
Virtual AGM: Listed companies may choose to proceed with holding their AGM using technology (unless restricted by the Articles of Association and subject to obtaining legal advice) to comply with the restrictions imposed by the Covid-19 pandemic. This may include electronic and teleconference mechanisms to host the AGM such as Facebook Live, WEB Ex, Zoom, Webinar. Virtual AGM seems like a preferable route across the world, it may have its own challenges and risks – but they can be manageable.
Hybrid AGM: A ‘hybrid’ AGM can be hosted concurrently, both at a physical location as well as a virtual location. The utilization of a hybrid AGM will enable the companies to conduct its AGM with minimal physical presence of its shareholders. If the Notice of Meeting has already been dispatched to the shareholders, it may be advisable to issue a Supplementary Notice, setting out the instructions. A disclosure in this regard must be made to the Regulator and the DSE, to be disseminated to the market. For this to happen, however, listed companies will need to implement temperature and health screening measures, allowing the companies to turn away shareholders who fail to satisfy the health screen measures.
Vote by Proxy: under these circumstances, this will be highly encouraged. Listed Entities may choose to include specific provisions in the Notice of Meeting encouraging shareholders to vote by Proxy. In such instances, the shareholders may be presented with the option of authorizing an independent director to attend and vote at the AGM on their behalf. Apart from individuals, a shareholder may appoint his or her Stockbroker, a custodian bank, or any of the share registrars as his or her proxy during the AGM.
Questions by shareholders prior to the AGM: As I indicated in my last week’s article, for the case of activist shareholders who likes throwing difficult questions at the Board and executives during AGMs making meetings combative and drawn out affairs – a virtual AGM and online platform may not save the purpose — but could be an acceptable challenge to them. I would, however, suggest that shareholders be permitted to submit questions related to the business of the AGM, directly to the Listed Entity prior to the date of the AGM. The Listed Entity may include responses from the Board of Directors and management to substantial queries and relevant comments from shareholders in the minutes of the AGM.
Conducting Annual General Meeting (AGM) during COVID-19 Pandemic
Under normal circumstances this period of the year, the months of between April and June is when most listed companies hold their Annual General Meetings (AGMs), as statutorily required by the Companies Act and Capital Markets Regulations. However, this year it is different, organizing and physically holding AGMs is not an option at present. However, to offer a practical solution for this challenge, some companies have set some options for holding AGMs: Option 1: holding the AGM, but without physical attendance and with the possibility for shareholders and members to exercise their voting rights or ask questions. Under such circumstances the Directors of the company are expected to implement remote participation, possibly combined with proxy voting, where Boards/shareholders could nominate one person who can act as proxy holder. Option 2: is the postponement of the AGM until the situation has returned to normal, even if invitations have already been sent. Shareholders and members will of course have to be duly informed of this.
Across the world, legal and investment management experts, urges companies to opt for online AGMs, rather than postpone, if possible. Under this circumstance, it is assumed that, as it seems to the fact, the corona crisis may be with us for a little longer and may become a catalyst to modernize meetings and AGMs for that matter, going forward. After-all, we seem to be learning that as is in other aspects of holding meetings, holding an in-person meeting after-all could be relatively expensive. We also are learning that with an online meeting, there is lower cost and lower complexity. However, we further learn that holding online meetings have their own complexities, especially for bigger groups such as AGMs. How?
With activist shareholders who likes throwing difficult questions at the Board and executives during AGMs, where shareholder meetings are usually combative and drawn out affairs – virtual shareholders meeting and online platform may not save the purpose — online AGMs will be quite different, stealing the opportunity for such affairs for well-meant activist shareholders. However, unfortunate for them, whatever may, the change of procedure of holding AGMs, from physical to virtual, is necessary in response to restrictions on travel and mass gatherings that aim to slow the spread of coronavirus. With regulators and policymakers taking similar actions in many countries – of discouraging physical meetings, shareholders are expected to participate online where AGMs are also expected to be more efficient, albeit with far fewer heated words than usual.
While virtual meetings have been commonplace in some developed countries for years, with blue-chips from Microsoft to Ford hosting them, however, companies all across many other parties of the world had, until now, almost universally stuck with the traditional format. In some jurisdiction, there are also doubts about whether online-only AGMs are legal and concerns about lawsuits by shareholders over potential procedural mistakes. There are some concerns from lawyers also that if virtual meetings are done wrong, they may create significant risks to companies. But then, what are options? Almost none, except learning the best way to manage and mitigate potential risks.
Furthermore, the coronavirus pandemic is forcing a rethink by regulators and policy makers —for example, we have started to see and may continue to observe policy makers and regulators putting in place emergency legislation to allow virtual meetings — and by companies amending their memorandum and articles of associations to reflect the same. But whatever it turns out to be, if Regulators and Policy makers delays in providing guidance response, as it were, companies would move on and act with what they consider to be the practical approach under the circumstances. Recently, Warren Buffett’s Berkshire Hathaway has announced it is going online this year, as have Amazon, Johnson & Johnson, Bayer, Commerzbank, BMW, etc. As in cases in these other parts of the world, here at home some companies have announced virtual AGMs while some other companies have decided that for now they will just postpone their meeting, but I expect many more will simply move their AGM online.
