COVID-19 and Opportunities for Stock Markets Innovation

Sweeping across the globe, the COVID-19 pandemic is disrupting the economic and social life of almost every society. It poses a particularly severe challenge to businesses, especially small and medium-sized enterprises (SMEs). Nimble and responsive, SMEs are crucial for sustained economic growth and employment. Market-based financing is again called upon to help corporate issuers, especially SMEs, weather the storm and capture emerging business opportunities.

Capital markets have proved their resilience and shown the strength of stock exchanges in supporting corporate financing. In response to the impact of the pandemic, market infrastructure operators across the world have maintained continuous and stable operations and been applauded for their positive roles as market organizers, regulators and service providers. Appropriate and timely contingency arrangements have been made including relaxing listing requirements, information disclosure or delisting for issuers as well as simplifying the refinancing process. All of those measures have helped reduce the impact of the epidemic and maintain the confidence of market participants.

According to the WFE’s Q1 2020 Market Highlights, the global number of IPOs and the amount of funds raised in the first quarter of 2020 significantly increased from the year-earlier period.

New opportunities

Despite wreaking havoc, a crisis can also create new opportunities. The same is true for the market infrastructure industry. Private financing boomed following the financial crisis in 2008. Since then legal restrictions for private equity have become increasingly relaxed, emerging technologies have been widely adopted, and global liquidity has increased significantly. As a result, more and more enterprises turn to the private equity market for financing. This provides increasingly mature conditions for exchanges to build private-equity platforms. Statistics show that more than 15 exchanges have launched their own private-equity platforms in the past decade, mainly in Europe, the US, and Asia.

The exchange-based private-equity platform is generally designed to serve SMEs and innovative businesses, and is strongly technology-driven, aiming to improve the fundraising capability of SMEs through new technologies. At present, represented by NPM in the US, KONEX in South Korea, ELITE in the UK, TOKYO Pro in Japan and EnterNext of Euronext, four different development models have been formed, namely trading platform, conduit platform, service platform, and hybrid platform. Through its advanced trading system and algorithm, NPM in the US provides “online + offline” services for equity transfer of innovative start-up companies, forming a brand new private-equity trading ecosystem with institutional buyers at the core.

In contrast, for instance KONEX in South Korea provides equity transfer services for technology-based SMEs. With government policy support coupled with links to markets such as KOSDAQ, KONEX has become the conduit for enterprises to get listed on KOSDAQ. ELITE in the UK is not a market in a strict sense. It provides comprehensive, full-life services for technology-based SMEs, covering competitiveness assessment, incubation, financing, and consultation. At the same time, it uses information technology to reduce intermediate costs, thus effectively cutting service costs.

Deepening innovation

“Exchange + private platform” breaks the limitation of past internal tiers of exchanges, and therefore represents a deepening and innovation of exchange functions.

Among the four types of platforms, the service platform consolidates the local enterprise foundation, and reserves a pipeline of high-quality listing candidates by providing all-round incubation services for innovative and micro, small- and medium-sized enterprises. The trading platform meets the development needs of innovative enterprises and the diversified investment needs of institutional investors, and fully embodies the deep integration of capital, talents, and technology.

The conduit platform accommodates a number of start-up companies that have not yet reached the listing stage, and provides them with special issuance and transfer channels in advance, which improves the coverage and inclusiveness of the capital market.

Although it is still difficult to judge the prospects of the various platforms, they have meaningful explored how to actively apply new technologies, improve the efficiency of financing SMEs and support the formation of innovative capital. And here I would like to focus on the V-Net platform launched by the Shenzhen Stock Exchange in China as a case study.

Focus on Technology

Compared with its overseas peers, the V-Next platform is similar to a service platform in terms of its positioning and service scope.

