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BusinessDay 09 Apr 2018

34 BUSINESS DAY

34 BUSINESS DAY C002D5556 Monday 09 April 2018 BUSINESSINTELLIGENCE In association with Firing The CEO A major responsibility of the Board is selecting the CEO. It must therefore ensure that it picks the right CEO and puts in place a succession plan that allows for smooth transition. With increased responsibilities and more stringent regulatory oversight, Boards need to ensure that they appoint CEOs who will allow them to go to sleep with both eyes closed. The Board also has the responsibility of setting Key Performance Indicators against which the CEO’s performance will be measured and appraised. More often than not, the KPIs are tired to corporate performance and many Boards don’t have a formal framework for appraising the CEO’s performance. It is good practice for the Board to define robust KPIs for the CEO beyond cor- porate performance. These should include the CEO’s leadership of the team, client/customer relationship management, corporate culture, employee development, managing key stakeholders, etc. Closely following the responsibility to select a great CEO is that of ensuring that a succession plan is in place. Oftentimes the Board does not pay sufficient attention to the senior leadership pipeline and delegates this responsibility to the incumbent CEO. The Board should ensure that there is appropriate capacity and competence at the level below the CEO and indeed across the organization. It should not take the CEO’s word for it, but sufficiently engage to ensure it has comfort in this regard. With a healthy pipeline of senior leadership, the impact of sudden CEO exit can be minimized. Firing the CEO is one of the most difficult tasks any Board will have to deal with. However, there are times it becomes inevitable to do just that. Where the CEO persistently does not meet set KPIs, fails to execute strategy, delivers non-inspiring leadership or “puts the company in trouble”, the Board may be left with no choice but to let him/her go. Firing the CEO could negatively impact the organization. For sure it comes at a significant cost. Some of the costs of firing a CEO are easy to measure. “Golden parachute” severance pay for example, are sometimes included in CEO employment contracts. Unless the CEO has been found complicit in some criminal or other underhanded matter, the company usually must pay up according to the terms of the contract. Some severance pay run into multiples of annual salary and bonuses. Another cost is that of replacing the exited CEO. Great CEOs don’t grow on trees and the process of recruiting the ideal candidate is not cheap. Beyond the fees of executive selection firms (many of these firms charge a percentage – sometimes in multiples - of the CEO’s salary and bonuses), the sheer time and effort that go into an unplanned exit, cause the Board to give careful thought when taking a decision to fire the CEO. There could also be the cost of losing business relationships which the departing CEO brought on board and nurtured. Some clients may choose to take their custom elsewhere with the departure of the CEO who courted them. Depending on the depth and nature of business, the effects of these could be 2018 Academic Session Theme: “The Company Secretary: The Corporate Governance Professional” Company Secretaries, In-­‐House Counsel, Interns, Compliance and Regulatory Officers, Lawyers and Chartered Secretaries Date: April 25 th & 26 th 2018 Location: Green House, 235 Ikorodu Road, Ilupeju, Lagos. Enrolment & Registration: N100,000 Modules: significant. The peculiarity of some businesses makes it difficult for the Board to mitigate the likelihood of this happening. Sometimes, the CEO’s personal connections constitute a large chunk of the patronage. Non-financial but equally damaging effects of the CEO’s unplanned exit include the impact on employee morale, especially among senior managers, who may wonder if theirs will be the “next head on the chopping block”. If the CEO was fired for taking a “risky bet” which went awry, employees will be less willing to take risks – a situation that will inevitably impact performance. There is also the possibility of mass exit – especially if the CEO was admired by his colleagues and goes on to either set up his own shop or to another organization from where he “poaches” his ex-colleagues. To be sure, some clients would also move with the CEO, particularly if the perception is that he/she has been unfairly treated. There is also the cost of perception. If