As for the case of shareholders actively participating into these virtual AGMs, it may be an acceptable challenge for now that their desires may not be met, this is the case despite the fact that investors and shareholders’ rights activists have mixed feelings about this. Some are adamant that shareholder meetings without shareholders can only be a stop gap during the corona crisis, arguing that AGMs are not just about decision making but also about the dialogue between the company and shareholders.
The above is so because otherwise what shareholders new to virtual meetings might expect? (1) no investors attending in person, (2) questions may have to be submitted in writing, and (3) the company may not answer all of them; and (4) even if they are answered there may be no much possibility to ask follow-up questions.
Smaller shareholders and retail investors could be the most to lose out in particular. Many institutional investors have access to company boards throughout the year, but for retail investors annual meeting is the only time they have an opportunity to ask questions. If it is a physical AGM, it is very hard not to give the microphone to someone who seems insistent on asking the tough questions.
For institutional investors participating in a virtual AGM, it is much easier to manage, while also they have access to other get-together meetings where shareholders can speak to their specific representative to the boards of directors. Whichever way this is looked at AGM is a really important arena for shareholders – so even if it is migrated from physical to virtual platforms, the same context should be at the fore.
So, a big challenge for any virtual AGM is how to set up a fair and efficient process for shareholders to ask questions and note objections. In a physical AGM, every shareholder can just walk up to the podium and speak. Similarly, for an effective on-line AGM there needs to be an equivalent, this is what shareholders and regulators should expect from companies.
Active Shareholders for better Performance
The second quarter of every year is the period where companies announce their annual performances and plans to pay dividends to their shareholders based on the previous year performance. This is also the time where Annual General Meetings (AGMs) of shareholders are also called, and where key statutory decisions about companies are made. This is the time where active, intelligent and energetic shareholders actively engage the Board and managements about the conduct, strategy and performance of their companies. This is the time where shareholders demand clear and satisfying explanations when the performance results appear to be less than they should be. It is also the time for shareholders to support movements towards improved performance, but also remove unproductive directors and indirectly management from governing or managing companies.
Unfortunately, in often cases shareholders do not understand that such crucial roles are theirs. Instead, when something has gone wrong with a listed company, or where there are sketchy details about what is happening with a company – investors/shareholders tend to think, it is either the role of the capital markets regulator or the stock exchange to right the wrongs. This kind of thinking is largely wrong, even though it also has some truths — I will explain:
One of the core mandates for the regulator and the stock market, as it relates to the above context, is to promote investor education, public awareness and sensitizing interest in the capital markets products from the public. The aim real is to ensure that shareholders gain the necessary skills in and understanding in line with the governance system of the companies they have invested into so as to hold directors and management accountable in the manner in which they execute their mandates, being stewards of shareholders’ and others interests in the company.
Apart from investor education regulators and exchanges also have the role of carrying out an assessment of continuing listing obligations as stipulated in the regulations and rules of the regulator and the stock market. They also carry assessments on the proposed issuance of securities (shares, bonds, etc) to the public prior to raising capital or listing these securities into the stock market. Such assessment seeks to establish the extent to which the envisaged securities offer meets the eligibility requirements for capital raising from the public and for listing into the stock exchange.
As it were, prior to issuance of securities to the public, the issuer is required to prepare the prospectus or information memorandum that provide details of the prospective security and disclosure of the relevant information that will help investors understand the nature of the security on offer, the company behind the security on offer, its strategies, its financial wellbeing, its future outlook, its risks and risk mitigation as well as its governance and control mechanisms.
During the Prospectus approval process the regulator and the exchange gets an opportunity to interrogate the company’s board and management as to the facts stated in the prospectus, challenge their assumptions, ask for details or seek clarification on matters that requires elaborations or detailed disclosures. Once satisfied, the regulator and the exchange approve the prospectus ready for capital raising and listing of securities. Up to this stage, the investing public is not so much engaged. Their involvement and engagement start thereafter.
So, what is the role of a shareholder? I started by indicating that most shareholders tend to think that the regulator or the exchange has a key role as to the performance outcomes or governance of companies. The truth is that shareholders contribute to the success or failure of the company to meet its performance and governance expectations. But what happens is that some shareholders lose touch with the company soon as the Initial Public Offering (IPO) process. Nevertheless, shareholders are required to increase their engagement with the company soon after the IPO process; why and how?
Shareholders elects the board to represent their interest to the company. The board then delegates this mandate to management —however the board retains the responsibility of ensuring that there is a smooth business operations, governance and risk management mechanisms throughout the company.
By attending in AGMs, shareholders get an opportunity to make major decisions impacting their rights, exercising their ultimate control over the company and how it is governed and managed, as well as engaging on other matters of interest to shareholders — this includes selection of the members of directors, appointment of external auditors, approval of audited accounts, etc.