Since its establishment, V-Next has provided investment and financing information services for hi-tech SMEs. Its resource pooling effect has become more and more pronounced. It has also actively adopted new technologies to empower clients and partners. As of the end of March 2020, the platform had covered 41 countries and regions in the world. It has served about 12,360 technological enterprises (or projects), gathered over 7,700 investment institutions, over 2,600 listed companies, and about 20,000 investors, and raised RMB 41.5 billion for technology-based start-ups, thus becoming a global innovation and entrepreneurship service platform with a wide range of participants, leading user base, and growing market influence.

V-Next has also played a positive role in responding to the COVID-19 outbreak by providing support for the COVID-19 Epidemic Prevention & Control Technology Innovation and Entrepreneurship Special Competition, part of the 9th China Innovation and Entrepreneurship Competition.

Identifying technology-based SMEs with advanced technology in epidemic prevention and control, the competition provided eligible companies with more policy support and value-added services, promoting the application of relevant scientific and technological achievements in frontline epidemic prevention and control and work resumption.

Generally speaking, a private-equity platform is niche market-oriented, efficient, and flexible. Driven by multiple factors such as technological innovation, and wide application of information technology, it is showing a diversity of development patterns. As long as the new round of technological revolution continues, the integration of “technology + capital” will continue to accelerate, and various innovations of private-equity platforms will occur.

For exchanges, the coordinated development with the private-equity platform not only will enlarge the potential for exchanges’ innovative development, but also provide SMEs’ financing services and product development with more choices. We believe that after the COVID-19 epidemic, “Exchange + private platform” will continue to demonstrate vitality and dynamism.

Probably this is worth of a consideration for us, to supplement the Enterprises Growth Markets (EGM) – the alternative listing platform for SMEs and start-ups, the DSE may consider providing a platform to listing the pre-IPO SMEs whose investor base would be Private equities (PEs), Venture Capital funds (VCs) and other Qualified Investors (QIs). Upon PE, VCs and QIs exit from these companies they would pursue exists via IPOs and listing in either the EGM or the Main Investment Market – this can be the extension of the currently DSE Enterprises Acceleration Program which helps in building capacity to business leaders and owners on various aspects of capital raising and sustainable businesses management.

Opportunity and Challenges of building SMEs-based Exchange

EGM, the DSE’s Enterprise Growth Market, began as a dream to offer small-and medium-sized enterprises (SMEs) a path to access the Tanzania capital market. It is a parallel equity market with lighter listing requirements that makes it easier for SMEs to list and get access to the capital they need to grow their business.

Currently, it is estimated that the SME sector makes up about 35 percent of total GDP in Tanzania, with the goal of enhancement and further contribution and growth, with access to capital/finance. Therefore the “EGM – Alternative Market” aims at playing a significant role in making this a reality, from the long-term financing perspective.

In October 2013 EGM started operations with one company listed on the day, and there has been 5 public offerings and listings since then. To ensure market stability and access (as well as opportunity) for all, trading in EGM is not limited to Qualified Investors, as is the case with similar markets in other jurisdictions.

EGM has come a long way from its modest beginnings, overcoming numerous challenges with book coverage, liquidity, participants and regulations. Each issue had its own challenges, but were carefully studied in turn, and solutions were developed that resulted in improvements in EGM market overall performance benefiting issuers and investors alike.

The Dar es Salaam Stock Exchange (DSE), alongside the CMSA (Capital Market and Securities Authority), has ever since seen some enhanced appetite – but one of the fundamental challenges has been structural, i.e. limited skills and capacities by advisers, non-availability of transactions underwriters as well as qualified investors. The virtually non-existence of the private equity and venture capital participants is also a hindrance.

Despite of these challenges, the limited awareness of the operability and benefits of the EGM is also a key challenge. For example, one of the most important features of the EGM is that of direct listing (by introduction), which allows companies to list their shares directly on EGM without a public offering – this enhances the company visibility and its profile to the investing public in case of future capital raising needs.

This can be done through two methods: floating the company’s shares with a staged liquidity plan; or through private placements.

