Corporate Governance as a concept has become mainstream in the corporate clime and many more organizations are taking baby steps in incorporating good corporate governance practices in their system and structures. However, a good number of individuals and organizations still consider corporate governance as a lofty concept that is nice to know about but doesn’t have any direct impact on their business operations. These organizations are usually deluded by the idea that they are not large public companies, hence there is no need to implement corporate governance structures as there is nothing significant at stake. Possibly also these organizations don’t understand the practicality of corporate governance and how its systems and structures can benefit from good corporate governance practices.
This post is geared towards enlightening such organizations on the essence of implementing good corporate governance and the simple steps to effect corporate governance best practices in their organizations.
A quick reminder of what corporate governance is about
Corporate Governance is still defined as the way and manner in which a company is directed and controlled to achieve its corporate goals and objectives.
Corporate Governance can also be defined as the mechanism by which the leadership of an organization manages its resources (finance, human, policies, machinery, and others) to achieve the objectives of the organization.
Several scholars have expressed several definitions of Corporate Governance but I would cite the definition proffered by Prof. Owolabi Sunday; Professor of Accounting/Associate Vice President, Financial Administration Babcock University Ilishan-Remo, Ogun State at a Lecture delivered on the 3rd of May 2015 AT THE 500 LECTURE THEATRE, COLLEGE LIBRARY BUILDING, OOUTH SAGAMU.
He stated on page 5 of his presentation slides that
“Pat Barret the Auditor General of Australia as cited by Ajogwu, 2007, opined that “corporate governance is largely about organizational management performance. Simply put, corporate governance is about how an organization is managed, its corporate and other structures, its culture, its policies, and how it deals with its various stakeholders. It is concerned with structures and processes for decision making and with the control and behavior that support effective accountability for performance outcomes/results.”
For clarity, a Company’s stakeholders are categories of persons who have a direct relationship with the company or who are impacted (positively or negatively) by the operations of the company.
Mr. Hakeem Ogunniran; Past President of the Institute of Chartered Secretaries and Administrators of Nigeria (ICSAN) in a Lecture delivered on the 30th of April 2018 at the ICSAN Lagos MCPE stated that stakeholders can be placed in two broad categories INTERNAL STAKEHOLDERS: which include Shareholders, Board of Directors and Management and EXTERNAL SHAREHOLDERS: which include Employees, Customers, Creditors/Suppliers, Investors, Government Regulatory Agencies, Host Community, etc.
It is clear that adopting good corporate governance practices is not just beneficial for the health of the organization but also for ease of engagement with stakeholders. Why is it important to have a good corporate governance structure?
This question is anticipated because it is a recurring question in the minds of business owners and organizations. The benefits of having a good corporate governance structure cannot be overemphasized and they are as follows:
- Good corporate governance will attract investors to the organization and suppliers of finance such as bonds and other instruments will assure themselves of getting a return on their investment. Public confidence is ultimately guaranteed. Practitioners, regulators, and academicians in recent times have argued that the stock price collapse of many big corporations is to some high degree due to poor corporate governance practices
- Good corporate governance implies that organizational risks (risk of mismanagement) are being monitored and adequate control measures to mitigate the risks have been adopted to ensure the achievement of organizational goals and enhance the profitability of the establishment.
- Good corporate governance is of interest to shareholders who are the owners/equity capital contributors of the company as it seeks to cure the problems in the agency relationship and balances the interests of all stakeholders. Accountability of Managers is established which eventually leads to sharing price appreciation.
- Good corporate governance boosts the economy as well-governed companies will have a good market premium which develops the local capital market and leads to economic prosperity and macro-economic stability. Productivity and output are enhanced and the poverty level is reduced.
- Good corporate governance improves competitive advantage and leads to the long-term success and sustainability of the company as unethical conduct which usually leads to corporate failures is avoided.
Examples of Corporate Failures as a result of poor Corporate Governance
The world woke up to a crisis of corporate failures and financial scandals that shook the corporate sphere such as the collapse of popular corporate organizations like Enron, Lehman Brothers, Worldcom, Tyco, etc. The failure of these organizations sparked a global discussion on corporate governance as one common denominator for these corporate failures was traced to weak corporate governance structures.
Historically in Nigeria, the impact of poor corporate governance has left an indelible mark in the financial services sector, particularly the Banking industry which is the pillar of economic development in any country.
