How cor­po­rate gov­er­nance can af­fect Nige­ria’s de­vel­op­ment

Ef­forts should be made to quickly re­solve the is­sues with the FRCN har­monised cor­po­rate gov­er­nance code for Nige­ria.

Financial Nigeria Magazine - - Contents -

Cor­po­rate Gov­er­nance is not just about how a com­pany is di­rected and con­trolled to max­i­mize per­for­mance and en­sure ac­count­abil­ity to stake­hold­ers. Bet­ter gov­er­nance prac­tices and pro­cesses have be­come im­per­a­tives for both na­tional and global economies. A com­pany that is run very ef­fi­ciently and re­spon­si­bly will per­form very well and ul­ti­mately con­trib­ute to strength­en­ing the econ­omy.

Public, pri­vate and non-profit or­gan­i­sa­tions all need to be gov­erned – apart from day-to-day man­age­ment of the en­ti­ties by their ex­ec­u­tive teams. Cor­po­rate gov­er­nance is the re­spon­si­bil­ity of the govern­ing body, or board of di­rec­tors in the case of com­pa­nies.

The first cor­po­rate gov­er­nance codes were in­tro­duced in De­cem­ber 1992 in re­sponse to cor­po­rate fail­ures in the United King­dom. A re­port, known as the Fi­nan­cial As­pects of Cor­po­rate Gov­er­nance, was pro­duced by a com­mit­tee headed by Sir Adrian Cad­bury. Now re­ferred to as the Cad­bury Re­port, the re­port sig­nif­i­cantly in­flu­enced cor­po­rate gov­er­nance think­ing around the world. Other coun­tries fol­lowed suit, France (Vienot Re­port, 1995); South Africa (King Re­port, 1994); Canada (Toronto Stock Ex­change rec­om­men­da­tions on Cana­dian board prac­tices, 1995); The Nether­lands Re­port (1995); and Hong Kong (a re­port on cor­po­rate gov­er­nance from the Hong Kong So­ci­ety of Ac­coun­tants, 1996). These re­ports tried to fore­stall the abuse of power by cor­po­rate en­ti­ties.

But at the turn of the 21st cen­tury, the world be­gan to ex­pe­ri­ence some cor­po­rate chal­lenges, which led to the re­view of cor­po­rate gov­er­nance prac­tices. One of the widely-recog­nised out­comes of these ef­forts was the United States' Sar­banesOx­ley Act of 2002, also known col­lo­qui­ally as SOX. The Act re­quires cer­ti­fi­ca­tion of in­ter­nal au­dit­ing, in­creased fi­nan­cial dis­clo­sure, and it also im­poses crim­i­nal penal­ties on di­rec­tors for non-com­pli­ance. SOX is con­sid­ered one of the most in­flu­en­tial pieces of cor­po­rate leg­is­la­tion in the world. It was built on the idea that cor­po­rate gov­er­nance should not be left to the dis­cre­tion of di­rec­tors of com­pa­nies and their chief ex­ec­u­tives.

Nige­ria also has its fair share of cor­po­rate gov­er­nance his­tory. Be­fore the 1990s, the prin­ci­pal com­pany law in Nige­ria was the Com­pa­nies Act 1968, which was mod­elled af­ter the Com­pa­nies Act 1948 of the United King­dom. The law was re­pealed and re­placed by the then Com­pa­nies and Al­lied Mat­ters De­cree No. 1 of 1990. There were sev­eral mod­i­fi­ca­tions over the years but the prin­ci­pal statute reg­u­lat­ing com­pa­nies in Nige­ria today is the Com­pa­nies and Al­lied Mat­ters Act Cap. C20, 2004. The cur­rent statute was the prod­uct of a rig­or­ous process led by the Nige­rian Law Re­form Com­mis­sion.

The first cor­po­rate gov­er­nance code in Nige­ria was the Code of Cor­po­rate Gov­er­nance for Banks and Other Fi­nan­cial In­sti­tu­tions in Nige­ria. It was is­sued by the Bankers Com­mit­tee in Au­gust 2003. The reg­u­la­tion was in­tro­duced in re­sponse to the fi­nan­cial cri­sis of the 1990s. The 11 prin­ci­ples of the reg­u­la­tion fo­cus on ap­point­ments, board pro­ceed­ings, board re­spon­si­bil­i­ties, as­sess­ment and au­dit com­mit­tees. Un­for­tu­nately, this code did not have much im­pact.

