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Corporate Governance and Market Development – Fund Manager Investing in Africa’s Perspective
Tutu AgyareManaging Director, Head of European Emerging Equities
October 2007
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Africa – The Next Investment Frontier?
Africa is increasingly being seen as an attractive investment opportunity.
Some African countries – South Africa, Egypt and Morocco are already seen as part of the mainstream emerging markets group.
Excluding South Africa annual growth has exceeded 7% over the past 5 years – compared with growth in the west of 1-2%
Africa offers the opportunity for diversification of funds as correlation between Africa and other regions is low.
“The emerging markets world was seen as the future but is increasingly being seen as the present…the reaction is to look for the next frontier and Africa is the final frontier.”
Financial Times 29th September 2007
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C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.potCash Equities Value Traded Continues To Grow Globally
Only a small number of African
countries has markets of a size
relevant to foreign investors.
South Africa, the largest market in
the continent is still small by
international standards.
However, some African markets
have experienced strong growth.
If African countries can ‘get it
right’ every chance they will be
targeted by mainstream emerging
market investors.Source – WFE
0
10
20
30
40
50
60
70
1990 1992 1994 1996 1998 2000 2002 2004 2006
USD
trillio
ns eq
uiva
lent
WFE Global Americas EMEA APAC
With the exception of South Africa, financial markets in Africa remain relatively underdeveloped compared to other emerging markets.
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Strong Growth in African IPO’s
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
2001 2002 2003 2004 2005 2006 2007 ytd
$m
's
Source – UBS –Oct 2007
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C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.potObstacles to the Development of African Markets
Scale
Efficiency Trust
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Capital Markets in Africa – Current State
Total market capitalisation of African stock markets amounted to c.US$870bn earlier this year.
South Africa accounts for almost three quarters of Africa’s market capitalisation.
South Africa 640bn (74%) Egypt 70bn (8%) Morocco 58bn (7%) Nigeria 62bn (7%) Kenya 11bn (1%)
Others 29bn (3%)
There are huge differences in market turnover among African markets.
Liquidity and size are likely to remain major issues for most African countries.
Source – UBS –June 2007
Capital markets based turnover is still small, making it difficult for outside investors to seek exposure to Africa.
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Recommendations
White labelling of state of the art trading platforms to
achieve an integrated pan-African Exchange.
Establish a pan-African Central Securities Depository –
and adhere to international standards in Custody and
Settlement.
Private sector to lobby governments to adopt a
regulatory approach to enforce higher governance
standards.
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C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.potObstacles to the Development of African Markets
The are five main obstacles to the further development of the African markets;
Low Liquidity
Lack of Automation / Weak Infrastructure
Inadequate Custody & Settlement Procedures
Relatively Poor Corporate Governance
Lack of information
The infrastructure is evolving in Africa – but from a relatively low baseline.
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Obstacle 1 - Low Liquidity
Merging of exchanges or regionalisation of exchanges in Africa.
Cross listing of stocks across countries – Kenyan & Ugandan stock exchanges cross listed 35 blue chips in 2007.
Listing of stocks on more advanced and internationally recognised exchanges – South Africa’s JSE.
Seek listings outside of African region.
Promote the development of Depository Receipts.
Liquidity is a problem for foreign investors. In most markets liquidity measured by monthly turnover remains small – integrating infrastructure is key to increasing liquidity.
Source – IMF Working paper – Stock Market Developments in Sub Saharan Africa: Critical Issues and Challenges – August 2007
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C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.potObstacle 2 - Lack of Automation /Weak Infrastructure
Sharing of technology – Namibia uses the trading system of the JSE of South Africa and a common depository system.
Invest in new technology – new MTF’s / ATS entering the European/US markets – cost of this new technology is reducing.
Sharing of post trade infrastructure – notably Central Securities Depositories (CSD).
Sharing of CSD infrastructure has additional benefit of increased efficiency through harmonisation of market practice.