If a company opts for the liquidity plan, an independent financial advisor provides a valuation and prepares the plan with the issuer to be submitted as part of the listing application and described in the listing document.

The private placement transaction method can take place before the direct listing in order to meet the entry requirements, which also helps the price discovery process.

A particularly important feature is to help potential issuers and increase flexibility in listing requirements, so as to separate between capital raising and the need for listing with a target for future capital raising.

There are also flexibility in reporting frequency where companies in the EGM are to report their performances in a semi-annual basis that helps such companies to also reduce the cost of compliance and lessened the burden on management, allowing SMEs to spend more time creating value by focusing on developing their core business.

Furthermore, the above combined with the decrease in the free float guard to at least 20 percent, compared to the Main Market’s 25 percent as well as the reduction in the number of shareholders to 100 compared to 1,000 in the Main Investment Market and also the amount of qualified capital prior to listing, better captures the listing and trading environment and the overall objective of facilitating SMEs to access public funds for their growth and expansion, leading to a fundamental increase in market growth, stability and confidence in companies’ governance; not mentioning its multiplier effect to the economy including jobs creations, more tax revenue, innovations, etc.

To support SMEs’ expansion plans further, DSE provides its EGM listed entities the opportunity to transition to DSE’s Main Investment Market, provided they have met all of the requirements for listing on the Main Investment Market (including market capitalization, free float, number of shareholders, etc).There are some EGM listed companies that are currently qualified and can graduate/upgrade to list into the Main Investment Market, but none of them have opted so for the time being. Much as this is choice by the company, however, the choice of not pursuing the upgrade denies the DSE an opportunity of affirming EGM’s credentials as a segment in the market that provides a fast-track to growth for SMEs and a springboard onto the Main Investment Market, indication of gradual growth and ambitious intent by listed companies.

Despite of the above, the EGM has enabled and enables businesses to fund their growth plans, provides investors with opportunities to generate financial returns and support overall economic growth.

To achieve further profiling and encourage more listings on the EGM the DSE has introduced the Enterprise Acceleration Program whose main objective is to build capacities to entrepreneurs, business owners and managers of SMEs to enhance their broader understanding of the financial markets, particularly capital markets and need to manage businesses sustainability. This program aims to increase the number of listed entities, eventually provide an opportunity for market depth and increase liquidity in the market.

One of DSE’s more recent initiatives is the amendment of its rules to provide for independent research providers to conduct research on EGM listed stocks. The results will be made available through the exchange, providing more information and further boosting market transparency. The government has also been keen to assist SMEs to list on DSE and has provided a number of fiscal incentives for companies to encourage them to make the leap onto the DSE’s EGM, creating opportunities for investors and issuers.

DSE’s main goal is to provide a diverse selection of products and services that add real value to all market participants. All changes and improvements are made towards this goal which upon crystalizing will translate into a stronger and more stable domestic market for access to long term capital and wealth creation.

DSE is proud to have been able to make such significant developments to the Tanzania capital market in such a short time. With DSE’s passion and commitment to innovation we are confident that SMEs on the EGM market will continue to blossom into much larger and successful companies, and we are honored to be able to help these companies on their journey.

Tips for Investment in Shares

Some of us wants to be financially successful by investing in shares listed in the stock market and probably make a fortune out of it. But, somehow our financial literacy constraints us from achieving such objective. Well, as I indicated in the last week’s article financial literacy is a necessary part of the saving and investment process, and therefore as you map out your action plan for getting there, financial education should be part of that map. In this article I will share with you a few suggestions on investing in shares and portfolio management.
The first thing you need to consider in deciding on whether you are ready to invest in shares is to look at your current financial circumstances. Some of us have goals, which are a good start, but we need to see if we can actually afford the investment required to realize our goals. In other words, you need to determine if you have the spare/surplus cash to make investments in shares.
To achieve that you need to construct your personal balance sheet and seek answers to some important questions to see where you stand.

