Restoring Public Confidence in Stock through Viable Corporate Governance
THE floor of a traditional stock exchange seems to be a chaotic marketplace. Mysterious (to an outsider) hand signals are employed, coded messages on electronic tickers appear and change at a frantic pace, and floor brokers compete to be heard above the flurry of activity.
Today, however, many people once bewildered by the stock market are investing in stocks. Why? For one thing, the Internet has enabled investors to access in moment's financial news, investment advice, and stockbrokers. Nigerian Stock Exchange is currently enjoying a growth that is not common in other countries. This is because of change in governance and talent investment in the industry. It has undergone sharp increase in demand and this demand is because of confidence invested overtime. As an investor, what information do you need when you want to invest in stock in Nigeria? What confidence and encouragement will keep you going? This is necessary as the growth foreseen is unprecedented.
Explanation of Terms
♦ STOCK: When you buy a share of stock in a company, you are actually buying a piece of that company. This is one way companies raise money.
Periodically, stockholders may receive a small percentage of the company's profits, called a dividend.
♦ BOND: Another way corporations raise money is to borrow it by selling bonds. When you buy a company's bond, you are lending it money. The company pays for the use of your money by means of interest payments. Stocks and bonds both fit under the blanket term “securities.” While bonds do not generally grow in value the way stocks sometimes do, they are often considered a safer investment. An exception is the junk bond, one that has been officially rated as very risky. The company that issues it is more likely to default, not paying you as agreed. People buy them because junk bonds pay a high interest rate.
♦ STOCK EXCHANGE: An organized auction, or marketplace, where securities such as stocks and bonds are bought and sold. On the floor of the exchange, brokers carry out the buy-and-sell orders of their clients, investors, and get paid by means of a commission.
How Markets Operate?
Companies need capital, or invested money, to operate successfully.
When a company prospers and requires a large amount of capital, its management may choose to offer shares of its stock to the public. One guide to the stock market illustrates it this way: “Stocks are pieces of the corporate pie. When you buy stocks, or shares, you own a slice of the company.”
At a street market, buyers and sellers meet and conduct business.
Similarly, the stock exchange is a marketplace for those who buy and sell stocks. Before the development of the exchange, stocks were traded through brokers at coffeehouses and on the roadside. On any given business day, at any hour, there is a stock market open somewhere in the world.
To trade stocks, an investor usually opens an account with a broker and places an order. Today orders to buy or sell stock can be placed over the telephone, through the Internet, or in person. The broker then needs to execute the order on behalf of the investor. If the stock is traded on a traditional trading floor, the brokerage office directs one of its floor brokers to buy or sell stock for the investor. In recent years some exchanges have adopted a completely electronic trading system, where trades can be made seconds after the order is placed with a broker. Trades are then recorded on stock quotations—current prices and trading details displayed on an electronic ticker.
The price at which stocks are bought or sold is usually determined by competitive bidding, as at an auction. Business news, company earnings, and the future prospects of an enterprise can all influence the price of a stock. Investors hope to buy their stock at a low price and sell their shares for a profit after they increase in value. A portion of the company's profits may also be divided among the shareholders as dividends. Some people buy stocks as a long-term investment; others trade stocks regularly, hoping to profit from stock prices that rise dramatically in a short time.
While the trading of stocks has traditionally been done over the telephone, on-line trading (buying and selling stocks over the Internet) has become increasingly popular.
Corporate Governance and Stock Business
Corporate governance has become a subject of heightened importance and attention in government policy circles, academia, and the popular press. This is a subject which has become increasingly important for public sector organizations in recent times, despite the relative lack of public debate about its development. Though the origins of corporate governance reform lies in the private sector, where its initial focus was on financial reporting and accountability issues, its influence has impacted on the public sector, in line with
expanding areas of focus for private sector corporate governance. It has continued to identify and manage risk; securing independent elements on boards; and defining the roles of audit committees and the relationship with audit, internal and external. Various reasons explain the current prominence of what many persons might otherwise consider a foreign and technical topic. In virtually all transactions, whether with customers or colleagues, we rely on the word of those with whom we do business. If we do not do so, goods and services could not be exchanged efficiently. Even when we followed to the letter, rules guide only a small number of day-to-day decisions required of corporate management.