Clearing & Settlemen
t
International
Custodian
Trading System
Central Securities Depository
Algeria Electronic None Electronic NoneBotswana Manual Y Manual None*BRVM Manual* Y Electronic NoneEgypt Manual* Y Electronic YGhana Manual Y Manual NoneKenya Manual Y Manual None Malawi Manual None Manual NoneMauritius Electronic Y Electronic YMorocco Manual Y Electronic YNamibia Manual None Electronic None**
Nigeria Electronic Y Electronic YSouth Africa Electronic Y Electronic YSwaziland Manual Y Manual NoneTanzania Electronic None Manual YTunisia Electronic None Electronic Y
Uganda Manual None Manual NoneZambia Electronic Y Manual YZimbabwe Manual Y Manual None
*BRVM & Egypt now has an electronic system** Namibia and SA use a common depository system SAFICAS
Source – IMF Working paper – Stock Market Developments in Sub Saharan Africa: Critical Issues and Challenges – August 2007
Low liquidity means it is harder to support a local market approach with its own trading system and Central Securities Depository.
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C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.potObstacle 3. Inadequate Custody & Settlement Procedures
Recognition and regulation of “Custodian” concept
Existence of 3rd Party client asset protection
Recognition of “Nominee” concept
Effective and fully developed Central Securities Depository / Assets in CSD viewed as ultimate record of ownership.
Regulatory need for local banks’ assets to be segregated from clients’.
Local custodian & counterparty default / bankruptcy protection.
Establishment of entitlement to corporate events.
Trade comparisons for direct market participants accomplished by T+0 – indirect by T+1
Delivery Versus Payment Settlement
Rolling Settlement with final settlement on T+3
ISIN numbering and ISO standard SWIFT settlement messages.
The lack of infrastructure means that basis market principles are not adhered to. There is a need for greater participation in African by Global Custodians.
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C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.potObstacle 3. Inadequate Custody & Settlement Procedures
Only South Africa and Egypt have ‘Advanced Emerging’ /’Emerging’ market status respectively on FTSE ‘Quality of Markets Criteria’.
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Obstacle 4. Poor Corporate Governance
McKinsey’s ‘Global Investor Survey’ indicated that effective Corporate Governance is a key decision making criteria for institutional investors;
Investors will pay a premium to invest in companies with high Corporate Governance Standards;
12-14% North America /
Western Europe
20-25% Asia / Latin America
>30% Eastern Europe
/Africa
Lobby Governments and regulators for higher corporate governance standards.
Push for a regulatory rather than voluntary approach to Corporate Governance.
Private sector initiatives to drive the development of Codes of practice in the form of market consultations.
African companies looking to benefit from higher governance standards overseas can seek listings on foreign exchanges.
Disclosure and Transparency are critical to market integrity along with the protection of shareholders rights.
Source – McKinsey & Co Global Investor Survey 2002
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Obstacle 4. Corporate Governance – Case Study
Launched in 2001, the Star Market is dedicated to mid sized companies with capitalisation of less than €1bn.
Star Market companies voluntarily comply with higher standards in Corporate Governance;
Sources – International Chamber of Commerce – Corporate Governance / Borsa Italiana
Liquidity
Transparency
⁻ 35% ordinary shares floated if newly listed, 20% if already listed
⁻ Mandatory appointment of specialist
⁻ Quarterly figures published within 45 days⁻ All information in Italian and English,
available on website⁻ Investor relation manager⁻ No ascertained breach or price sensitive
disclosure rules⁻ Positive audit opinion on latest annual
accounts
⁻ Market cap lower than € 800 m⁻ Not included in MIB30 and MIDEX indices
Liquidity
Transparency
Capitalisation
Borsa Italiana’s Star Segment - How good governance boosted Italian midcap's financial performance.
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Obstacle 4. Corporate Governance – Case Study
• Star outperformed non-Star companies listed on the exchange both in terms of price and performance – in the first 3 years following launch they outperformed MTA-traded companies by 26%. In the first 4 months of 2005 daily turnover was 300% higher than other MTA market firms.
• Conclusion – Sound Corporate Governance can have a beneficial impact on both price and liquidity.
