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…Your Word is Your Bond.
Anyone who understands the workings of a capital market would realize that in course of any transaction, a lot is riding on the trust between the customer and the service-provider, be it a Stock Broker, Advisor or Banker. Just observe the frenzied pace of activities and rapid sign language in any trading pit at the New York Stock Exchange (NYSE) or Chicago Commodities Exchange and you wonder how the market thrives under such chaos.

By merely divulging your personal information to a financial institution, to set up an account, it is assumed that the later would act in a trustworthy manner in the execution of its fiduciary responsibility and not tamper with your money or utilize any privileged information.

In Wall Street parlance, its usually said that your "word is your bond" and slowly but surely, the Nigerian capital market as represented by the Nigerian Stock Exchange (NSE) is coming of age and whilst that is happening this golden rule would more than ever be very instrumental to the prosperity of market players, investors and public companies. Since inception in 1960, the NSE has undergone various phases that could be categorized as follows:

a) Phase One - 1960 - 1975. The initial growth stage, marked by low investor participation, dismal trading volume and handful of listed securities. With little or no emphasis on corporate governance.

b) Phase Two - 1975 - 1995. The mid growth stage, characterized by an upsurge in the number of listed securities, thanks to the indigenization policy and successive privatization exercises. Trading system was quite outmoded. Settlement time very lengthy and low level of liquidity, with some focus on improving standard and ethics of governance.

c) Phase Three - 1995 - Present. A period marked by rapid transformation in the annals of the market as could be witnessed by the rising level of awareness, robust growth in activities, upswing in liquidity volume and number of listed securities, thanks to privatization, economic/ regulatory reforms and ambitious internal development policy embarked upon by the management of the exchange. Emphasis on transparency, strict compliance and ethical standards is at the highest level ever.

…Modernization and Corporate Governance.
Automated remote trading, introduction of T+3 settlement, installation of trade alert system and recent adoption of the Peterside's Code of Corporate Governance (named after the Chairman of the corporate governance committee and CEO of Investment Banking and Trust Company, Mr. Atedo Peterside) are some of the major steps that I strongly believe could lead to a continued improvement in the integrity and caliber of the market.

However, the level of transparency and corporate governance standard in the Nigerian environment is still far from adequate to support the emerging market structure that is fast evolving. Even in the most advanced markets, nay US capital market, recent experience involving corporate shenanigans has brought to the forefront the problem of tighter regulation that could ensure that investors are not fleeced. As investigations progress, corporate malfeasance over the last 5 years, in the US has resulted to increased investor apathy. Experts agree that a whole generation of small to medium-sized investors who are potential market-drivers might have been scared away. Most are yet to return and have resorted to alternative investment opportunities. It would take a while before they regain the lost confidence in public companies and their management.

All this occurred against the backdrop of a very sophisticated market infrastructure and advanced regulatory framework considered topnotch worldwide. As a matter of fact, the regulatory system found in the US today evolved over six decades after the unprecedented market crash of 1929-1933, principally thanks to the leadership role of the first Securities and Exchange Commission (SEC) Chairman, Mr. Joseph Kennedy, (the patriarch of the Kennedy clan). The SEC Act of 1933 and subsequent years were enacted as the backbone of the investment industry in the US. Over the years painstaking effort was made to continuously modernize the mechanisms, even at that, the corporate debacle of early 2000 couldn't totally be averted.

This experience is very instructive for the Nigeria capital market, where the management under Dr. Ndi Okereke-Onyuike (Director General) is spearheading an ambitious growth initiative. With less that 5% of the potential population currently investing in the market, there is a huge upside to attract new generation of more-informed and enthusiastic investors both domestically as well as from the Diaspora. However, for the current spate of new listings and growth effort to have a long-lasting impact, regulatory agencies must focus on continually updating compliance standards and entrench transparency.

Nigerian society is notorious for financial malpractice that have permeated the public service as well as the private sector. Adhering to contractual covenants in Nigeria is still a matter of personal values and principles rather than judicial compliance or laid-down corporate culture. Up until recently, when the Economic and Financial Crimes Commission  (EFCC) and Central Bank started a concerted crackdown on financial crimes and malpractice it wouldn't be unusual that culprits of white-collar crimes such as forex round-tripping, churning (incessantly trading on customers account) or insider-trading (acting on privileged information) could simply receive a slap on the wrist rather than face serious sanctions to deter future offenders

…Return of Capital.
For majority of individual investors at home and abroad the concern is not only the return on their investment, but also the "return of their investment" This was buttressed during my recent presentation to a group of prospective investors at an open house organized by the Nigerian People's Forum (NPF) in University of Pennsylvania, Philadelphia. One question that featured quite prominently was -- how could the system guarantee that stock brokers will act on strict instructions rather than at their own whims? Another person gave examples of some share purchase scams perpetrated by stock brokers in Nigeria, citing how a buy order at a given price could go unexecuted (or executed at a higher price by the stock broker), yet the same broker might enter the order for his own account using the customer's money (called front-running on Wall Street). Such blatant abuse of trust, simply discourages new investors, hence most Nigerians would prefer to spend their money than strive to grow it in the stock market.

Given that nearly 30% of listed stocks in the Nigerian Stock Exchange are not actively traded the onus is still on investors who are quite uninformed (or must rely on Brokers) to decipher where to invest their money. Corporate boards and company management in Nigeria do not yet sufficiently realize that they are answerable to the investing public, despite the rush to be listed. Some of the actions of management during recent share quotations leave much to be desired. Unfortunately, we must agree that the usual Nigerian factor has no room in an efficient capital market environment. Everyone should be made to play by the rules.

As a consequence to the corporate scandals in the US, the Sarbanes-Oxley Act was enacted two years ago, to ensure that public company CEOs sign-off on any financial statements they publish. In other words, "the buck now stops with the CEO" who could be held accountable for any unnecessary "creative accounting". Nigeria might be speared a scenario such as we experienced here, by borrowing a cue from the events of the last few years and tightening the noose early enough on unethical practices by management and operators.

…Beyond The Current Leadership.
The Director General of NSE has done a marvelous job in concert with the SEC to instill discipline and sanity in the market over the last 5 years. Quite admirably, she goes the extra mile of personally vouching for the integrity of the market to international investors and whatever she says "you can take it to the bank", but what happens without her at the helm a few years from now? The institutionalization of compliance standard should be paramount so that reforms could outlive their initiators.

Some measures worth considering are to:

A) Make it mandatory for every stock brokerage firm to have an internal or external compliance department/officer and for licensed brokers to undergo periodic continuing education modules on market regulations to keep them up to speed.

B) Conduct regular training sessions and seminars for both licensed brokers and compliance officers/securities lawyers to expose them to global best practices of the investment industry.

C) Strive and continuously build credibility by implementing and strictly adhering to the Peterside's Code of Corporate governance as an "industry bible" that should guide the activities of market players.

It is a known fact that a private pension scheme is now in place, whilst foreign institutional investors and Nigerians in the Diaspora are gradually turning their attention to opportunities at home, anecdotal evidence suggests that the single most critical factor that could determine the outcome of the current investment mobilization effort is the level of corporate governance and management credibility in public companies and financial institutions. Unless investors develop long-term trust in the system it would be an uphill task to persuade them to deploy their money there.