COMPANIES & GOOD CORPORATE GOVERNACE PRACTICE
THE SIGNIFICANCE OF CORPORATE GOVERNANCE IN THE LIVES OF NIGERIAN COMPANIES
1.0 INTRODUCTION
1.1 Corporate Governance Defined
The term Corporate Governance describes the process and structure used to direct and manage the affairs of a company towards promoting prosperity and accountability with the ultimate objective of realizing long-term shareholder value1 while considering the interest of other stakeholders.2 This definition is in line with that of the Organization for Economic Cooperative & Develop-ment (OECD) principles 3 which provides that Corporate Governance involves a set of relationships between a company’s management, its board, its shareholders, and other stakeholders to provide a structure through which the objectives of the company are set and the means of attaining those objectives and monitoring performance are determined.4
1.2 The Emergence of Corporate Governance
The term “Corporate Governance” first appeared in the United States5 in 1976 and only gained distinct persona after the collapse of some major corporations in the United States and the United Kingdom such as Lehman Brothers and the likes, which resulted in the 2008 financial crisis. A variety of factors contributed to the collapse, but it was later established that a distinct lack of gover-nance and oversight was largely to blame, as well as the lack of a general long-term risk-mitigating strategy, and questionable remuneration practices and out-of-control incentives leading CEOs to pursue short term growth rather than long term sustain- ability. Regulators feared more corporations' collapse and decided to develop corporate governance codes to guide companies and further curb the excess that contribute to a collapse of the economy.
- Shareholder value is the value delivered to the equity owners of a corporation due to management's ability to increase sales, earnings, and free cash flow, which leads to an increase in dividends and capital gains for the shareholders.
- Better Governance across the Board by John Zinkin available online at https://www.degruyter.com/document/doi/10.1515/9781547400935-001/pdf date of access 15/10/2022
- One of which is to Improve confidence in markets and the institutions that help them function.
- Corporate Governance & Regulatory Compliance: The Regulator, The Regulations & The Regulated by Society of Corporate Governance Nigeria.
- https://www.praxonomy.com/blog/the-evolution-of-corporate-governance/ date of access 25/12/2022
Nigeria’s plan against the collapse sustained in developed countries was to integrate corporate governance principles into its system, and although corporate governance principles are not new in Nigerian as evidenced in the regulations of corporate entities i.e., the Companies and Allied Matter Act (CAMA 1990) which was later replaced with CAMA 2020, the law provided for corporate governance related issues in greater details such as the roles of Board members and the rights of shareholders. These were seen as basic standards and not sufficient to address the challenges faced by companies in relation to transparency, accountability and fairness. It was therefore necessary to have a set of rules and regulations that will ensure that international best practices are adopted by companies in Nigeria this birthed the issuance of the first code of Corporate Governance in 2003.
2.0 THE HISTORY OF THE LEGAL FRAMEWORK OF CORPORATE GOVERNANCE IN NIGERIA
The first Corporate Governance code in Nigeria was the code for Banks and other Financial Institutions issued by the Bankers Committee in August 2003, after which the Central Bank of Nigeria (CBN) issued a code known as the code of corporate gover-nance for banks operating in Nigeria,
2.1 The National Pension Commission then issued the Code of Corporate Governance for Licensed Pension Operators in 2008.
2.2 The National Insurance Commission (NAICOM) issued the National Insurance Commission Corporate Governance Guidelines for Insurance and Reinsurance Companies in Nigeria and
2.3 The Securities and Exchange Commission (SEC) issued a code in October 2003 known as the Code of best practices of Corporate Governance in Nigeria which was later replaced with the Code of Corporate Governance for Public Companies in Nigeria in 2011.
2.4 The idea that not all sectors had a code and the multiplicity of codes of all sectors meant that the objective of having a corporate governance code that addressed all the issues would be attained, consequently there was deliberation to introduce a code that will cut across all sectors in the corporate world.