To many investors, it is a new idea that only dwells with the inventors. Though little light and orientation is being provided, but the curiosity should be sustained considering that we are living in a globalised world. Most investors find it a rather dry distraction from the far more interesting and dynamic discounts and premiums, distribution rates, and investment performance. But, the directors, if they truly take their fiduciary responsibilities seriously, should significantly influence these aspects. Ultimately, a fund's success or failure lays with its board of directors, and yet many investors couldn't care less about their ability to influence that board. For long-term shareholders--the owners of the fund--such negligence makes no sense.
What then is corporate governance? It is the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It deals with conducting the affairs of a company such that there is fairness to all stakeholders and that its actions benefit the greatest number of stakeholders. In this regard, the management needs to prevent asymmetry of benefits between various sections of shareholders, especially between the owner-managers and the rest of the shareholders. This is a set of systems, processes and principles which ensure that a company is governed in the best interest of all stakeholders. It is the system by which companies are directed and controlled. It is about promoting corporate fairness, transparency and accountability.
The aim and fundamental objective of corporate governance is to enhance shareholders' value and protect the interests of other stakeholders by improving the corporate performance and accountability. Hence it harmonizes the need for a company to strike a balance at all times between the need to enhance shareholders' wealth whilst not in any way being detrimental to the interests of the other stakeholders in the company. Further, its objective is to generate an environment of trust and confidence amongst those having competing and conflicting interests. Further to the aim is to ensure commitment of the board in managing the company in a transparent manner for maximizing long-term value of the company for its shareholders and all other partners. It integrates all the participants involved in a process, which is economic, and at the same time social. It is about commitment to values, about ethical business conduct and about making a distinction between personal and corporate funds in the management of a company. Ethical dilemmas arise from conflicting interests of the parties involved. In this regard, managers make decisions based on a set of principles influenced by the values, context and culture of the organization. Ethical leadership is good for business as the organization is seen to conduct its business in line with the expectations of all stakeholders.
The most influential parties involved in corporate governance include government agencies and authorities, stock exchanges, management (including the board of directors and its chair, the Chief Executive Officer or the equivalent, other executives and line management, shareholders and auditors). Other influential stakeholders may include lenders, suppliers, employees, creditors, customers and the community at large. A board of directors is expected to play a key role in corporate governance. The board has the responsibility of endorsing the organization's strategy, developing directional policy, appointing, supervising and remunerating senior executives, and ensuring accountability of the organization to its investors and authorities.
All parties to corporate governance have an interest, whether direct or indirect, in the financial performance of the corporation.
Directors, workers and management receive salaries, benefits and reputation, while investors expect to receive financial returns. For lenders, it is specified interest payments, while returns to equity investors arise from dividend distributions or capital gains on their stock. Customers are concerned with the certainty of the provision of goods and services of an appropriate quality; suppliers are concerned with compensation for their goods or services, and possible continued trading relationships. These parties provide value to the corporation in the form of financial, physical, human and other forms of capital.
Many parties may also be concerned with corporate social performance.
Having broadened this subject matter, it further requires an in-depth explanation of the benefits of corporate governance.
Corporate governance is also concerned with finding ways to encourage stakeholders to undertake socially efficient levels of investment in firm-specific human and physical capital. The competitiveness and ultimate success of a corporation is the result of teamwork that embodies contributions from a range of resource providers including investors, employees, creditors, and suppliers. Corporations should recognize that the contributions of stakeholders constitute a valuable resource for building competitive and profitable companies. It is, therefore, in the long-term interest of corporations to foster wealth-creating co-operation among stakeholders. The governance framework should acknowledge that the interests of the corporation are served by recognizing the interests of stakeholders and their contribution to the long-term success of the corporation.
Broadly speaking, it is the interaction between various participants (shareholders, board of directors, and company's management) in shaping corporation's performance and the way it is proceeding towards. It ensures that the relationship between the owners and the managers in an organization must be healthy and there should be no conflict between the two. The owners must see that individual's actual performance is according to the standard performance. These dimensions of corporate governance should not be overlooked. With its broad scope, it has both social and institutional aspect that encourages a trustworthy, moral, as well as ethical environment.