When shareholders’ role is not fulfilled companies face bad results which then disappoints shareholders who end up selling their shares at low prices or not getting returns (including dividends) from their investments. The idea is active shareholders could real help themselves by supporting moves of improving companies by making their presence left at annual meetings
The Role of Investment Advisors during Challenging times
We started the week with some good news, as reports from major global media houses read: “Stock markets in Asia and Europe started this week on the front foot, this was after positive news on the slowing rate of deaths in France and Italy which appeared to give investors hope that the coronavirus lockdown measures are bearing fruits. Share indices rose strongly in Japan, Australia, Hong Kong and Korea, amid signs that the lockdowns imposed on countries around the world have indeed slowed the spread of the disease. Korea, Italy and France all reported numbers over the weekend that suggested the spread had slowed. But Chinese stocks dipped in Shanghai and Shenzhen”.
This is all good news until you consider the side of investment analysts and advisers, for instance when the above was being report, the rejoinder from some economists in major investment banks noted, according to their analysis, that there is still significant uncertainty over when countries will return to some semblance of normal functioning, and hence markets should not be too optimistic.
Now, that says something — and this is where this article will focus, the role of investment advisers to investors and investment markets, especially in challenging and uncertain times – i.e. during global pandemic, or financial collapse, or a potential/actual world war, or a failure in agreement in dealing with climate change, or etc.
It is a fact that so far year 2020 has been a trying year for the humanity in whatever angle you look at it. From the investment and financial markets context, traders and investors have so far lost billions of dollars due to large trading and investment losses and yes, they are both financially and emotionally affected. And as the corona virus pandemic continue to spark wild swings in the financial markets, investors and traders are becoming all the more desperate and fearful. Understandably, experiencing this situation has taken an emotional toll on the investing and trading community. But as defeating as these losses feel, how one reacts to such losses and the advice/news related them is as important, probably more than the loss itself. I will explain.
Since the business of investment money in securities is unique among business operations in that it is almost always based in some degree of advice received from others, it is thus important that some degree of carefulness be excised. Carefulness should be exercised when in the process of seeking advice, especially if the advice sought is related to ways of making “huge” profits. Now, it is natural that many businessmen seek professional advice on various elements of their businesses, but seldom should be the case for a businessman to expect to be told by advisers on how to make huge profits whether during predictable or during crisis times, doesn’t matter. But then if we assume that there are normal results that are expected to be obtained from investing money in securities, then the role of advisers can be rightly established. That is, s/he will use their superior knowledge, experience and skills to protect his/her clients against mistakes of perceptions and in the process enable the investor obtain the results to which their money is entitled.
But then when it comes to investment in securities, where do potential investors expect to obtain their advice? Well, there are many sources, these include: (i) a relative or friend, presumably knowledgeable on investing in securities; (ii) a banker; (iii) a brokerage firm (or in some other places investment banking houses); (iii) a licensed investment and financial adviser; (iv) in some cases – accountants, lawyers, rating agencies; (v) books, periodicals, blogs; (vi) etc. However, probably the largest volume of information and advice to investors in securities comes from stockbrokers. Let’s expound on this:
Stock brokerage houses are firms which are members of stock markets who execute buying and selling orders from their clients for regulated commissions. Their staff member are trained by the industry regulator and the stock market on, among others are matters of securities research and analysis and are therefore expected to be capable to make securities recommendation to their clients, such recommendations must be informed by proper research and analysis on an economy, sectors within the economy and on particular companies and securities. Members of staff of brokerage houses are also expected to hold themselves in high professional and ethical standards.
Stock brokers are expected to confine their activities to executing orders given to them by their customers (investors), to supply information and analyses, and to rendering opinions on investment merits of securities, but since some customers want speculative advice and suggestions from their stockbrokers – some of the brokers finds themselves in speculative activities, as opposed to their professional mandates. That is, even though in some few cases investors and brokerage houses may thrive on speculation activities, but still brokerage houses are expected to operate on a thoroughly professional basis.
In any way investment advisers should not speculate with investors needs for information or their investing money especially in challenging times. It is in their best interest to help protect their customers against financial losses – times like these are when advisers are needed most, but their advice should be based on the information that is well researched and properly analyzed.
