Udo Udoma, SEC and the Perception Gap

January 02, 2010; 2130 hrs, Omole, Lagos, Nigeria

“We must not allow ourselves to become like the system we oppose.” – Bishop
Desmond Tutu

There can be few less likely heroes for Corporate Nigeria’s progressive class than Senator
Udo Udoma, Chairman of the Securities & Exchange Commission (SEC); who as at today,
has stayed a full month unfortunately as a ‘conflicted personality’ in the unfolding dynamics
reverberating in the Nigerian Financial system. He was a friend to all, a man with pedigree
and an ally to count on in Corporate Nigeria and the general public.

Yet, he choose to risk all for the sake of an office that needed a higher set of standards than
the laws available and the guidelines covering its operations could have anticipated in the
light of the growing challenges the market is beset with.

He did this, perhaps believing in the force of good he represents and the loyalty shown him
through the ‘silence of the grave approach’ adopted by the media and operators; than in his
otherwise sound and informed judgment on most issues; before now.

When we responded to the January 04, 2010 press release by UACN Plc and highlighted the
‘deliberate and obvious’ omission of his current status as the SEC Chairman in their
announcement of his chairmanship of UACN; his response was to further draw attention to
the fact that he was not only the chairman of UACN Plc, a quoted company under his
supervision as the Chairman of the apex capital market regulatory body of the land; but a
Vice Chairman of linkage Assurance Plc and a director of Unilever Plc.

In his defense of the decision, he affirmed that he has met the criteria for disclosure set out
by the ISA and indeed had held those positions before he took office as the SEC Chairman.
If he thought that addressed the central issue of the day; he was soon to be gob-smacked
by the pronouncements from CBN, days after.

Furthermore, the conflicted status of the SEC Chairman thus immediately placed the newly
appointed SEC Director General in a perception spot – how can she exercise the
independence required where such a glaring conflict of interest or/and roles exist at it
highest echelons?

The Perception Gap Hypothesis

The perception gap occurs when we begin to dig a bit deeper to understand what's actually
happening with the regulatory bodies hitherto expected to operate above board and conflict.
These enquiries lead us to an obvious conclusion – the rot we currently find ourselves was a
man-made creation driven by our inability to separate personal estate from the public
responsibility matrix that is so crucial to defining, establishing and discharging a level
playing field.
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A culture of incestuous relationships between regulators and operators has, over the years
conspired to define access and interpretation of the market rules. These has led to so many
‘unintended consequences’ including but not limited to:

1. Perception of injustice, no reprimand and no sanction for erring defaulters for serious
and often times, criminal acts in the market against investors;
2. A weak regulatory regime driven by the knowledge that principal officers are conflicted
or that they are unwilling to act within the best ideals of the commission where the
issues affect politically advantaged individuals; and
3. A deliberately weakened supervisory and enforcement function either due to a
‘sycophantic work culture’ or due to a ‘punitive and vindictive management culture’.

Needless to say, and prior to now; the joke in the market was on SEC – an institution with
quality workers who are unable to discharge their professional duties – on account of
political posturing, structural inadequacies arising from interference from the supervising
ministry and the ruling class; and an inability to claim the high moral ground on matters
related to disputes and conflicts between operators and investors on the one hand, and
between regulators and operators on the other hand.

It is common knowledge that the issue between Femi Otedola and Aliko Dangote remains
largely unresolved, - yet the market chooses to move on – to what? Ditto the AP Plc public
offer underwriting issues – a subject of a sustained media battle without any resolution to
serve as guidance for the market or comfort for investors in the offer.

There are a few cases known in the market that has been passed to the EFCC for which a
holistic solution has arisen and even though it has its own APC system; justice can take
years in a market for which TIMELINESS ought to be a minimum guiding principle – delayed
decisions cost the prosecuting parties (investors) more and SEC is often credited with
saying that it is structurally unable to enforce judgment it passes.