Under normal circumstances, only once you have paid off all your obligations and paid for all your important expenses and you still have income (savings) left-over should you consider investing in shares. Therefore, first thing you need to consider, is to settle your expenses and pay outstanding high interest debts. This is not a rule but it is a prudent advice because if you have debts that costs you say 20 per cent in interest per annum and if you are to use that money for investing in shares, your shares investment returns should be growing at more than 20 percent per annum so that, at some stage you can sell the share to repay the debts and still remain with some profits. If that will be the case then you are doing very well, but this is often difficult to achieve and thus it is advisable or rather recommendable for you to take a simple approach, which says invest your savings, do not borrow or get into debts trying to make investments in shares – because the moment you do that, that will be speculation.
I know some retail/private individual investors who in some cases take the approach of borrowing for the purpose of investing in shares during Initial Public Offering (IPOs); where they borrow from banks with the speculative motives that after the IPO and share have been listed in the stock market for trading, then immediately prices will go up and they will be able to liquidate their investment positions, pay the debt and retain some profits. In some few cases they are successful and, in many cases, they are not successful.

Having achieved the act of careful analysis of where is your financial position, you then need to have a closer look at your attitude towards risk. This will help you see where you would like to be in the future.
So, what kind of things do you need to look into? Here are some points you need to consider: (i) Age and the time remaining for you to continue working before retirement – as well as how much time do you have to achieve your goals? (ii) Occupation and employment status – do you have job security and a reliable income, or are you self-employed or a pensioner?; (iii) Standard of living – what are your ongoing requirements for an enjoyable standard of living, including personal belongings, holidays and luxury (entertainment) items? Are you comfortable now? Are you able to budget?; (iv) Family and dependents – do you wish to provide for your children and dependents’ education or for other needs?; (v) Need for financial independence – do you have a strong need for financial independence and don’t wish to rely on a pension upon retirement?; (vi) Personal control – how much control do you like to have in managing your financial situation?; (vii) Insurance – do you have adequate insurance against risks to your property, possessions, income and wellbeing?
I suggest you speak to a financial or investment advisor to assess this if you do not have the objectivity or knowledge to do so.
Funding your share investment: If you’re going to invest money in shares, the first thing you need is money. In the paragraphs above I’ve proposed that you consider investing in shares if you have surplus income/savings. However, you may to also note that for some many investors, reallocating their investments does the trick.
Reallocating simply means selling some investments or other assets and reinvesting that money into shares. It boils down to deciding what investment or asset you should sell. Generally, you want to consider those investments and assets that give you a low return on your money. Re-allocation is only part of the answer; your cash flow is the other part.
Your cash flow refers to what money is coming in (income) and what money is being spent (outflows). The result is either a positive cash flow or a negative cash flow, depending on your cash management skills. Maintaining positive cash flow helps to increase your net worth.
Lastly, it is important that you set the right expectations and learn what to expect from the share (stock) market, learn to evaluate and analyze businesses that you intend to invest into. Most of these information and data can be obtained from the companies’ published financial statements; also company news and releases might assist. Historical precedents and information related into it are also things to consider, as it is history tends to repeat itself in the share market.