Understanding Value vs Price of Shares
When contemplating to invest in shares, what factors determines how much you should be willing to pay for a share? What makes one company’s shares to be worth several times compared to another? How can you as investor be reasonably sure that you are not overpaying for an apparent promising future, which could as well turn out to be a nightmare? Benjamin Graham in his 1949 famous investment book, The Intelligent Investor mentions five aspects that he feels are key decisive elements in responding to some of the above questions: (i) the company’s “general long-term prospects”; (ii) the quality of its management; (iii) the financial strength and capital structure; (iv) its dividends payment records; and (v) its current dividend rate. In today’s article we will explore these five key investment aspects in light of our current market challenges, as investors are in a panic mode and markets are losing value significantly. What we are about to learn (and mostly from that book) is that even in trying times for economies ad financial markets, value investors (as opposed to speculators) can still maintain their safety, or even increase their worth from investment. Let’s elaborate:
The long-term prospects: in recent days, investors have been so keen in following up about movements of share, of course since January to-date the movement has been on the downward direction across all markets. For speculative or aggressive investors and stock traders perspective this isn’t good news at all. But for a “value and defensive investor” this should be the time to download at least five years’ worth of annual reports for some listed companies (which are obtainable in the DSE website). Then go through the financial statements gathering evidence that will help you answer the following two overriding questions: what makes the company grow? where do (and where will) its profits come from? As you study the sources of growth and profits, pay attention on the competitive advantage of the company as well, where is it relative to its short-versus-long term plans? whether the company invest in long-term development activities i.e. its people, brand, research and development, etc; or overly reliance in short term unsustainable plans.
The quality and conduct of management: one of the most important leadership traits is trustworthy, company leaders should state what they intend to do during a period of time, and then follow up on their commitments. To appreciate this, read the past annual reports, see what plans and forecasts company executives made, if they fulfilled them or if they fell short. And, if they fell short what were the reasons, did they externalize their short comings? are they seem responsible and accountable or do they rather blame things like “the economy”, or “the uncertainty”, or “weak demands”? These questions can help you to determine whether the people who runs the company are acting on the shareholders (and other stakeholders’) interest, or their own interests.
The Financial strength and capital structure: one of the basic possible ways of looking into a business which is well and sustainably run is in finding out if the business is making cash profits i.e. if cash generated revenues exceeds what the company consumes. Under normal circumstances good business managers keeps finding ways of putting that surplus cash into productive use which also helps the company to continue enhancing its value. But how would you know this?– read the statement of cash flow, which is part of the financial statements in the annual reports. See if cash from operating activities has grown steadily in the period under review, or not?. The other element to look into is the earnings or profits per shares, is it growing? As for the capital structure, this can be seen from the balance sheet. Draw your attention onto the amount of debts that the company is obliged to pay, under normal circumstances the amount of debts should not exceed 50 percent of total capital for the company. If it exceeds such levels, you should question, because the company could end up being owned by debt holders instead of shareholders. Also, on the notes to the financial statements, observe as to whether interest rates of debts are fixed or variable – this has an impact on the profitability of the business.
The last aspect that a “defensive investor” or “value investor” is expected to pay attention into is the historical dividend records as well as the current dividend rates. What is dividend? dividends are a form of cash flow to the investor. Dividends are an important reflection of a company’s value. It is important to note also that shares with dividends are less likely to reach unsustainable values. Investors have long known that dividends help companies from declining in value.
Despite of the above, there is an argument that, usually companies pay dividends because that could be the best use of their cash; that growth companies looking to capture more market share would not pay dividends instead they would invest their cash profits in innovation and looking to provide appreciation to their assets instead of giving money to shareholders. In either case, from the practical aspects of the investors and markets, companies that pay cash dividends are highly perceived to bring more value addition to investors and hence enhancing shareholders’ value compared to companies that do not pay dividends.
Based on the above, it can be said that in investing as with life in general, the ultimate victory goes to those who are willing to devote a considerable amount of efforts to their undertakings, those who does things and know where they are going. As Yogi Bela once said: “you’ve got to be careful if you don’t know where you’re going, because you might not get there”. During these times where markets are trading on the low, you better know where you are going with the actions you take. Either way, try not to speculate.
Democratization of Companies is for the greater good
The role of corporate entities in our lives has become greatly intertwined — companies, as it is for human are treated as legal persons, and are proportionally engaged in determining some key aspects of our lives – from where we sleep, to what we eat, what and how we wear, how and where we work, how we commune and communicate, sometimes to how we decide and govern ourselves, the list goes on and on. As it is for humans, companies have their own rights and obligations, and armed with these “rights,” corporations have increased control over resources, jobs, commerce, political engagements, and even in the making of laws. And the fact that companies have limited liability – this has somehow decreased citizens authority over them.
Given this situation, that’s why the debate and movements related to the spirit and culture of distinguishing between a society oriented towards capital versus the one oriented towards people gets the necessary policy and political attention, especially ever since the idea of corporations operating as legal persons came into being. Because of this, many within societies would prefer to see the relevance of companies within societies are judged based on principles of democracy, which include accountability, integrity, and transparency.
Let me draw our attention to statement that was issued sometime in 1981 and then later in 1997 — by the Business Roundtable, a group comprising the CEOs of most of the largest corporations in the USA.
This “Statement on Corporate Responsibility” reads: a group of the CEOs of the largest US firms, recognizes six constituencies – customers, employees, communities, society at large, suppliers, and shareholders – as forming the ‘web of complex, often competing relationships’ within which corporations operate. It accepts the idea that ‘shareholders have a special relationship to the corporation’ but doesn’t allow their interests to trump all others.”