2.5 The Federal Reporting Council of Nigeria (FRCN), a unified independent regulatory saddled with the responsibility to monitor compliance with regard to accounting, auditing, actuarial, valuation, and corporate governance 6 , critically looked into the issues faced by companies after which it then introduced the Nigerian Code of Corporate Governance (NCCG) 2018. The new code was meant to deepen public knowledge of corporate values that can be instilled in companies thereby enhancing the integrity of their business, boosting investors’ confidence, and build the economy 7 , it was issued to guide companies of various sizes with diverse industrial sectors and was described as “a code that seeks to institutionalize and encourage better corporate governance practices and promote awareness of essential corporate values and ethical practices that will advance the integrity of the business environment of Nigerian Companies” 8
- https://en.wikipedia.org/wiki/Financial_Reporting_Council_of_Nigeria accessed 14th February 2023.
- Pg iv of the Nigerian Code of Corporate Governance 2018.
- Nigerian Code of Corporate Governance 2018, Elewechi Okike & Peace Okougbo Corporate Governance in Nigeria (2019)
3.0 NIGERIAN CODE OF CORPORATE GOVERNANCE 2018 (NCCG)
The NCCG 2018 was unveiled on the 15th of January 2019. It applies to all public companies, private companies, and private companies that are the holding companies of public companies. The code was aimed at institutionalizing best practices in corporate governance in Nigeria in order to restore confidence in the Nigerian economy and create an environment for sustain-able business operations.
The reason for the issuance of the NCCG 2018 is that there was no uniform corporate governance standard for all companies and across all business sectors, and the companies were made subject to the codes of corporate governance applicable to the sectors in which they operate, thereby making some companies subject to more than one corporate governance regime which may have created and overlap and possibly confusion as to compliance.
The introduction of the NCCG did not void sector-specific codes, however, where standards, as prescribed in the sector-specific codes, are higher than the provisions in NCCG, those higher standards must be followed, given that the NCCG sets minimum standards.
In order to ensure compliance and effectiveness with the NCCG, the FRCN requires companies to file annual reports, this report is based on the code’s application9, and what has been done with regard to the provisions of the code. The FRCN has the mandate to monitor the implementation of the Code and is empowered to issue guidelines for the implementation of the Code by the sectoral regulators
4.0 IMPORTANCE OF CORPORATE GOVERNANCE
4.1 The existence of corporate governance practice in an organization cannot be overemphasized and goes beyond the mere management of a company and ensuring accountability to shareholders. Corporate Governance structure helps companies to perform better through quality decision-making. It strengthens commercial existing ties between companies’ shareholders, management groups, the board of directors, and all other stakeholders. The NCCG has since its emergence reflected a good reputation and ease of business for companies that ensure its practice.
4.2 A company would be regarded as practicing good and efficient corporate governance when it holds frequent board meetings and annual General meetings, files governance reports which should include all governance-related information, ensures that management is separated from the board, appoints internal and external auditors, who will ensure that the company’s financial statement reflects the true and fair nature of its accounts amongst others.
4.3 The practice of good corporate governance creates transparency, accountability, and fairness, these qualities are likely to promote a good measure of trust, thereby maximizing investors’ confidence.
4.4 Good and effective practice of corporate governance in a company is evident in its overall performance as it affects how a company sets and achieves goals, monitors, and evaluates its risks, and maximizes internal performance.
4.5 It has been stated that when an organization is not in compliance with necessary laws, codes, and regulations, this will result in failure in the organization’s activities
5.0 ISSUES FACED IN CORPORATE GOVERNANCE
Corporate governance issues are mostly created by the management of companies i.e., by window dressing and publishing false financial statements, thereby misleading stakeholders, directors rewarding themselves with exorbitant remuneration thereby misusing shareholders’ funds, lack of checks and balances in the operations of the company and making decisions that suites them, instead of decisions in the interest of the shareholders and the company.
All these issues can be reduced if regulators impose compliance with the Corporate Governance Codes, how firms must comply by imposing specific governance structures expressly designed to change how the firm conducts business and create incentives for companies in compliance10.
6.0 OBJECTIVES OF THE NCCG 2018 : KEY PRINCIPLES OF CORPORATE GOVERNANCE
6.1 Directors and officers of the Board: The NCCG generally applies to all types of companies regardless of their size, sector, or specialization. The code serves as a guide for companies, but it is not a mandatory code in terms of application. However, there is an expectation of a fully structured board and organizational structure in line with best corporate practice by ensuring strict compliance with regards to the structure of aboard while taking account of the leadership role of the chairman, the role of the company secretary in ensuring the practice of good corporate governance, and further ensuring that there should be an appropriate mix of Executive Directors (Eds), Non-Exec-utive Directors (NEDs), and Independent Non-Executive Directors (INEDs), not forgetting to note that the board should be diverse in culture, gender, and ethnicity. The Code recommends the establishment of Board Committees as this will further ensure an in-depth decision from the Board of Directors and the aim of a structured board is for the separation of power and checks and balances.
