Essentials of Corporate Governance

Corporate governance is the system by which companies are managed, directed and controlled. The system of corporate governance is a set of actors interacting within the framework of the law. It protects the interests of major stakeholders in a corporation by ensuring that adequate checks and balances are not just enshrined but complied with. The stakeholders in a corporation are the shareholders, directors, employees, customers, vendors/suppliers, creditors and the community.

The CAMA, Memorandum and Articles of Association; Code of Corporate Governance for Public Listed Companies 2011 provided by the Securities & Exchange Commission, Central Bank of Nigeria Code of Corporate Governance for Banks in Nigeria Post Consolidation, all contain the legal framework for corporate governance in Nigeria. Please note that there is no universally agreed Code of Good Corporate Governance.  What obtains usually is a set of rules laid down to be followed by Companies.

1.     Major Components of Corporate Governance

Corporate Governance principles as captured in the codes relate to key areas such as:

1.        Leadership: Under the Corporate Governance Code, the Chief Executive Officer should be different from the Managing Director; there should be no fusion. This allows other people to have influence in the company. It also balances of executive and non-executive directors. The essence is that the company must have checks and balances.

2.       Effectiveness: Here the question is how effective is the system put in place to ensure that the Board of Directors run the company effectively? This encompasses issues relating to the method of appointment of directors, checks and balances, orientation and re-orientation for directors, and are the directors the best people to run the company? For example, the provision of section 259 of the CAMA on periodic review of the directors by rotation of directors.

3.       Accountability: This is the processes in place to ensure that the accounting processes are in line with the provisions of the law. Thus, there must be no book cooking/falsifying of accounting records. There must be independence of external auditors from internal auditors and audit committee.

4.       Remuneration: This refers to a system for measuring the remuneration of directors.

5.       Relations with Shareholders: This is a means of promoting relationship with shareholders. Example, directors are to attend the Annual General Meetings of the company to brief shareholders on the progress/running of the company.

2.     Underlying Assumptions of Corporate Governance

There are two (2) underlying assumptions of corporate governance. The first is the Agency Theory, which is to the effect that shareholders are principals and directors are the agents. So we need codes guiding this agency fiduciary relationship. The second is the Shareholders' Model, which is to the effect that shareholders are in control of the business.

Under the shareholders' model of corporate governance, there are the following underlying assumptions and these assumptions underscore the supremacy of shareholders over directors:

a)       Section 244(1) of the CAMA: directors are persons duly appointed by the company to direct and manage the business of the company.

b)       Section 262 of the CAMA: director can be removed but subject to confirmation at the general meeting.

c)       Section 233 of the CAMA: confirmation is by ordinary resolution (by way of simple majority of votes cast by members in a meeting.

d)       Section 63(5)(c) of the CAMA: members may ratify or confirm any action taken by the board of directors.

e)       Section 299 of the CAMA: only the company can sue for any wrong or ratify any irregular conduct committed in the course of a company’s affairs.

f)       Section 300 of the CAMA: exceptions to the rule on Foss v. Harbottle on minority protection.

g)       Section 248 of the CAMA: members in general meeting have the power to re-elect or reject directors and appoint new ones.

In contradistinction to the above, there is the following arguments in favour of the Supremacy of Directors in corporate governance.

(i)       The company is a legal person different from its members. A decided case stated a principle that directors are agents of the company and not agents of the members because even if members want to change the objects, they cannot without the resolution by the directors.

(ii)     Members must follow laid down procedure before removing directors. They cannot just remove the directors without following this procedure.

(iii)    Section 244 CAMA: directors are appointed to run the company (not the members).

(iv)    Section 63(1) CAMA: this section merely stated the three persons that have power to run the company (members in general meeting, board of directors or agents appointed by board of directors or by the members of the company). It does not state that shareholders are more powerful than directors.

(v)      Section 63(3) CAMA: Board of directors run the company.

(vi)    Section 63(4) CAMA: Board of directors shall not be bound to obey instructions of general meeting if acting within powers in their Articles of Association. Thus, it depends on the articles of association as to whether or not the directors or members will be more powerful.

3.     Models of Corporate Governance

1.        Berle and means model (Agency theory)

2.       Takeover model

3.       German bank model

4.       Leverage buyout

5.       Stakeholders model

6.       Disclosure model

7.       The co-determination model

8.       Political model: political interplay between different players in a company; example, shareholders versus directors) BTGLSDCP

4.     Stakeholder Model of Corporate Governance

Under the stakeholder model of corporate governance, the following stakeholders are recognised.

1.     The directors who are the managers of the company.

2.    Shareholders/members as the “owners” of the company; they ratify decisions of the board. They are the investors.

3.    Creditors; example, debenture holders.

4.    Auditors.

5.    Employees of the company who run and see to the affairs of the company in order for their jobs to be secured.

6.    Expert, financial, branch managers who may not be directors of the company. They may constitute the management team as distinct from the Board of Directors. They are engaged by the Board and are accountable to the Board.

7.    Company Secretaries who are the Returning Officers, Compliance Officers, Managers of the Company’s Secretariat. They serve as a bridge between shareholders and the board.

5.     German Model of Corporate Governance

The Germans operate a two tier of Directorship – Directors (Vorstand) who are directly managing the affairs of a company and a Supervisory Board (Aufsichsrat) which oversees the acts of the Directors. This is embedded in the structure and management of public companies

6.     Some International Best Practices for Corporate Governance

1.        If possible the German model of two tier of directorship should be recommended and adopted by other countries; that is to say, Management Board and Supervisory Board.

2.       Offices of Chief Executive Officer/Managing Director and Chairman of a company should no longer be fused.

3.       Tenure of office of Chief Executive Officer should be fixed to prevent perpetuation.

4.       Board of Directors should include a balance of Executive and Non – Executive Directors.

5.       Transparency in procedure for appointment of auditors.

6.       Limitation of the number of shares that can be owned by a member.

7.       Regular re-election of Directors.

8.       Ensure transparent relationship between external and internal auditors of a company to avoid cooking the books of the company’s financial transactions.

9.       No individual should unduly hold large number of shares in large companies. In this regard, it is instructive to note that section 95 of the CAMA states that person who has at least 10% unrestricted voting rights at a general meeting in a public company shall give notice in writing to the company within 14 days after the person becomes aware that he is a substantial shareholders. A fine of N50 payable for every day during which the default continues.

10.     Rules of corporate democracy and sovereignty must be followed.

11.      Transparency, Accountability and Credibility in the management of a company.

12.     The interests of shareholders and stakeholders of the company must be protected.

13.     Members Direct Action to protect the rights of the minority shareholders.

14.     Regular and continuous scrutiny of the financial transactions of the company by persons independent of the company; that is to say, Auditors.

15.  The mode of arriving at decisions must follow due process. This means that the decisions are to be taken at duly convened meetings which requisite notices had been given to members.

16.     The Provision of a Director acting as a Secretary ought not to be abused. In this regard, it is provided in section 294 of the CAMA that the Director may act as a Secretary but cannot act in both capacities at the same time, example when signing a document.

In Nigeria, the move to corporate governance started by Industry Regulation, such as that by the Central Bank of Nigeria to the effect that a Chief Executive Officer cannot be more than 10 years in office.