Here is an excerpt from the Business Roundtable statement: “Balancing the shareholder’s expectations of maximum return against other priorities is one of the fundamental problems confronting corporate management. The shareholders must receive a good return, but the legitimate concerns of other constituencies also must have appropriate attention. Striking the appropriate balance, some leading managers have come to believe that the primary role of corporations is to help meet society’s legitimate needs for goods and services and to earn a reasonable return for the shareholders in the process. They are aware that this must be done in a socially acceptable manner. They believe that by giving enlightened consideration to balancing the legitimate claims of all its constituents, a corporation will best serve the interest of the shareholders.”
As it reads, this statement is anchored on the need for rebalancing the share of income and wealth in favor of other interested stakeholders in the manner companies are governed, and hence the need to expand democracy in companies’ ownership and eventually finance and the economy. That is, if left unchecked — corporate greed and interests can destroy the social and economic fabric of communities, where a small group of people owning and running corporations make decisions that increasingly determine overall societies’ economic, social, environmental, governance, policy and political future.
As matters stands, it’s a fact that today, the richest 10 percent own an estimated over 90 percent of global capital income – including capital gains, corporate dividends, and interest payments. And almost 50 percent of all new income generated goes to the top 1 percent individuals, who owns or manages global corporations. In the US, for example, the three wealthiest people own more wealth than the bottom 160 million Americans. And the richest family in America – the Walton family, is more wealth than the bottom 42 percent of American citizens. Much data and information are difficult to come by in our local context – but the same can be said for us.
While corporate profits that presently go to a small number of ultra-wealthy families are at or near an all-time high, returns on other corporate stakeholders – employees, governments, and other operatives within companies’ eco-systems as a percentage of economies do not match up.
And yes, it is also a fact that those who control these corporations have strong allegiance to profits, executive bonuses and the value of shares of companies. What happens to employees, what happens to the environment, what happens to the community in which their corporations’ function, what happens to government tax revenue income matters very little.
This type of corporate entities operations, governance and ownership is not an economic model that is sustainable for the long end. Societies can do much better and cohesively while encouraging enterprising spirits and business success at the same time encouraging more transparency, accountability, payment of fair share of tax revenue to the government, etc.
The truth is, we can grow and develop in an economic model that create jobs, increases productivity while corporate are democratized by sharing part of their ownership stake with other stakeholders – employees, customers, suppliers, communities, governments, etc. and all have a say in the decision-making process that impacts their lives, and a fair share of returns to their involvement.
In our local context – I was asked recently by participants in the DSE Enterprises Acceleration Program, a program designed to build capacity to owners and managers of our SMEs so they can be more suitable to access various forms of capital; the question was, why is that Tanzania corporate entities which have much to do with what we consume and the lives we live, etc are almost all owned by either families or few foreign investors and are not publicly listed? Much as I didn’t have a response, but I know this – for sustainability, good corporate citizenship is fundamental. But also, I know some countries that mandates companies with certain thresholds such as levels of turnover, number of employees, size of balance sheets, operating in some key sectors, become publicly traded companies.
Value Opportunities during Markets Turmoil
In recent weeks, global equity markets have experienced the worst performance in recent history. Investor sentiment and market psychology are currently on the negative, volatilities are more than doubling, and many markets are down by more than 20 percent since the beginning of the year — without certainly on the possibility of correction territory in the horizon. As we know these are results of one: the impact and fears emanating from the COVID-19 disease (commonly known as Coronavirus) pandemic; and two: the significant drop in oil prices. Because of these two major global events and the uncertainties related them, investors are selling off (exiting) their investments in shares, as a result sending markets in turmoil all across.
However, in the world of business, investment, financing and trade, they say whenever there are crisis and chaotic situations as well as the downside that accompany it, there is also an opportunity of the upside. And so, as financial markets are in the panic mode, the pullback from it may set the stage for increased opportunities for the so called “value investors”. Remember: Value investing is an investment strategy that involves selecting stocks that appear to be trading for less than their intrinsic or book value, as reported in the books of accounts.
Economic slowdown forecasts and oil’s plunge rattle global markets
Economic slowdown and the continued plunge of oil prices coupled with uncertainty of reactions towards a possibility of stability all play a role in the current and potential downturn. Unfortunately, this time around it seems a little different as safe-haven investment instruments such as governments’ bonds and gold doesn’t seem to command much traction as well.
Fears of a continued slowdown in global economy and its implications on global demand, investment, trade and finance have intensified recently. Oil prices plunged to unthinkable levels per barrel last week, which markets view as a harbinger of a dramatic slowing economic activity in developed nations and lower revenues and economic activities for emerging and developing markets.
Many economist and analysts hold a view that many economies, in the short to medium term will experience hard landing, which will then require deliberate, albeit painful, transition back to both production-driven and consumption-driven economic growth, and one can safely say, these fears are not exaggerated. But, one can also hold the opinion that China and other major economies has enough policy ammunition to stimulate their economies, once the current pandemic is dealt with and senses have been brought back particularly on the issue of global oil prices.
