MTN CASE SHOWS HOW BAD GOVERNANCE HURTS
MTN’s (self-made) Nigerian disaster continues to light up the headlines and some experts are citing this as further evidence that investors who want superior returns should steer clear of companies with patchy governance records.
It’s a comforting notion. It reinforces the idea that there are consequences for taking short cuts. It also feeds into that warm and fuzzy view that there is a sense of intangible justice that punishes those who think they’re above the rules.
It’s tricky though, because it just doesn’t seem to be a universal truth of investing.
There have been many companies in recent years that have done all manner of schlenters, yet have only seen their stock value increase. True, some came short: think of Regal Treasury Bank, Blue Financial Services and African Bank. But others, who’ve taken equally questionable decisions, still thrive.
By the same token, there are also some companies with a spotless record of governance — a shiny board full of well-titled independent directors — who also run aground because of bad luck, circumstance, or just a bad deal they made.
As you’d expect, there are plenty of studies which try to make the case that good governance pays — but the evidence isn’t as strong as some would think.
Last year, for example, Hermes Fund Managers did a global analysis and found that companies with good governance outperformed those with poor governance by 0,3 percentage points a month.
They assessed whether a company was run badly or well by looking at various factors — including remuneration, the independence of the board, and whether a company had a “poison pill” clause in place to protect it from a takeover.
But when it came to technology stocks in the US, for example, where the likes of Uber, Google and Apple are soaring right now, companies with poor governance actually outperformed those with better governance by 0,7 percentage points.
The Hermes view was that “it is not good governance that leads to outperformance, but poor governance that leads to underperformance”.
So how should we think about this in a case like MTN? The company seems perpetually under siege, whether it be bribe allegations in Iran, spying claims in Syria, or numerous regulatory breaches in Nigeria.
Several analysts now privately say the risk of investing in MTN is too high.
“I have concerns over the company’s history of governance problems (such as in Iran). I’d rather own Vodacom because of this,” said one analyst.
No reason has been given as to why MTN didn’t disconnect 5,1m Nigerian Sim cards when they were first told, months ago, to do so. Its risk managers and oversight group either didn’t know about this, or did nothing about it. At the time of going to print, this meant MTN faced a $5,2bn fine.
The MTN case might not be a definitive answer to the question of whether governance weaknesses lead to price weakness. But what is clear is that the odds of a company lurching into crisis increase exponentially the worse the run is. And when a governance failure of such epic proportions hits, it can be devastating — as MTN’s R70bn loss in value illustrates.
The MTN case should act as a wake-up call for investors who’ve allowed governance concerns to fall off their checklist.
What is clear is that the odds of a company lurching into crisis increase exponentially the worse run it is