not properly handled, the CEO’s exit could send negative signals to the public. It could create the impression that the company is “in trouble” and inevitably affect the share price – at least in a mature stock market. According to James McRitche in his article “When the CEO Really Must Go” (2011), there is never a “good time” to act, “so do it when you make the decision”. Many underperforming CEOs think they are doing a good job. In this regard, the Board must tell the truth early on. The CEO shouldn’t get a bonus he/ she doesn’t deserve because the Board doesn’t want to “demotivate” them. If the Board is not getting the expected results, it should communicate this clearly to the CEO. Upon coming to a decision that firing the CEO is the best in the circumstance, the Board needs to handle the exit with great care. The CEO should be allowed to exit “with grace”, quietly so that both parties can move on without bad blood. • Effective Minutes Writing • Effective Use of Board Committees • The Duty of Confidentiality • Understanding Financial Statements, Key Financial Ratios and IFRS Provisions • The Corporate Governance Framework • Preparing for Meetings – What the Company Secretary Should Know • Regulatory and Statutory Compliance • Effective Stakeholder Relationship Management For enquiries and registration: • Nike Taiwo: ntaiwo@dcsl.com.ng or08090381864 |Mobile:08052800715 • Anne Agbo: aagbo@dcsl.com.ng or 08090381864 |Mobile: 080053038482 Bisi Adeyemi is the Managing Director of DCSL Corporate Services Limited. For comments and reactions, kindly contact badeyemi@dcsl.com.ng.

Monday 09 April 2018 C002D5556 BUSINESS DAY 35 Stocks Currencies Commodities Rates + Bonds Economics Funds Week Ahead Watchlist P.E Yield curve flattens on Fiscal and monetary policy synchronisation FSDH sees Nigeria inflation slowing for fourteen successive months to 13.49% Page 36 Page 36 ECONOMY Seplat navigates oil rebound better than Erin, Savannah DIPO OLADEHINDE While Seplat, N i g e r i a ’ s largest indigenous firm rebounded to growth on the back of improved crude oil price, Erin energy and Savannah Petroleum both midsized firms continues to gasp for breath as it sweeps in an ocean of losses over major assets acquired. Seplat surmounted the headwinds brought on by lower oil price and political unrest the Niger Delta region as it recorded a profit after tax of $265 million to end 2017 financial year from a loss of $165 million the previous year. On the other hand, Erin Energy, a small oil and gas firm recorded a 6.3 percent increase in its loss after tax to $151.9 million in 2017 from $142 million in 2016 while Savannah Petroleum, another small player in in the industry recorded an astronomical 178 percent increase in loss after tax of $27.3 million in 2017 compared to $9.8 million in 2016. The lifting of a force majeure in the third quarter of 2017 was a boon for Seplat as it resumed production and recorded returned to profitability however the two other firms gave reasons for their loss. Erin Energy said they have being investing money in the acquisition of new assets and shareholders will have to wait for dividend payment while share-buy backs could be delayed. “2017 had its challenges for our industry and our company, but Erin Energy’s perseverance and some stabilization of the commodity price, allowed for good progress in many of our efforts.” Femi Ayoade, ceo of Erin Energy said on the company’s official website. Savannah Petroleum is faced with the same dilemma as Erin Energy; the company acquisition of integrated gas company, Seven Energy increases its operating expenses by 222 percent to $27.1 million in 2017 from $8.4 million in 2016. Savannah Petroleum CEO Andrew Knott said “the acquisition of assets from Seven Energy creates a full cycle exploration and production company, capable of paying a dividend from the cash flows generated by its upstream assets.” “The increase in overall general and administrative expenses during the year was as a result of exceptional business development costs of $18.5 million in relation to the Seven Energy transaction,” Knott said on the company official website. In 2017, Seplat recorded a Profit before tax of $44 million in 2017 after making a loss after tax of $173 million in 2016 in 2016; Erin Energy increased its loss to $151.9 million from $142 million in 2016 while Savannah Petroleum Plc announced a loss of $27 million which was a 170 per cent increase from $10million in 2016. Jubril Kareem an energy analyst with Ecobank Re- search group said when oil company assets are in