Opportunity for value investors
Despite of the above, there’s absolutely no need to begin dumping stocks when prices goes down, because by doing so can cost you in the long run. If you already have a good position in your stock portfolio, hold it tight. Of course, you may also consider redirecting fresh cash into underpriced stocks and the cash equivalent instruments as well. But the message here is by holding most of your current stock positions, you’ll benefit from a market upturn, and you can be sure there will be an upturn.
Additionally, one of the bets places to take cover in the volatile stock market is in the high dividend stocks. The dividends themselves provide something of a cushion. Even though the price of the underlying stock may fall, you’re still earning steady dividend income. The good thing is that even the income itself also helps to stabilize the price. After all, in a market where capital appreciation is less certain, income becomes more important. Investors are naturally drawn to the reliability of dividend income, which can serve to minimize stock price declines.
Furthermore, pick value stocks. These have historically been considered as one of the most successful ways to invest in the market. It’s an investment strategy followed closely by Warren Buffett, and it helped make him one of the wealthiest people in the world.
The basic concept is to identify stocks that represent bargains. This is usually because such companies are out-of-favor with the general investing public during turmoil, like the one we currently have. They’re considered to be undervalued based on certain metrics that can include a price-to-earnings ratio lower than their industry-standard, below average price-to-book ratio, or an above average dividend yield.
Beneath the market headlines, a careful observation on what is happening (even in our local context) will tell the curious observer that value assert itself in many aspects, as a market that had previously priced stocks with a great deal of parity is now seeing a significant dispersion. We view these conditions as an opportunity that can reward value investing, active investing, and patient investing. One has to choose investment grade stocks and consider the possibilities of profiting from ongoing pendulum swing. Two possible ways by which one may try to do this are: by way of timing and by way of pricing. It just requires a bit of good analysis to identify underpriced stocks and the buy/accumulate them while still in lower prices.
Let me finish by quoting the Bible book of Ecclesiastes 1:9-10 which says: What has been will be again, what has been done will be done again; there is nothing new under the sun. Is there anything whereof it may be said, See this is new? It has already been here long time ago before us.
The Necessity of Financial Literacy
Not long ago, hard cash used to be the main means of payment for our purchase of goods and services. Online, mobile, credit card payments, etc were not so much in the radar. This is changing, especially as technological changes happen in that space and as many financial products and services consumers keeps on enhancing their understanding of finances.
As it were, lack of financial understanding is singled out as the main reason behind savings, savings mobilization, financial intermediation and investing challenges in many economies. So, what is financial literacy? financial literacy is the education and understanding of various financial areas including topics such as managing money and personal finances, managing money, managing debts and borrowings and managing investments.
Financial literacy is important in almost every aspect of life, from managing retirement funds; to the choice of asset classes where you invest your savings; to debt and borrowing management; to management of risks and bad lucks; etc. Financial literacy remains necessary into various decisions we make everyday as far as they involve our personal economy and finances. These decisions are integral to our everyday lives. With financial literacy, chances for responsible decisions are increased.
To be clear, the challenges of lack of financial literacy is not a challenge for developing or emerging countries. Consumers in developed countries in often cases fails to demonstrate a strong grasp and understanding of financial principles either, making it hard to negotiate and manage their financial affairs and related risks. Of course, challenges from individual to induvial and community to community differs depending on the context, exposure to education, income levels, etc. However, there is strong evidence showing that even highly educated individuals can be just as ignorant about financial issues as the less-educated and lower-income people.
And it seems that we are all the same in being hesitant to learn about these issues. For instance, a recent OECD (Organization for Economic Cooperation and Development) survey conducted in Canada found that, for many, choosing the right investment for retirement savings was more stressful that a visit to a dentist – can you imagine that! Yes, I can imagine that – in my personal and career experience first working in the banking sector, then as corporate transactions advisor, and then as a stock broker and investment advisor and now at the Stock Exchange, I’ve met many a people who are either unwilling to learn about financial issues or fail to take any action once learned.
But there comes a moment when financial literacy becomes a matter of necessity, and I see that moment is now. Current lifestyle, trends and decisions-making all points towards the direction where financial literacy seem even more important, I will explain:
In retirement planning and pensions for example – in the past generation(s) people depended on public pensions plans to fund a significant part of their retirement lives. Excluding our case, in many societies pension funds, managed by professional independent fund managers do not significantly rely on companies and governments to sponsor their upcoming obligations, they instead rely both on contributions and largely on clear investment decisions and the expected investment returns from those investment decisions. Under such circumstances, pensions consumers are also involved in decision making as to the contribution amounts and the fund manager who will be engaged to manage contribution funds.
Even furthermore, in the past a major source of retirement income was social security, but as it turns out the amount paid by social security are not enough, and in some cases may be delayed, while in worst of circumstances may not be available at all – tell me, what will become for a financial consumer safety net which could barely provide enough for basic survival?