Good corporate governance calls for honest reputation and trust. In a system of liberalized markets, a reputation for honest dealings is a valued asset. Indeed, without trust there would be no banking as we know it today. It is the honest reputation created by the earlier goldsmiths and the trust such reputation engendered in the early merchants that led to the creation of paper money as we know it today.
It is only honest reputation and unalloyed trust that cause them to issue and accept uncollateralized receipts which were later exchanged for specie. They help companies to weather the severe consequences of an economic downturn with more equilibrium, as the results during the current global financial crisis show and constitute a set of relationships among a company's management, its board, its shareholders, and other stakeholders. Those relationships define, among other things, the property rights of shareholders, the mechanisms of exercising and protecting those rights, and the path of ensuring a fair return. Corporate governance also sets the structure through which a firm sets its objectives, as well as determining the means of attaining those objectives and monitoring performance. It also provides proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders. Corporate governance also encourages companies to create value, through entrepreneurialism, innovation, development and exploration, and provide accountability and control systems commensurate with the risks involved. It also influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimized.
Good corporate governance allows even outsiders to assess the company on how well it is being governed. The core of corporate governance is its transparency and disclosure principles. An advantage with corporate governance is that the benefits are measurable. Good corporate governance ensures higher market valuation. Corporate governance initiatives ensure that the board of control and management take the necessary steps that are in the best interest of the business of the company. It also encourages more transparency of the business, thereby attaining the trust of its stakeholders. This transparency is brought forward by improving access to capital and financial markets.
Raising capital also becomes easier because of the support the company earns from its stakeholders. Asset diversification through mergers and acquisitions is made easier with a company that follows good corporate governance. Corporate governance practices encourage a system of internal control, which in turn leads to better profit margins. Thus, for a company, corporate governance initiatives make it possible to attract equity investors. The corporate value of the company is increased by adopting good corporate governance practices. If two companies have comparable financial records, institutional investors prefer to invest in the one that has shown a proven record as a well-governed company.
Invest Wisely
The apparent ease of trading stocks on-line and gaining access to information previously reserved for brokers and professional traders has prompted many individual investors to take up day trading, the buying and selling of stocks full-time. Some have given up lucrative careers to become day traders. Why? The allure is obvious. No bosses, complete control over how and when you trade and the potential—or so it seems—to make a lot of money. How else can you have no inventory and no employees, pay no rent, tap-tap-tap on a keyboard and make a living?”
Advice
Investment advisers urge potential investors to consider a company's past record and future prospects, the demand for its products, competition from other businesses, and several other factors before selecting a firm's stock. This information is often available through stockbrokers and other financial institutions. Many investors consult with financial planners before purchasing stock. By considering the background of a company, an investor can also ensure that his money will not be used to support an unethical enterprise.
Don't think that it goes without its risk. A measure of risk is involved in nearly all financial investments. Some people buy real estate, not knowing if the value of a property will increase or decrease over time. Others deposit their money in a bank, trusting that their savings will be secure. While the stock market is more complicated, simply put, one who invests in stocks buys the shares of a company in the hope that the enterprise will prosper and the stocks will increase in value. A prospective stockholder has purchased part of a company. These shares may be sold to another person or saved in the hope of future growth. This cannot be said of a person who bets money at a casino or on a game of chance. It is purely an investment
It is evident from the foregoing discussion that corporate governance came with good intentions. Its invention would decrease liability by reducing the cost of expected failures and increase flexibility by reducing the cost of adjustment and restoring confidence. This provision is important since it will serve as a lubricant to the cog of the wheel of the nation's economy while appropriate policies must be put in place to ensure proper monitoring and the determination of the optimum size required to attain efficiency. If Nigerians can see where, how and when this idea is properly utilized then Nigerians will get more orientation and sustain it. But if the roads are worst than ever or failures, mismanagement and corruption rules instead of the desired objective, then Nigerians may find it difficult to accept it wholeheartedly. It would simply be a case of short term pain for no long term benefit.