exploration phrase it’s normal to make loss in Nigeria Oil and Gas industry. “Compare to International oil companies and Seplat which already have established revenue stream, majority of Erin Energy assets are exploration and developmental phrase so there revenue is in the future when these assets they are investing in will start making profits,” Kareem added. BusinessDay investigation showed at full year 2017 Seplat expanded revenue by 78 per cent to $452 million from $254 million in 2016; Erin Energy had an increase of 30 per cent to 101.2 million in 2017 from 77.8 million in 2016, while Savannah Petroleum year-on-year operating loss remained flat at $8m, as the Group remained in the pre-revenue exploration and development phase of operations. In 2017, Seplat shareholders fund stood at $1.5billion, while Erin Energy and Savannah Energy Shareholders fund stood at $251 million and $289 million respectively. Investigation in net cash flow from operating activities showed Seplat recorded increase of 161.40 percent to $447 million from $171.59 million recorded last year, Erin Energy recorded an increase of 333 percent to $26 million in 2017 from $6 million in 2016 while Savannah Petroleum recorded 85 percent increase from $8.4 million in 2016 to $15.6 million in loss net cash flow in 2017. The indigenous upstream oil and gas giant Seplat had a $450 million in free cash flow in 2017, which represents a 275.75 percent surge from $119.76 million recorded as at December 2016, while Erin Energy and Savannah Petroleum both have a negative free cash flow of $26 million and $17.4 million respectively A negative free cash flow from operating activities means oil and gas firm has been investing money in the acquisition of new assets albeit shareholders will have to wait for dividend payment while share-buy backs could be delayed. Further investigation revealed Seplat has a free cash flow yield of 0.11 percent, while Erin Energy and Savannah had free cash flow yield of 3.2 percent and 7.8 percent respectively. The free cash flow yield is a powerful tool, mostly because it establishes the relationship between the money you put in a company compared to the returns it generates. The recession as well as a slump in oil prices had many companies on their knees in 2016. Seplat, Erin Energy and Savannah Petroleum were part of them, after sinking to less than $28 in 2016; oil prices rebounded to give vim to the economy with oil companies cashing in big. The price of Brent crude, Nigeria’s benchmark grade, cooled 0.13 percent to $68 per barrel Friday, according to Bloomberg data, Oil production on the other hand has recovered to 1.8 million barrels as at February 2018, according to OPEC data, from as low as 1.2 million barrels daily in the thick of militant disruptions. These factors contributed to lifting the economy from recession in the second quarter of 2017, according to the National Bureau of Statistics (NBS). The economy has consolidated its exit from recession after growing 0.8 percent in 2017 compared to a 1.6 percent contraction the previous year. SHORT TAKES $1.64 million FCMB group seeks to convert its wholesale banking unit in Britain, FCMB UK, into a retail bank, as part of its push to grow its balance sheet and tap into non-institutional customers in Britain. The impact of the British strategy would not be immediate but would enable the lender to achieve incremental growth. The earnings contribution in naira terms from the British unit will be around 500 million naira ($1.64 million) for 2018. FCMB UK grew pre-tax profit by 250 percent to 300 million naira last year. N3.04 billion AIICO Insurance Posts Full Year Profit Before Tax of N3.04billion compared to N11.84 billion year ago . While tits Full Year ended December 2017 net premium income was N17.50 billion naira versus N26.69 billion naira year ago. 15 Kobo Caverton Offshore Support Group announces proposed final dividend Of 15 Kobo Per 50 Kobo ordinary share, subject to appropriate withholding and approval will be paid to shareholders whose names appear in the Register of members as at the close of business on the 25th of April, 2018 . BusinessDay MARKETS INTELLIGENCE (Team lead: BALA AUGIE - Analyst: DIPO OLADEHINDE, ENDURANCE OKAFOR, BUNMI BAILEY Graphics: DAVID OGAR ) BMI provides in-depth analysis and data on industries, companies, stocks, currencies, fixed income/credit, economics, regulation and factors that influence investor’s decision-making Email the BMI team patrick.atuanya@businessdayonline.com

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