There are brokers that have made away with depositors funds, who simply closed
operations and months and years after, investors still run from one law enforcement agency
to the other because there is no one to aid them. Further, there are brokers sanctioned by
SEC who still engage in activities in the sector because there is no system to check and
enforce these decisions.

This credibility gap predates the current Chairman of SEC it must be said that strides have
been made under his leadership to set a clear path for the commission; especially the
review conducted and delivered on time. Much more was even done during the tenure of
Daisy Ekineh, who held it together during a difficult time.

Our share support service – helping investors resolve issues that should be taken for
granted - is however constantly inundated with complaints from investors and the public
over matters that should receive the attention of SEC. For how long must we pretend
that all is well with the regulatory commission?

The expectation of a change arising from the appointment of an outsider has been dealt a
blow with the insistence of the SEC Chairman to retain his dual role as a chairman and
director of a public quoted company subject to his decision (excusing himself from such
discussions) – this robs the SEC of the value it was meant to deliver.

The CBN Directives on Bank CEO’s as an Informal Code for Regulators

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When the CBN on January 19, 2010 released it directives to banks in respect of the tenure
of CEO’s and the qualification for appointment of ex-CBN and ex-NDIC officials into the
boards of these publicly listed banks - http://www.proshareng.com/news/singleNews.php?id=8843 – it
created a far-reaching paradigm that Senator Udo Udoma must have missed.

The directive from CBN not only fixed a 10-year tenure for bank chief executive officers in
the country, it laid out an exit date for those who would be affected, a disqualifying period
for the CEO’s, CBN, and NDIC officials, and made changes to both engagement contracts
and provisions of the Memart.

While it can be argued that the limits of this policy ends with banks licensed by the CBN;
the wider implications of the policy was the setting up of an informal code for regulators.

For how can one rationalize the use of this code within a limited sense and exclude other
regulators within the financial services sector – when the problem within the sector was not
confined to the banks. The problem, as defined by the apex regulator was that a culture of
incestuous relationships had been established in fact and perception and if this was not
addressed, existing rules cannot hold those who abuse the system liable. Most importantly,
the need to establish a conscious distance between OPERATORS and REGULATORS was
imperative rather than discretionary; existing laws notwithstanding.

The Senate Committee on Capital Markets

We have passed on to the Senate Committee all the correspondence and investor
complaints on the subject of the ‘conflicted position of the SEC Chairman’; and this has
been virtually a daily affair since January 6, 2010.

So many wrote under a ‘pseudo name’ for fear of reprisals which they collectively agree is
very real on matters relating to expose of information on SEC. Not a few even doubted our
desire to furnish, publish or comment on same given the almost media blackout that has
occurred ever since. Further investigations revealed more damning tales of ‘institutional
intimidation’ either directly or through actions taken on others with similar cases like
theirs on otherwise ‘routine’ complaints on operator infractions.

Recall the SEC position on private placements, Transcorp issue, criminal actions against
brokers referred to EFCC after an investigation, unpaid refunds from public offers, unpaid
dividends by quoted companies and the poor handling of the post-public offer obligations of
quoted companies.

It must be said that no direct accusation was made with regards to the person of the SEC
Chairman, but the general impression was that no one would dare go against a matter ‘they
would rightly think he was interested in’.

This and other fundamental issues must have therefore informed the Ganiyu Solomon-led
Senate Committee on Capital Markets to invite the SEC Chairman for a private audience to
address this current and immediate ‘perception gap’ arising from his dual role in the market.

Our sources have confirmed that he did not attend the meeting with the committee,
scheduled for today as earlier agreed.

A review by market analysts and legal practitioners of the ISA reveals that unlike other
governing boards, the SEC Board’s role goes beyond advisory – indeed, not in a few
instances have we found the words – ‘decisions are subject to the board’ used literally and
explicitly.
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This action in itself lends credence to the fears expressed on having such a status go
unchecked. It has nothing to do with the person or personality but the office and its
imperative to not only be independent in fact but have the appearance of independence –
not one saddled with a perceived, potential or portent conflict of interest or/and role image.