An­a­lysts have at­trib­uted the lack of im­pact to the is­suance of an­other leg­is­la­tion by the Se­cu­ri­ties and Ex­change Com­mis­sion (SEC) two months af­ter the Bankers Com­mit­tee had is­sued its cor­po­rate gov­er­nance code. In Oc­to­ber 2003, SEC's 17-mem­ber com­mit­tee, headed by Atedo Peter­side, is­sued the Code of Best Prac­tices on Cor­po­rate Gov­er­nance in Nige­ria. The SEC code em­pha­sised the role of the board of di­rec­tors and man­age­ment; share­holder rights and priv­i­leges; and the au­dit com­mit­tee. Not only was the code in­flu­en­tial, it was also the first to be is­sued by any reg­u­la­tor in the coun­try.

Al­though the SEC code pre­sented some sweep­ing re­forms, it was soon found to be in­ad­e­quate in ad­dress­ing new chal­lenges. There­fore, in 2006, the Cen­tral Bank of Nige­ria (CBN) is­sued its Code of Cor­po­rate Gov­er­nance for Banks in Nige­ria Post Con­sol­i­da­tion. This code was in­tro­duced to en­sure ac­count­abil­ity on the part of bank CEOs. It spec­i­fies fines and penal­ties, in­clud­ing jail terms for erring CEOs. It pre­scribes risk man­age­ment mea­sures within the or­gan­i­sa­tion, par­tic­u­larly em­pha­sis­ing the role and qual­i­fi­ca­tion of a com­pany's in­ter­nal au­di­tor.

The Na­tional Pen­sion Com­mis­sion (PENCOM) is­sued its own code in 2008, known as the 2008 PENCOM Code. Sub­se­quently, the Na­tional In­sur­ance Com­mis­sion (NAICOM) is­sued its Code of Cor­po­rate Gov­er­nance for the In­sur­ance In­dus­try in 2009. These three in­dus­tryspe­cific codes were meant to ad­dress the is­sues that were not ad­dressed in the SEC leg­is­la­tion.

How­ever, in 2011, SEC re­leased the Code of Cor­po­rate Gov­er­nance for Public Com­pa­nies in Nige­ria, which ef­fec­tively re­placed its 2003 leg­is­la­tion. This lat­est law was ad­judged at the time as the most com­pre­hen­sive cor­po­rate gov­er­nance code

in Nige­ria. The code is an­chored on five main prin­ci­ples, which in­clude: lead­er­ship, ef­fec­tive­ness, ac­count­abil­ity, re­mu­ner­a­tion and re­la­tions with share­hold­ers.

A new study jointly pub­lished by the As­so­ci­a­tion of Char­tered Cer­ti­fied Ac­coun­tants (ACCA) and KPMG places Nige­ria among the top five coun­tries in Africa for com­pli­ance with the Or­gan­i­sa­tion for Eco­nomic Co-op­er­a­tion and De­vel­op­ment (OECD) Prin­ci­ples of Cor­po­rate Gov­er­nance. The re­port ex­am­ines the cor­po­rate gov­er­nance re­quire­ments for listed com­pa­nies in 15 African coun­tries against the four tenets of cor­po­rate gov­er­nance as un­der­pinned by the OECD Prin­ci­ples. The coun­tries were ranked based on the prin­ci­ples, which in­clude lead­er­ship and cul­ture; strat­egy and per­for­mance; com­pli­ance and over­sight; and stake­holder en­gage­ment. Nige­ria came be­hind South Africa, Kenya and Mau­ri­tius – but ahead of Uganda in the top five bracket.