In the savings, finance and investment space options are becoming complex, and financial consumers are being asked to choose among various investment and savings products. Sometimes these products are more sophisticated for us, but we are being asked to choose among different options offering varying rates of returns, maturities, payments intervals, etc – such decisions require an adequate financial understanding.
As it were, deciding on complex financial instruments with a large range of options can impact the financial consumer’s ability to finance a home, education for children, savings during retirement, access to health care when sick, recovery from circumstances when undesirable event occurs, etc. under these life necessity situations what happens if an individual is not financially educated?
Additionally, the financial landscape is becoming very dynamic by the day – in the global marketplace, there are many participants and many factors at play, added to this is the changing technological advancement in the financial markets. Taken together, these factors can cause conflicting views which may sometimes make it difficult for a financial illiteracy consumer to make clear decisions. In the mix, is also a number of financial intermediaries and supporting institutions in the ecosystem – banks, stock and insurance brokers, credit card companies, mobile network operators, financial and investment advisors, other financial services companies, etc — these are all vying for financial assets creating confusion for a not so financial literate consumer.
In conclusion – I have tried to paint a picture of where we are and how crucial it is to become a financial literacy society. The bottom line is, any improvement in the financial literacy will have a profound impact on financial consumers and their ability to provide for the future. As we have seen above, recent trends make it so imperative that financial consumers understand basic finance because we are being asked to shoulder more of the burden of savings, investment and retirement decisions while we decipher more complex financial products and options.
Acceleration Programs for Financial Sector Development
Some years ago, the Capital Markets and Securities Authority conducted a study to determine the most appropriate stock market structure for Tanzania. The study aimed at, to among others, answer the question — why the number of listed entities at the DSE was not increasing as anticipated in year 1998 when DSE started its operations.
Among others, the study found that: (i) there was low level of awareness about capital market institutions and transactions; (ii) existing listing conditions were too stringent for small, but growing enterprises; and (iii) majority of companies were willing to list on the DSE if conditions for listing were relaxed.
The study also indicated that firms would be interested to list if there will be an alternative market segment of the DSE to complement the existing Main Investment Market, whose target is for relatively well-established corporate entities.
Of the 300 entities that were surveyed: 21 percent stated that they would immediately consider listing on an alternative market segment; and 48 percent would consider the option if they met the listing requirements.
Based on the above, in year 2013, the Dar es Salaam Stock Exchange introduced the Enterprise Growth Market (EGM) segment to complement its Main Investment Market Segment in order to address the SMEs challenges of access to capital.
The introduction of the EGM on the DSE for the listing of SMEs – both at the start-up stage and growth potential – aimed at enabling SMEs country-wide to have access to the capital markets in order to raise sustainable capital and to increase expertise among market stakeholders in financing SMEs.
For the past six (6) years of its operationalization, the EGM market segment has not performed as expected i.e. (i) there are only five (5) companies that have listed in the EGM so far; (ii) investor base of about 270,000; (iii) EGM listed companies total market capitalization is only about TZS 110 billion (i.e. less than 1 percent of DSE market capitalization); and (iv) total volume of shares traded on EGM is less than 0.5 percent of the total annual turnover at the DSE.
These metrics depicts how low are activities on this market segment, which was designed to support SMEs within the Economy, which indicates that we have further challenges than just the lack of existence of institutions, structures and schemes that could enable SMEs to access financing.
From this backdrop, there is a clear need for various stakeholders to consider implementation of solutions that will facilitate addressing some of the existing challenges within our business community – part of it are cultural and behavioral related. In any way there is apparent capacity gap for SMEs owners/managers in the context of managing businesses sustainable, the necessity of good corporate governance, the desire for achieving greater results, etc.
As one of the interventions to bridge the gap, the DSE this week has launched the DSE Enterprises Acceleration Program. This program has the objective of: (i) providing capacity building to identified SMEs to enhance their capacities in key areas of their business growth ecosystem; (ii) create practical linkages and networking solutions between suppliers of funds and those in demand of funds hence bridging the knowledge and financing gaps; and (iii) ease their access to various sustainable funding options, short-medium-to long term, both local and globally.
This is a necessary intervention. It will assist businesses and companies take advantage of the structures and institutions that the country has put in place to enable businesses access to diverse sources of finance.
The Program is for 12-months where 6-months will be for classroom training, the next 3-months for mentorships and couching and the remaining 3-months for Networking and accessing capital from financiers, investors and capital markets platforms. And then, each year there will be a new class for new SMEs participants.
The idea of Acceleration Programs in the financial sector is being championed across many countries i.e. London Stock Exchange Group (which includes Bourse Italia have been running an ELITE Program (which is an acceleration program covering over 300 companies). South Korea has over 200 Acceleration Programs covering many start-up and SMEs – these programs are run by various financial institutions (Industrial and Development banks, Venture Capitalists, Government Agencies, etc), and in Africa– Morocco works with ELITE of LSEG for a similar program covering over 40 companies, BRVM in West Africa also works with ELITE covering over 20 companies, in Kenya, the Nairobi Securities Exchange launched their IBUKA Program in 2019 now covering over 20 companies. And so are other markets.
