Demutualization or the conversion of a broker-dominated Exchange to aninvestor-dominated Exchange has been a global trend to introduce transparency,better corporate governance and greater efficiency in the management ofequities, commodities and fixed income Exchanges around the world. The higherstandards of accountability of an investor or shareholder-led Exchange isdesirable but with a few niggling problems.

Whilean Exchange run along the lines of a private company would ensure efficiency inresource deployment and drive a profit-motivated business process, the factthat the NSE is an Exchange for trading in third-party assets places on it aburden beyond profit considerations. The Exchange has a responsibility that itdoes not use privileged information in such a way as to give it insideradvantage and provide its shareholders with returns derived from non-publiclyavailable information. The imperative for the NSE is to separate its businessgoals from its regulatory duties. Achieving operational silos will be the testof the desirability of demutualization in the Nigerian stock market whichappears to have taken a cue from developments in markets in Europe, the USA andAsia. Demutualization was first tried by the Stockholm Exchange in Sweden in1993 and appears to have provided a template for similar developmentsglobally. 

Thenew ownership structure of the Nigerian Exchange would mean the constitution ofa Board of Directors who would be expected to guide the affairs of the companywhile management and other staff would, presumably, be appointed on merit tohandle day-to-day operations. The new corporate arrangement may require a quickreview of existing operations and a streamlining of the Exchange's businessstructure, but most importantly the Exchange would need a viable business modelthat ensures profitability without price gouging on Exchange provided retailand partner services (the old Council guards seeTable 11).

Table 11:  Change of Guards;The Old Council Will Give Way to A New Board

Recalling the Fear of a Ghost

WhenOkereke-Onyiuke was DG of the Exchange one of her strongest reservations wasthe composition of the board of directors of a demutualized Exchange. That fearstill subsists.

Oncethe demutualization process is concluded, perhaps before Onyema wraps up histenure, a new board would be put in place to take over from the presentcouncil. The problem is that once the Exchange becomes limited by shares ratherthan by guarantee, the shares of the Exchange becomes a free game for thosewith cash to spare, meaning that brokers and their clients may be edged out ofthe oversight of the new Exchanges activities as the Exchanges shares would bebought and sold on its floor like any other equity.

Analystsnote that the directors of the NSE's premium board companies who have deeppockets could buy large slices of the Exchange's shares on offer with themarket finding itself in a situation where the biggest players in the equitygame officiating matches in which they participate. This creates a classic agency problem where the principal becomes an agent to the tenant in an estate he orshe owns. The conflict of interest is tangible. 

Onyema,over the next few months, will need to collaborate in forward-lookingdiscussions with other stakeholders to ensure that the Exchange avoids a situationof 'market capture' by investors with large financial firepower. This reawakensthe ghost of Okereke-Onyiuke's past market visions and anxiety.

The Boardroom 

Withthe demutualization of the NSE, the management of the organization wouldchange, meaning that instead of having a governing council the market wouldhave a board of directors. The new board would decide the NSE's strategies andset the direction of the limited liability company's activities and its actionsin respect of its market trading platform.

Afew factors would determine the success of the Exchange's new structure, theywould include:

• Experience and knowledge of Board Chairman
• Experience and knowledge of other Directors
• Board power relative to shareholder-influence
• Board's strategic purpose and vision
• CEO power concerning shareholder influence
• Relationship between the CEO and the Board
• The extent of engagement between the Board and shareholders

Ifthe NSE's board of directors is made up of experienced businesspersons withstrong hands-on knowledge of managing successful enterprises, the spillovereffects of the collective wisdom of the board members should ensure thetopnotch performance of the Exchange. A further factor for success (preceded bygrowth and development) is a strong group of shareholders. Since the turn ofthe decade, the role of shareholders has become increasingly important in thelife and health of companies as knowledgeable and vocal shareholders serve asescape valves that prevent either board or management from overheatingorganizational operations by errant behavior and emotional outbursts (see matrix illustration 7).

Illustration 7:  The CorporatePower Matrix

Notmuch is expected to change in the management of the Exchange after thedemutualization has been completed as the old market guards are expected tostay as they keep a firm grip on the newly established board of the Exchangeand see to it that the system does not experience a transition shock.

However,one area the Exchange may change is the level of efficiency in which it doesits business may improve as board members and shareholders expect and willcompel greater transparency and operating effectiveness. With the Exchangerequired to produce regular financial reports on the state of affairs of itsbusiness, top management would be under pressure to meet performance targetsand budget expectations.

The New Corporate Value Chain

Asthe NSE transforms its oversight structure, the Exchanges managers must beconcerned about how its processes, policies and procedures feed into decisionchannels that raise shareholder value. Unlike in the past, the Exchange cannotbe concerned only with cost recovery and recurrent expenditure, but it mustalso be worried about an incremental increase in corporate net earnings whichtranslates into dividend payouts for shareholders.

Themanagement of the Exchange must grow operational revenues as they hold downcosts and increase working capital. As the Exchange grows bigger annually itsmanagers need to worry about the optimization of the organization's capitalstructure. The proper debt to equity structure to yield the highest possiblereturn on equity (ROE) and return on asset (ROA) must be uppermost in the mindsof those running the Exchange and its sundry businesses, the consequences couldinvolve a rise in existing fee-based services and new charges onpreviously free products or services offered by the NSE. The NSE's newdemutualized reality could prove to be a hard nut to chew for market operators(CMOs) facing rising costs in other areas of their business (see illustration 8).   

Illustration 8:  NSE'sProspective Value Chain Drivers

Growing Debt or Raising Equity? The New Face of a Fiscal Dilemma

Corporationsare leaning into a difficult era where they become more painfully aware of thechoice between funding operations with debt or equity. The debt or equitychoice is taking on greater prominence as investors become more anxious aboutreturns on their investments against the backdrop of a COVID-19-inducedrecession (see table 12). 

Table 12: Debt or Equity, The NewFace of a Dilemma

Downloadable Versions of NSE Ten Years After Takeover Report (PDF)

1.  Executive Summary: NSE Ten Years After a Takeover: The Good, The Bad and Undecided - Sep 16, 2020

2.     Full Report: NSE Ten Years After a Takeover: The Good, The Bad and Undecided - Sep 16, 2020