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.