The DSE Program is run in partnership with UDSM Business School, KPMG Advisory, Institute of Directors Tanzania, Banks, SSC Capital (a Venture capital fund) and the Financial Sector Deepening Trust (FSDT).
Capital Markets for Development Financing
Globally, stock markets’ topical issues in recent times are: how dark pools can be better alternatives to trading platforms, or the role of blockchain technology and Distributed Ledger Technologies as alternatives or complementarities to legacy stock exchanges systems, or how to enhance the role of central counters parties (CCPs) in clearing and settlement for over the counter (OTC) transactions and exchange traded derivative instruments, these are some — one thing to note is that we are all operating in the same global markets competing for same share global capital for economies development.
While these are topical issues in the capital markets space, our domestic issues remains: i.e. lack of awareness and education about the role and relevance of the stock markets in the economy, enhancing of listings of cash-based instruments, how can local institutional investors, such as pension funds can be liquidity providers in the market, etc. Should we up our game? Yes – obviously, our capital markets eco-system needs more players such as private equity and venture capital funds, liquidity providers and market makers, we need transaction underwriters and we need to at least have the second generation plain-vanilla products such as Real Estates Investment Trusts (REITs), Exchange Traded Funds (ETFs), Closed-Ended Collective Investment Schemes, Municipal Bonds, Industrial or Infrastructure bonds, Securities Lending and Borrowings, etc — seems to be in our distant future.
However, as I think of that, I am also mindful of some of the progress we have made in these two past decades. However, despite these milestones, the potential for capital market’s contribution to the economic growth and social development could be better. And hey, if it could be better, what would that mean to us? To respond to such a question, one has to ask — what is the role of the capital market in an open society, whose economic model is market based and supposed to encourage private enterprise?
The existence and actually the growing of the capital market offers a variety of financial instruments that can enable economic agents with the country to raise efficiently priced capital and manage financial risks. Additionally, through assets with attractive yields and enough liquidity but with still risk characteristics, the capital market has the potential of encouraging savings in the long-term financial form. Capital markets as an integral part of the financial markets plays a pivotal role, essential for government, private enterprises and other institutions who are in need of long-term funds to source such funds. Government uses the capital market to raise funds for infrastructure development and state related activities; while the private enterprises use the market for business expansion, growth and development.
Given its role in the market-based economy, the capital markets occupies an important place, via their specific mechanisms, capital markets can efficiently succeed to give its contribution to the economic development of the society. The importance of the capital markets is more significant in the case of emerging markets as it is for developed economies, being well-known for their contribution in reorienting financial resources to efficient activities, contributing to the economic reform, but also in implementing economic empowerment and enterprises transparent-based policies.
Economic growth in a modern economy hinges on an efficient, vibrancy and effective financial sector that pools savings and mobilizes capital for productive projects and enterprises. Absence of effective capital market leaves most productive projects/enterprises which carry developmental agenda unexploited. But if exploited, capital market has the potential for connecting monetary sector with the real sector (such as agriculture, manufacturing, infrastructure, etc), therefore facilitates growth in the real sector and economic development. The fundamental channels through which capital market is connected to the economy, economic growth and development can be in the following aspect:
The contact between economic agents with deficit of money and the ones with monetary surplus can take place in a direct way (direct financing), but also by the means of any financial intermediation form (indirect financing), situation in which specific operators realize the connection between the real economy and the financial market. In this case, the financial intermediaries could be banks, investment funds, or other non-bank financial institutions.
Furthermore, Capital market increases the proportion of long-term savings (in the form of pensions, life insurance, etc.) that is channeled to long-term investment. Capital market enables these long-term contractual savings units to mobilize long-term savings from individual household and channel them into long-term investments. Capital markets fulfills the transfer function of current purchasing power, in monetary form, from surplus sectors to deficit sectors, in exchange for reimbursing a greater purchasing power in future. In this way, capital market enables firms to raise capital to finance their investment.
The necessity of capital markets activities in an economy results into an increase in productivity within the economy leading to more employment, increase in aggregate consumption and hence growth and development. It also helps in diffusing stresses on the banking system by matching long-term investments with long-term capital. The existence of the capital market encourages broader ownership of productive assets by small savers. It enables citizens to benefit from economic growth and wealth distribution and provides avenues for investment opportunities that encourage a thrift culture critical in increasing domestic savings and investment ratios that are essential for rapid industrialization.
Additionally, the capital market mechanism allows not only an efficient allocation of the financial resources available at a certain moment in an economy – from the market’s point of view – but also it permits allocating funds according the return and the risk – from the investor’s point of view – offering a large variety of financial instruments with different profitableness-risk characteristics, suitable for saving or risk covering.