Macroeconomics and Shares Performance
There are several factors that influence the share price performance and the level of return (capital gain) for investors in listed shares. Key factors are: (1) demand and supply factors; (2) economic variables i.e. GDP, inflation, interest rates and exchange rate; (3) company news on corporate actions; and (4) psychological or market cycle-related factors. In today’s article, we will focus on the economic variables, read on:
A company’s value, return and share price reflect the perception of its earnings and profit flow. If the stock market detects something about a company that may harm its earnings flow, the company’s share price falls. If the stock exchange hears good news about the company — i.e. its current earnings, new innovations or discoveries that have future earnings growth potential, leadership enhancement, etc — its share price rises.
Share prices change because sellers and buyers are constantly reviewing companies’ news and especially its earnings prospects. Out of the two factors that determine a change in share prices – future expectations of earnings and the price to earnings multiples, both of these factors depend on an evaluation from buyers and sellers as they learn more about, and understand the listed companies.
Apart from fundamental performance-related factors, investors are also looking at other market information, including economic news (such as economic growth, inflation, changes in exchange rates, change in interest rates, etc) and political aspects that can cause share prices to rise or fall. In the short term, the share price is also affected by intangible factors such as hype, rumors, and word-of-mouth.
Share prices performance on companies listed in the DSE, like other stock markets, are also influenced by what happens in other markets and economies. If there is a substantial fall in other markets prices and indices, Tanzanian share prices are likely to be under pressure as well, mainly because of foreign investors participation in our market. Foreign investors contribute over 90 percent of DSE trading activities and owns a large part of companies listed.
The stock market activities and performance largely depend on the state of the economy and its activities. Economic conditions directly affect companies’ earnings and earnings prospects. Therefore, economic news is as an important influence on the share market activities and performance. Economic statistics that affect the share market are:
• Official interest rate, dictated by both financial markets and Central Bank
• Inflation rate or the rate of increase in consumer prices
• Rate of growth of the economy — Gross Domestic product (GDP)
• Exchange rate, or how the Shilling fares against other currencies
• The health of other key economies
Interest rates and inflation
Interest rates affect companies’ earnings directly because their debt repayment costs rise and fall with the interest rate changes.
Interest rates determine how much it costs to borrow or what one can receive in an investment. A rise in interest rates increases the attractiveness of fixed interest investments (such as bonds) relative to shares. High interest rates also increase a company’s borrowing cost, it means taking money directly from profit to pay the bankers. Rising interest rates also affect the level of economic activity and consumer spending.
Alterations to interest rates are part of monetary policy, a tool that Central Banks wields from time to time in relation to economic activity. Like any central bank, the Bank of Tanzania lifts interest rates to choke off any stirring of inflation, as a result of bubbling economic activity.
During a period of tight liquidity, interest rates rise increases production costs. Conversely, interest rates fall when there is ample liquidity. People have more purchasing power, which is positive for business expansion and share investment. During these times, interest rates are used as tools for mopping up excessive liquidity.
Inflation simply refers to how much the prices of the goods and services that you buy go up by each year. It is usually written as a percentage. One of the reasons that people invest in the share market is to try and beat inflation.
The stock market dislikes inflation: inflation pushes up costs for companies quicker than it can pass them on to customers, adversely affecting earnings. Conversely, when a central bank believes that economic growth needs to be stimulated or an economic decline reversed, it will cut interest rates.
Historically, low inflation has had a strong inverse correlation with valuations (low inflation drives high multiples, and high inflation drives low multiples). Deflation, on the other hand, is generally bad for shares because it signifies a loss in pricing power for companies.
Gross Domestic Product (GDP) is the value of all goods and services produced in the economy. When GDP decreases, the economy contracts and companies’ earnings fall and when GDP increases, the economy expand, and companies’ earnings rises. Therefore, any prospects of positive economic (GDP) outlook will attract investors in the shares of companies operating in such an economy — but the opposite is also true, prospects of negative outlook in the economic activities will reduce investments in shares listed in such an economy.
The health of the key economies
Foreign investors accounts for about 90 percent of the DSE’s activities and over 60 percent of listed shares ownership. Since economic performance and health of other key economies affecting the domestic stock market, this is a concern. The case of COVID-19 pandemic, the tightening global financial conditions, decline in prices of exports and disruptions of economic activities on the backdrop of adopting measures to manage the spread of the pandemic affects market indices, price volatility and returns for listed securities especially for the kind of our markets which overly depend on foreign investors for liquidity and market activity.

Holding AGMs by Listed Companies during COVID-19 Pandemic

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.