6.2 Business conduct with ethics:
Companies are required to provide policies or guidelines that would be adhered to ensure the company's professional ethics are in line with the required standards. The principle is of the belief that formulation of a Code of Business Conduct and Ethics will curtail certain negative factors businesses experience I.e., to prevent corrupt practices and conflict of interest amongst others, and has by its code introduced an avenue that will ensure top-down commitment by companies to ensure adequate professionalism and ethical standards, from the Board and management level to employees, contractors, suppliers, etc. and this has, in turn, resulted in positive professional and ethical behavior in their dealings with the company.
6.3 Sustainability:
The Code provides for sustainability measures like Corporate social responsibility (CSR) which is a measure that helps a company be socially accountable to itself, its stakeholders, and the public. Companies should be conscious of the kind of impact they are having on all aspects of society, including economic, social, and environmental. Companies, in practicing good governance are required to pay attention to sustainability measures as it ensures a successful long-term business performance and enhances investors’ confidence.
6.4 Transparency:
Filing financial statements, engaging shareholders at the general meeting as well as ensuring full disclosure of matters regarding the company to investors ensures transparency of a company. When there is transparency, investors’ confidence is guaranteed.
- Sean Griffith (2016) Corporate Governance in an Era of Compliance.
The NCCG was put in place to strengthen the trust of stakeholders and for its effectiveness and in line with best corporate practices, appropriate policies and frameworks should be developed to tackle future or present difficulties. The appointment of an external Auditor who will provide an independent opinion on the true and fair view of the company’s financial statement. Putting all these in place would give the shareholders assurances of the company and that would in turn attract new investors.
The NCCG also promotes and encourages the organization of general meetings in line with best corporate practices which as a result engages shareholders in the activities of the company. Including the shareholders in the business of the company and giving them updates on how their funds are being utilized will increase the trust of the shareholders as they are not blindsided towards their investments and they tend to add more stakes to their investment or invite new investors when they notice the positive growth of the company and their investments.
7.0 IMPLICATION OF CORPORATE GOVERNANCE ON THE FINANCIAL PERFORMANCE OF A COMPANY
7.1 The implication of a company ensuring the practice of good corporate governance cannot be overemphasized as it has over the years been proven to increase maximize the owner’s or shareholder’s wealth thereby increasing the value of the company.
7.2 It has been proven over the years by companies in developed countries that are in compliance with corporate gover-nance principles have experienced economic success. These companies have over time implemented corporate governance standards which have in turn improved their financial performance as well as positively impacted their internal efficiencies11.
7.3 Many times, we are faced with many questions like, what would a company gain by practicing corporate governance, and what does a company that doesn’t stand to lose? Why don’t we just run the company the way we deem fit? Why must all these rules and procedures have to be a determinant factor to the success of a company? All these questions come down to, implications… According to Kaihatu (2006), it is not enough for management to only ensure that the company’s management process runs efficiently, but also requires corporate governance to ensure that management in the company runs well12.
7.4 Having a number of key corporate governance principles listed above imbibed in the activities of a company relieves a company of being unsure of the things to be included in the day-to-day activities. Corporate governance is related to how investors believe in a company and what benefit it will provide to them as investors. They believe that a manager will not embez-zle funds or venture into unprofitable projects because corporate governance is enabled in such a company, this further provides that trust, and this certainly will evolve the company positively, so why will a company not practice good corporate governance when the benefit definitely out ways the outcome of non-compliance.
7.5 A company can create a great deal of wealth by ensuring corporate governance principles are imbibed into its activities. Noncompliance with the principles can bring about losses which will discourage prospec-tive investors.
