Financial Mail - Investors Monthly - - Opinion -

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

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