De­spite these de­vel­op­ments, Nige­ria lags be­hind coun­tries like the United King­dom in terms of cor­po­rate gov­er­nance codes, poli­cies and en­abling laws. The UK, through the Fi­nan­cial Re­port­ing Coun­cil, reg­u­larly re­views and up­dates the coun­try's cor­po­rate gov­er­nance codes, prin­ci­ples and best prac­tices. The reg­u­la­tor pro­motes high stan­dards of cor­po­rate gov­er­nance to fos­ter in­vest­ment.

The es­tab­lish­ment of the Fi­nan­cial Re­port­ing Coun­cil of Nige­ria (FRCN), through the Fi­nan­cial Re­port­ing Coun­cil Act 2011, was widely praised. The Direc­torate of Cor­po­rate Gov­er­nance of the FRCN has the re­spon­si­bil­ity to de­velop prin­ci­ples and prac­tices of cor­po­rate gov­er­nance. The direc­torate can act as the co­or­di­nat­ing body re­spon­si­ble for all mat­ters per­tain­ing to cor­po­rate gov­er­nance in Nige­ria. Un­for­tu­nately, the coun­cil's at­tempt to over­haul the coun­try's cor­po­rate gov­er­nance frame­work to en­cour­age more dis­clo­sure and bet­ter gov­er­nance prac­tices was scut­tled last year.

One is­sue be­dev­illing Nige­ria's cor­po­rate gov­er­nance land­scape is the mul­ti­plic­ity of over­lap­ping leg­is­la­tions. The coun­cil tried to ad­dress this is­sue and unify the sec­toral cor­po­rate gov­er­nance codes with the Na­tional Code of Cor­po­rate Gov­er­nance 2016 (NCCG), re­leased in Oc­to­ber 2016. The NCCG – which pro­vides cor­po­rate gov­er­nance leg­is­la­tion for pri­vate and public sec­tors as well as not-for-profit or­ga­ni­za­tions – was sus­pended by the fed­eral gov­ern­ment in Novem­ber fol­low­ing stiff op­po­si­tion from var­i­ous stake­hold­ers. In sus­pend­ing the code, the Min­is­ter of In­dus­try, Trade and In­vest­ment, Okechukwu Enelamah, also is­sued a query to the FRCN for over­reach­ing it­self and to es­sen­tially ex­plain the ra­tio­nale for the leg­is­la­tion.

While the po­lit­i­cal lever­age of re­li­gious or­gan­i­sa­tions was ap­par­ent in the sus­pen­sion of FRCN code, it is im­por­tant to state that the cor­po­rate gov­er­nance of char­i­ta­ble or­gan­i­sa­tions, es­pe­cially re­li­gious bod­ies, needs ur­gent at­ten­tion. At the very least, if im­ple­mented, the code would fos­ter trans­parency in the man­age­ment of these or­gan­i­sa­tions that are be­com­ing be­he­moths in the coun­try. Ef­fec­tive and fre­quently up­dated cor­po­rate gov­er­nance codes are re­quired for a de­vel­op­ing coun­try like Nige­ria to over­come its de­vel­op­ment chal­lenges.

Data in­di­cates that Nige­ria has lost 75 banks since the ad­vent of bank­ing since 1914. There is ev­i­dence sug­gest­ing that these bank fail­ures were largely due to

weak­nesses in cor­po­rate gov­er­nance. A CBN and Nige­ria De­posit In­sur­ance Cor­po­ra­tion (NDIC) study of dis­tress in the Nige­rian fi­nan­cial ser­vices sec­tor (Oc­to­ber 1995) pro­vides the fol­low­ing data, show­ing the fac­tors that cause dis­tresses in the bank­ing in­dus­try: Eco­nomic de­pres­sion (25%); po­lit­i­cal crises (17.9%); bad credit pol­icy (25%); un­due in­ter­fer­ence by board mem­bers (cor­po­rate gov­er­nance) (32.1%).