- https://ajssr.springeropen.com/articles/10.1186/s41180-018-0020-4 accessed 15th January 2023
- The Effect of Corporate Governance on Financial Performance: Evidence from Islamic Banks in Indonesia Hamas Askar Islami, Iwan Setiawan, M Umar Mai accessed 25th
8.0 THE IMPACT OF CORPORATE GOVERNANCE AND ITS TRANSFORMATION ON COMPANIES
8.1 Corporate Governance strengthens Shareholders’ Value
Corporate governance has been proven on many occasions to strengthen shareholders’ values, although there has been no established relationship between the company’s value in the market and corporate governance. However, it is a known fact that practicing corporate governance includes holding Annual General Meetings, which is an avenue to include the shareholders in the activities and decisions of a company. Also, when corporate governance is religiously practiced, value would be delivered to shareholders from management being able to increase sales, earnings, and free cashflows which then leads to an increase in dividends and capital gains for shareholders. An increased value of shareholders plays a major role in safeguarding the valuation of an organization13
.8.2 Protection of Investors is guaranteed
Investors seek protection as no one would want to put a stake in a company where one’s rights would not be protected. The introduction of corporate governance principles and regulations will however protect prospective and current investors. This is achieved through corporate governance as companies practicing good corporate governance are required to educate investors and enlighten them about their rights, this will boost their confidence in such companies.
8.3 It promotes foreign investments
A company is expected to follow the highest standard of protection against losses and it has been proven that companies in compliance with corporate governance principles are less likely to experience the downsides of investment as the companies have in place risk-mitigating factors for times like that which will reduce or prevent losses. It can be sensed by the management of other companies, particularly in relation to a partnership. A foreign company that intends to go into business or engage the services of a company will conduct due diligence and when carried out, if evidence of a lack of corporate governance is noticed, such a company may be blacklisted, this is because the word corporate governance itself is just a blanket word for accountability, sustainability, transparency e.t.c.
8.4 Globalization of the economy
When a company integrates corporate governance into its affairs, it is easy to meet the demands of the international standards required to collaborate/ partner with companies internationally. It will be difficult for a company to start when it intends to go into business with an international company, hence the requirement of a company secretary/ legal practitioner to advise accordingly.
8.5 Financial Reporting and Accounting
Good corporate governance ensures transparent, credible, and sound financial reporting and accountability to investors and stakeholders so that funds can be effectively raised . When a company is in compliance with corporate governance principles, it brings about transparency, credibility, sound financial reporting, and accountability to prospective and current investors.
8.6 Compliance with Corporate Governance is crucial during Merger and Acquisition
During Mergers and Acquisitions, due diligence is conducted and if defaults are noticed, it could stop the whole deal, however, if a company integrates corporate governance in its dealings and affairs, it would be less likely to be found defaulting. Corporate governance helps to differentiate between good deals from the bad.
8.7 Compliance and Risk Mitigation
A company in compliance with required laws and policies will be prepared for prospective risks and measures to take to mitigate such risks. A company that is not in compliance with CG principles stands the risk of being met unprepared for risk thereby crumbling the company and discouraging current and prospective investors as governance, compliance, and risk mitigation are directly related.
9.0 CONCLUSION
In conclusion, although there are gaps in the current NCCG which include a lack of recommendations for transition mechanisms, small and medium-sized companies that may not have incorporated corporate governance practices in their structures and may not be able to afford the services of experts to aid their transition to governance compliance in line with the NCCG and interna- tional best practice. The NCCG should have stated mechanisms that would benefit every company and ensure compliance. Companies and stakeholders have long suffered the absence of a law providing for corporate governance which made the recent development bring about a noticeable immerse growth in companies thereby boosting investors’ confidence, the goal is to make sure it tackles every inadequacy experienced by companies. Good Corporate Governance should not just be seen as a matter of practice but as the heart and corporate bible of every organization as it promotes growth and sustainable development of the economy as a whole.
In essence, the practice of good and effective Corporate Governance is crucial to the development of every organization. Lack of transparency and poor disclosure practices reduce the effectiveness of corporate governance mechanisms. Embracing corporate governance despite the global financial crisis and major corporate scandals has reinforced the merit of good corporate governance structures in enhancing firms’ performance and sustainability in the long run.
- https://www.theceo.in/blogs/corporate-governance-has-transformed-business
- Corporate Governance in Nigeria: Law and Practice
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