The announcement therefore in January 2010 of a joint commitment of the CBN, SEC, NSE,
NAICOM, PENCOM and NDIC to commit to a code of conduct for regulatory agencies
officials.

The Fallacy of the SEC Chairman’s Stand in the light of the Proposed Code of
Conduct for Regulatory Agencies Officials

Need we waste time on this subject?

Maybe not but it might just be well to re-iterate the unintelligent approach to managing the
market – by calling the proposed ‘plan’ a ‘sweeping reform’ in the nations’ financial sector
through the creation of an umbrella code of conduct for the financial industry regulatory
agencies spearheaded by the Central Bank of Nigeria (CBN), Securities and Exchange
Commission (SEC), Nigerian Deposit Insurance Corporation (NDIC), the Nigerian Stock
Exchange (NSE), and Pension Commission (PENCOM).

Under the planned approach, senior officials of the regulatory agencies are to be
restrained from holding significant equities in companies under their jurisdiction.
According to analysts, this is a loose approach to the CBN move to prevent such regulators
from holding shares in companies supervised by them.

The intendment of this new rule is that officials, mostly senior personnel in the regulatory
agencies, will no longer have a free reign in terms of investment in ‘financial’ institutions,
which they oversee. For instance, CBN and NDIC officials in the Banking Supervision
Department, whose duty is to monitor the health of the banks, may cease to be
shareholders in those banks.

Indeed, the quantum of credit facilities such officials can take from any bank will be defined
in the new rules. According to proponents of the new order, the prevailing regime, where
some officials in the regulatory agencies were either former employees or investors
in the firms, raises moral and credibility questions.

According to The Guardian, who broke the news - an official of one the regulatory agencies
said that the essence of the code of conduct, “is to avoid a conflict of interest between
the regulators and the regulated, especially as regards the level of shares senior
officials can own in companies under them. The rules also touch on the level of
funds a regulator can borrow from a bank, the terms and the disclosure
requirements among other things.”

So why limit it to financial institutions?

For hypothesis sake, let us assume that the Chairman of SEC was the Chairman of Cadbury
Nigeria Plc under Bunmi Oni, as the facts made available suggested; how would SEC have
handled a situation where his chairman – holding a dual role – will sit in judgement to be
removed from the board and retain his SEC Chairmanship without consequences on the
moral fibre of the commission?

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Posers:
If the ethical code is considered of such paramount importance outside the ‘disclosure of
interest rule’ the Sec chairman has clung on to; why is it less applicable in his case.

Further, if as we understand, the CBN has already co-opted other regulatory agencies into a
scheme that will enable them to operate as one entity (a brilliant decision) in supervising all
the financial institutions to avoid any loophole; while allow the SEC situation to remain at
status quo.

What if Musa El-Faki or Daisy Ekineh (recent past DG and Ag. DG of SEC respectively)
decides to accept an offer of chairmanship of a quoted company tomorrow, would the SEC
Chairman have the moral right to ‘borrow a leaf’ from the CBN type directive to prevent
him/her from doing so? Or would he start a staff management change (or cleansing) in the
enforcement function – thus subjecting the sitting Director-General to a lame-duck status

An Enlightened Approach/Example

According to Lamido Sanusi - "I do believe that the dividing line between the
regulator and the operator needs to be very clear and I need to be clear about my
role as a regulator, and that includes creating a level playing field." He stressed that
this included avoiding questions of conflict of interest. He continued: "I have just left First
Bank and as an employee of First Bank I had loans that were staff loans at concessionary
rates. Usually, what happens in institutions like that is when you have left; they leave your
loans at that concessionary rate. One of the things I did was to call the managing director
that I wanted my loans converted to a commercial rate, precisely because I am the
governor of the Central Bank." Sanusi said he took the step to set a standard for himself if
he intended to hold other regulators to those standards.