Sources – International Chamber of Commerce – Corporate Governance / Borsa Italiana
Corporate Governance⁻ Number of Independent directors
⁻ - 2 up to 8 board members⁻ - 3 from 9 to 14 board members⁻ - 3 above 14 board members
⁻ Internal control committee (ICC) (with a majority of independent directors)
⁻ Performance-related incentives for top management
Corporate structure ⁻ Not to have assets or revenues mainly consisting of an investment or of the results of an investment in a listed company
Borsa Italiana’s Star Segment - How good governance boosted Italian midcap's financial performance.
Star outperformed non-Star companies listed on the exchange both in terms of price and performance – in the first 3 years following launch they outperformed MTA-traded companies by 26%. In the first 4 months of 2005 daily turnover was 300% higher than other MTA market firms.
Conclusion – Sound Corporate Governance can have a beneficial impact on both price and liquidity.
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Obstacle 5. Lack of Information
Research is patchy and of poor quality.
Information dissemination is erratic.
Rules around IPO’s are inconsistent and not properly enforced.
Market image is poor and little is being done to reverse this.
Need for transparency is not understood.
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Cost of Trading in Africa
High cost of trading is a product of the lack of automation/ infrastructure.
Sources – Exotix Limited
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In Summary
Establishment of Integration of trading and settlements infrastructure is critical to; Reducing market inefficiencies and increasing automation Increasing liquidity Lowering the cost of trading
Establishment of Central Securities Depositories and adoption of market best practice.
Renewed commitment to improving Corporate Governance and improved market information.
Appendices
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Implementing Corporate Governance Frameworks⁻ The ‘OECD (Organisation for Economic Co-operation and Development) Principles of Corporate Governance’ articulates the fundamentals of good Corporate Governance;
I. Ensuring the basis for an effective corporate governance framework
II. The rights of shareholders and key ownership functions
III. The equitable treatment of shareholders
IV. The role of stakeholders in corporate governance
V. Disclosure and transparency
VI. The responsibilities of the board
Source – Organisation for Economic Co-operation and Development
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Governance Benchmarks
• The UK is seen as a leader in setting standards in Corporate Governance.
• The Combined Code on Corporate Governance forms a part of the Financial Services Authority’s (UK Listing Authority) Listing Rules for the UK main markets.
• The Listing rules in the UK require companies to disclose in a statement how its applies the principles contained in the code.
• Where principles are not complied with companies are required to provide and explanation to that effect – known as a ‘comply or explain’ approach.
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Corporate Governance – Best Practice MAIN PRINCIPLE
Directors
The Board -Every company should be headed by an effective board, which is collectively responsible for the success of the company.
Chairman and Chief Executive
-There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one person should have unfettered powers of decision.
Board Balance and Independence
-The board should include a balance of executive and non-executive directors (and in particular independent non-executive directors) such that no individual or small group of individuals can dominate the board’s decision taking.
Appointments to the Board
-There should be formal, rigorous and transparent procedure for the appointment of new directors to the board.
Information and Professional Development
-The board should be supplied in a timely manner with information in a form and quality appropriate to enable it to discharge its duties. All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge.
Performance Evaluation
-The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.
Re-election -All directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance. The board should ensure planned and progressive refreshing of the board
Remuneration
The level and make up of Remuneration
-Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more that is necessary for this purpose. A significant proportion of executive director’s remuneration should be structured so as to link rewards to corporate and individual performance.
Procedure -There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his or her own remuneration.
Source: The Combined Code on Corporate Governance – Financial Reporting Council – June 2006
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Corporate Governance – Best Practice
MAIN PRINCIPLE
Accountability And Audit
Financial Reporting -The board should present a balanced and understandable assessment of the company’s position and prospects.
Internal Control -The board should maintain a sound system of internal control to safeguard shareholders’ investment and the company’s assets.
Audit Committee and
Auditors
-The board should establish formal and transparent arrangements for considering how they should apply the financial reporting and internal control principles and for maintaining an appropriate relationship with the company’s auditors.
Relations With Shareholders
Dialogue with Institutional
Shareholders
-There should be a dialogue with shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.
Constructive use of the AGM
-The board should use the AGM to communicate with investors and to encourage their participation.
Institutional Shareholders
Dialogue with
companies
-Institutional shareholders should enter into a dialogue with companies based on the mutual understanding of objectives.
Source: The Combined Code on Corporate Governance – Financial Reporting Council – June 2006
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