Prof Owolabi Sunday on page 28 of his presentation slides provided the following information on the corporate failure in the Banking industry which can be linked to poor corporate governance
“In Nigeria, corporate governance challenges are responsible for several bank failures even from the 30s, some of the banks that had experienced failures in the past include Gulf Bank of Nigeria Plc, Metropolitan Bank Limited, Assurance Bank Nigeria Limited, Lead Bank Plc, Hallmark Bank Plc, Societe General Bank of Nigeria, All States Trust Bank, Trade Bank limited, and African Express Bank Plc, whose licenses were revoked by the Central Bank of Nigeria. Also in recent times, banks like intercontinental bank Plc, Oceanic Bank Limited, and Bank PHB failed partly due to weak corporate governance (Fatima, 2012).”
These corporate failures not only eroded shareholder’s funds but also retarded economic development which had rippled effect on businesses and the populace.
Features of an Effective Corporate Governance Structure
It would be foolhardy to expound on the problems of poor corporate governance without at least proffering solutions on how to adopt an effective corporate governance structure. There are several codes of corporate governance issued by several regulatory authorities such as the Securities and Exchange Commission (SEC), the Nigeria Insurance Commission (NAICOM), and the National Pension Commission (PENCOM). These codes were issued to regulate business activities in their respective business sector.
The National Code of Corporate Governance for Private and Public Companies and Not-for-Profit organizations is in the process of completion as public hearings for the legislation have been conducted by the Financial Reporting Council in July 2018. The codes provide principles that organizations can adopt to implement a good corporate governance structure.
Some features of these features include:
a) Separation of the Function of Chairman and CEO: Generally, organizations are not organically aware of the distinction between these functions. The Chairman is the Head of the Board of Directors while the Chief Executive is involved in the day-to-day management and administration of the organization. For transparency and to avoid over-concentration of powers in one individual, it is recommended that the functions be occupied by two individuals to leverage checks and balances in the discharge of their duties.
b) Tenure of Directors: Directors who are saddled with decision-making and policy formulation should be subject to re-election at regular intervals of at least two years to minimize their influence and opportunity for the pursuit of personal interest. Also, a mechanism for assessing the performance evaluation of the Directors should be implemented so that such information can be utilized in the decision of re-election of Directors.
c) Internal Audit: All companies should set up an internal audit system to promote effective internal processes and systems such that risk management becomes integrated into the day-to-day activities of the company.
d) General meetings of the Company: The Company’s general meetings should be made openly and accessible to all; allowing for free discussions on all issues on the agenda. There should be an adequate flow of information to shareholders concerning the affairs of the company. Shareholders should not be disenfranchised as a result of the choice of venue for the meeting.
e) Disclosure and engagement of shareholders: There should be adequate disclosure of the activities of the company in the annual reports and participation of shareholders should be encouraged through free discussions and regular interface.
f) Policy Framework for the Board of Directors: The Board of Directors should provide exemplary leadership based on ethical principles. Its deliberations, decisions, and actions should be influenced by the principles of Accountability, Transparency, Responsibility, Independence, Integrity, etc which should be defined in a policy for ease of abidingness.
g) Whistle-Blowing Mechanisms: Organizations should set in place mechanisms (hotline and emails) to aid easy reporting of unethical behavior or illegal practices or fraud.
The Nigerian Stock Exchange had in February 2018 introduced a Corporate Governance Index for Listed Companies whereby the corporate governance practices of listed companies are tracked through the Corporate Governance Rating Scores (CGRS).
As of February 2018, 35 companies and 437 Directors in Nigeria have achieved the 70% threshold on the ratings. The Corporate Governance Index is expected to track the performance of the 35 rated companies using their market capitalization, free float, and corporate governance rating scores. The Index is expected to be an important tool for investors keen on investing in well-governed companies as well as corporate organizations eager to distinguish themselves on the ground of corporate governance.
In conclusion, Prof. Sunday Owolabi expressed the following words
“The essence of effective corporate governance is to produce a visionary and intelligent team that will work collectively to achieve the long-term objective of the organization. The basic characteristics of effective corporate governance include total disclosure, accountability, shareholder rights, integrity, honesty, and fairness.
The macroeconomic performance indicators have shown over the years that a relationship exists between good governance and economic growth and development. The consequences of a poor governance system lead to unemployment, closure, and liquidation of companies, and loss of wealth by shareholders, these are obvious indicators of backwardness. … we plead that all and sundry should work closely to ensure an effective governance system to attain the desired national development and growth.”
Paraclete Legal Consulting can help your organization implement a bespoke Corporate Governance Structure that ensures the achievement of the long-term objective of the Organization.