He also pointed out that there are certain circumstances that could lead to conflict of
interest, "and we need to be very explicit in our definition of those circumstances. You may
not avoid everything; you may not stop people from borrowing from banks or buying shares
in banks, but then if you do, to what extent? What are the terms? What are the disclosure
requirements?"

Based on the foregoing, the CBN Governor said he would suggest that “senior regulators
should not be shareholders in the institutions they regulate”, adding that, "I
personally would sell any shares in any bank as long as I was the Governor." So what is the
SEC considering?

SEC Considers Tenures for Quoted Firms’ Directors

Thisday published a story in January 2010, barely a week after the Central Bank of Nigeria
(CBN) rolled out its policy fixing tenure for bank chief executives -
http://www.proshareng.com/news/singleNews.php?id=9001 where the Securities and Exchange
Commission (SEC) stated that it was considering enforcing the 2009 Code of
Corporate Governance which will limit the tenures of directors of quoted
companies. Under the proposal, directors of quoted companies must retire at the age of 70
years or after serving for a maximum of 12 years - that is, three terms of four years on the
board.

SEC, it was reported, was unhappy with a situation whereby older directors sit on the board
of quoted companies and deny younger hands the opportunity to contribute to the
development of quoted companies and institutions. This must have informed the
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recommendations contained in the Report of National Technical Committee on the review of

the Code of Corporate Governance, which was submitted to SEC in March 2009.

The committee, headed by Mr. Balarabe Mahmoud (SAN), was inaugurated on

September 15, 2008 by the SEC Chairman, Senator Udoma Udo Udoma to, among
others, review the existing Code of Best Practices on Corporate Governance in Nigeria, that
of the 2003 Code as well as to examine and recommend ways of effecting greater
compliance with the 2003 Code by public companies. According to the Code, such steps are
designed “to avoid conflict of interest, breach of confidentiality and
misappropriation of corporate opportunities”. The code also encourages the
appointment of independent directors to boards of quoted companies.

While SEC is understood to be considering adopting the Committee’s report, which could
become effective immediately thereafter; we await a revised copy of the recommendation to
affirm whether it has any provision in it for the conflicted status of the SEC Chairman.

Conclusion

The real joke in all this is that SEC is actually considering penalizing companies and
individuals for violating the new code of Corporate Governance once it becomes operational.
Indeed the punishment ranges from a fine to a possible delisting of an erring company.

According to Thisday, the enforcement of the 2009 Code of Corporate Governance is said to
be on top of the agenda of the new SEC Director-General, Ms. Arunma Oteh. How can she
possibly hope to do this when she is unable to resolve the one central issue affecting her
independence – a SEC Chairman in direct contradiction with the proposed code of
Governance? The same report highlights the stack reality that outside Senator Udo Udoma,
there are also over 25 companies whose directors are sitting as either multiple directors or
interlocking directors in breach of Organisation for Economic Co-operation and Development
(OECD) internationally accepted standards of best practice. Apart from the tenure and age
limit, the new code also frowned on family and interlocking directorship as well as multiple
directorships where one board member sits on the board of several companies in the same
industry.

The problem is that the Nigerian SEC has never been officially given the free hand to
perform their role which is to "to protect investors, maintain fair, orderly, and
efficient markets, and facilitate capital formation”. There has always been a power
tussle between the NSE/SEC.

The current work being done in the banking sector by Sanusi will not correct most of the
problems at the NSE. There has to be a major shake up at the NSE, and the SEC has to
show that they have the guts to take on the culprits (i.e., brokers/brokerage firms being on
the buy/sell sides of a deal, lack of transparency, etc) and this is not helped with a
conflicted status of its chairman.

Reference: Udo Udoma & SEC – Legality, Perceptions and Sacrifice http://proshareng.com/blog/?p=131

Olufemi Awoyemi, FCA

MD/CEO Proshare Nigeria Limited

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directed to info@proshareng.com

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