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.