Increased transparency: The key to an improved investment climate in Nigeria
Nigeria is both Africa’s largest market and economy due to its natural resources and an ever-growing population; but in order to sustainably leverage these assets, it must encourage a culture of strong corporate governance within its organizations and a recognition of the broad value of enhanced transparency and access to information.
Attracting high levels of investment will depend on an improved investment landscape reflected by easy access to information vital to decision making, and businesses reputed, not just for profitability, but also, transparency, accountability, and strong ethics. This is increasingly important as the competition for capital and investment increases over time and investors are presented with a wider basket of investment opportunities.
Over the last decade, new industries and entrepreneurs have grown to prominence rapidly, and more Nigerian companies are listed on the Nigerian and international stock exchanges than ever before. This is encouraging considering that only in 2010; the country was rebuilding confidence in its financial markets.
However, as Nigeria faces new economic challenges, including a depreciating Naira, limited domestic sources of mid-to long-term financing, and institutions that require capacity strengthening, the need for emphasis on transparency as a means of building trust and enabling investment in the Nigerian business environment remains unequivocally important.
According to the United Nations Conference on Trade and Development’s 2014 World Investment Report, Nigeria remains one of the top three destinations for foreign direct investment in Africa. However, attracting investment is only one manifestation of how essential good corporate governance is for efficiently channeling savings to productive use by companies.
Transparency is vital for building strong domestic financial markets, public securities markets, and banking and non-banking financial systems. It also increases public confidence in the securities markets, which adds liquidity to the system and helps it meet the short to long-term investment needs of businesses.
In Nigeria, the mechanisms of corporate governance are the Companies and Allied Matters Act (CAMA) 2004, Investment & Securities Act 2007, and the Corporate Governance Code among other industry-specific governance codes for public companies as stipulated by the Securities Exchange Commission.
Some of the major innovative provisions in the CAMA include provisions for greater accountability and disclosure from company directors, improvement in the forms and contents of financial statements of companies, requirement of IFRS reporting for all companies, creation of the Financial Reporting Council (FRC), provisions for the establishment of audit committees by public companies, and expanded provisions for relief against illegal and oppressive acts including provisions for derivative actions and relief against unfairly prejudicial conduct.
It is worth noting that no country has a perfect investment climate, and perfection is not a prerequisite. Unfavorable investment climates are often a result of macroeconomic policy imperfections, inadequate infrastructure, bureaucratic red tape and opaqueness, and frail legal systems. In Nigeria specifically, a lack of transparency around the internal policies of many organisations have been culpable for some of the country’s largest corporate failures. A lack of access to information for prospective investors, an equally damaging obstacle to enhanced investment.
For the Nigerian Stock Exchange, the benefits of improved transparency in Nigerian companies are clear. Adherence to disclosure requirements go a long way in bolstering investor confidence in the NSE, the institution responsible for instituting a verifiable governance structure that ensures compliance with reporting financials. The recent creation of a premium board, made up of companies committed to a higher standard of corporate governance and transparency is indicative of this, with similar board’s globally tending to outperform less accountable peers. OECD studies have shown that companies with enhanced corporate governance demonstrate stronger operational and market results, higher levels of profitability, relatively high share prices and liquidity and lower cost of capital.
The private sector in Nigeria has often been at the vanguard of the country’s positive reforms, and some companies have elected to lead in entrenching transparency and good corporate governance, in the knowledge that it provides competitive advantage. The financial sector, for example, has seen improvements although there must be concerted efforts on the part of all stakeholders to ensure that it does not lose the progress made after the 2010 sector crisis. To solidify these gains, it must be legally binding for companies in Nigeria to comply with the principles of transparency, internal controls and accountability in the system. Likewise, regulators must insist on efficient performance measurement systems for senior management and the board, and encourage companies that prioritize efficient processes, performance evaluation and reporting to stakeholders.
The progress of such efforts in Nigeria is dependent on the synergy between the private and public sectors. Actions by the former will only prove successful if the latter understands and promotes the ideology. This implies that as private players drive the development of transparency through company policies, the public sector and the government must drive its growth through regulation. Inclusive policy making and collaboration between both sectors must be actively encouraged, as well as increased awareness, research and regulation.
The government must accept the role it must play in ‘democratising’ access to information on opportunities. If the government has the data available to enable sector specific opportunities, then it must invest in, and publicise that information more broadly.
The Transparency Forum Initiative, an example of collaboration between sectors, was created as a platform for open dialogue about redefining transparency within Nigeria. The initiative is centered on four objectives – enabling dialogue, national interests, advocating solutions and building capacity. Its recent press launch buttressed the importance of transparency i.e. collectively promoting the culture fosters an attractive investment climate in Nigeria; an atmosphere that can spur inclusive growth that trickles down and ultimately drives national development.
The Transparency Forum Initiative will host its inaugural conference on the 29th and 30th of March 2015.
• Buchi Ajufo is a Strategy and Communications Consultant at africapractice, Africa’s premier Strategy and Communications Consultancy.