In a re­port pre­sented to the Global Cor­po­rate Gov­er­nance Fo­rum in 2003, Stijn Claessens, Pro­fes­sor of In­ter­na­tional Fi­nance at the Uni­ver­sity of Am­s­ter­dam, iden­ti­fied sev­eral chan­nels through which cor­po­rate gov­er­nance af­fects the growth and de­vel­op­ment of a na­tion. Ac­cord­ing to him, “The first is the in­creased ac­cess to ex­ter­nal fi­nanc­ing by firms. This in turn can lead to larger in­vest­ment, higher growth, and greater em­ploy­ment cre­ation. The sec­ond chan­nel is a low­er­ing of the cost of cap­i­tal and as­so­ci­ated higher firm val­u­a­tion. This makes more in­vest­ments at­trac­tive to in­vestors, also lead­ing to growth and more em­ploy­ment. The third chan­nel is bet­ter op­er­a­tional per­for­mance through bet­ter al­lo­ca­tion of re­sources and bet­ter man­age­ment. This cre­ates wealth more gen­er­ally.

“Fourth, good cor­po­rate gov­er­nance can be as­so­ci­ated with a re­duced risk of fi­nan­cial crises. This is par­tic­u­larly im­por­tant, as fi­nan­cial crises can have large eco­nomic and so­cial costs. Fifth, good cor­po­rate gov­er­nance can mean gen­er­ally bet­ter re­la­tion­ships with all stake­hold­ers. This helps im­prove so­cial and labour re­la­tion­ships and as­pects such as en­vi­ron­men­tal pro­tec­tion. All these chan­nels mat­ter for growth, em­ploy­ment, poverty, and well-be­ing more gen­er­ally. Em­pir­i­cal ev­i­dence us­ing var­i­ous tech­niques has doc­u­mented these re­la­tion­ships at the level of the coun­try, the sec­tor, and the in­di­vid­ual firm and from the in­vestor per­spec­tives.”

De­spite the flaws of the NCCG, the un­in­tended con­se­quence of its sus­pen­sion is the po­ten­tially neg­a­tive im­pact on in­vest­ment in the coun­try. The ef­fect of cor­po­rate gov­er­nance on the over­all de­vel­op­ment of an econ­omy can­not be overem­pha­sised. In his fore­word to the Claessens' re­port, Sir Adrian Cad­bury said of the sig­nif­i­cance of cor­po­rate gov­er­nance for the sta­bil­ity and eq­uity of so­ci­ety: “The aim is to align as nearly as pos­si­ble the in­ter­ests of in­di­vid­u­als, of cor­po­ra­tions, and of so­ci­ety. The in­cen­tive to cor­po­ra­tions and to those who own and man­age them to adopt in­ter­na­tion­ally ac­cepted gov­er­nance stan­dards is that these stan­dards will as­sist them to achieve their aims and to at­tract in­vest­ment. The in­cen­tive for their adop­tion by states is that these stan­dards will strengthen their economies and en­cour­age busi­ness pro­bity.”

It is for the sake of bol­ster­ing in­vestor con­fi­dence and at­tract­ing for­eign in­vest­ments in Africa's largest econ­omy that the In­ter­na­tional Fi­nance Cor­po­ra­tion (IFC) and SEC jointly de­vel­oped and launched a Cor­po­rate Gov­er­nance Score­card for pub­licly-listed com­pa­nies in the coun­try.

Ef­forts should be made to quickly re­solve the is­sues with the FRCN har­monised cor­po­rate gov­er­nance code for Nige­ria. More­over, the coun­cil should be pro­vided the in­de­pen­dence it needs to func­tion ef­fec­tively and pro­mote higher stan­dards of cor­po­rate gov­er­nance and re­port­ing in the public, pri­vate and non­profit sec­tors.

Ola­jide Olu­tuyi, a Fi­nan­cial Nige­ria Guest Writer, is a grad­u­ate in Man­age­ment from the Uni­ver­sity of Leth­bridge, Canada. He is Found­ing Part­ner, Green­touch Con­sult­ing Inc. Canada, Co­Founder/CEO Top-Olax En­ergy Ltd. He is on the Board of Calgary Quest School, Canada. Email: Ola.olu­tuyi@green­touch­con­sult­ing.com. Twit­ter: @jide­o­lu­tuyi

A view of the sky­line of Ma­rina, La­gos

Mounir Gwarzo, Di­rec­tor Gen­eral, Se­cu­ri­ties and Ex­change Com­mis­sion

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