The Corporate Monsters

In this article, Adesola Falaiye discusses what she refers to as “Corporate Monsters”, who are basically Directors, Shareholders or Corporate Managers of companies, perpetuating corporate and financial malpractices, with the objective of earning wealth il

According to a learned Professor of Corporate law in his inaugural lecture titled, the “Monster Theory: Setting the Boundaries of Corporate Financial Malpractice”, corporate history is filled with frauds, corporate failures and scandals (Prof. Abugu 2015). Corporate failure manifests in insolvency or bankruptcy, often with allegations of unethical behaviour by Directors and Management of such companies. Directors therefore, are perpetually at the risk of losing capital invested. An investor who has suffered loss or adverse effect of wrong activities of people in charge of a company, will view them as monsters.

Monster Creation The twin concept of Corporate Personality and Limited Liability, were created as catalysts for business creation, development and growth. These concepts have however, not only served good purposes, but they have also created and allowed monsters to grow and feed fat on other constituents of the company. They inherently provide versatile capacities for wealth generation and growth on the one hand, and fraudulent practices on the other hand.

Corporate Personality/Limited liability, recognises the company as a legal entity separate from its members. It confers the company with the personality of an independent legal existence, separate from its shareholders, directors, officers and creators. This is said to create a veil of incorporation between the company as an entity, and its members/officers. As a separate legal entity, a company is set up to shield the shareholders, from personal liability for the debts or negligence of the business; they are not liable beyond their capital investment, and have no interest in the property of the company. If a company with limited liability is sued, then the claimants are suing the company, not its owners or investors. The fact that the shareholders and managers of companies have the protection of corporate personality and limited liability, actually allows for fraudulent actions by those running the company. The freedom from personal liability, actually fuels the monster syndrome and recklessness on the part of shareholders and managers, at the expense of investors and creditors.

Corporate Malpractices

Corporate malpractices exhibit generally in two broad categories:

(a) Financial malpractices by promoters/ shareholders perpetuated on creditors and unwary members of the public.

(b) Financial malpractices by corporate managers perpetuated on shareholders, creditors and unwary members of the public.

Financial malpractices are such financial activities committed or undertaken, with the objective of earning wealth illegally either individually or in a group, thereby violating existing legislation, financial guidelines or Code of Conduct, including any form of fraud, embezzlement, bribery, looting or any form of corrupt malpractices in this instance, by promoters or shareholders of companies, and more common in the rank of private companies.

Prof. Abugu highlighted two inherent elements of human nature, that make the corporate fraud an ideal vehicle for fraud. First, is the proposition that “the easiest money to spend is other people’s money. We naturally tend to be more indulgent and profligate when we administer or spend other people’s money.” The scenario typically plays out in companies where those who manage, are different and separate from owners of capital. The second proposition is that, “individuals are naturally selfish and would maximise corporate opportunities, to their individual advantage before the interest of owners of capital. As profit maximisers, in the corporate world, individuals tend to take care of themselves before others”. The implication of the second proposition, is that corporate directors and managers, are naturally disposed to personally profiting from corporate wealth, before rendering returns in terms of dividend to owners of residual capital. The Legislative Factor

Corporate regulations, like the Companies and Allied Matters Act (CAMA), have been inadequate, as far as dealing with financial malpractices are concerned. Regulations treat such issues as civil, with the mindset that private law regulates the relationship between companies and their managers. Cases like Foss v Harbottle and Percival v Right, support the principle that malpractices done by managers are done to the company and not shareholders, and only the company can seek redress for such wrong.

To curb the excesses of directors, corporate law prescribes duties expected of directors in the course of managing the affairs of the company. Section 279 of CAMA provides that a director of a company stands in a fiduciary relationship towards the company and shall observe the utmost good faith towards the company in any transaction with it or on its behalf. Despite the prescriptions of the law as set out in the duties, directors still have the monstrous tendency to bypass the prescriptions in the following ways:

. The monster tendency is showcased, where a director rather than act with skill and diligence, shirks duties to the detriment of the interest of shareholders and company.

When directors engage in making secret profits, they monstrously rob the company of corporate funds, and thereby, rob shareholders of returns on investments. Secret profits, include bribes and benefits which they wouldn’t have derived if they weren’t directors. This is also reflected in Insider dealing. Insider Dealing is the act of dealing in unpublished price sensitive information to trade in securities of that company, or that of a related company. This practice is against the principle of equal access to information; the Investment and Securities Act (ISA) and Securities and Exchange Commission (SEC) Rules and Regulations, prohibit false trading of securities and market rigging transactions. The regulations try to ensure fair and transparent dealings.

ests.

Taming the Monster

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When the personal interest of a director conflicts with his duties as a director, he becomes a monster preying on the interest of the company and its shareholders. -

The ISA lists such conducts of public company directors as may constitute the above, to include: false trading and market rigging transactions; securities market manipulations, false or misleading statements, fraudulently inducing persons to deal in securities; employing or engaging fraudulent means for the trade in securities; insider dealing and abuse of information obtained in official capacity.

Noting that these contraventions listed above, cause business failure, how then, do we prevent or reduce the damage caused by the monstrous behaviour of the directors? Despite the fact that regulation has not adequately made provisions to curb, to check, corporate managers malpractices, attempts have been made to augment the regulations by applying practices such as:

check abuses. provided under the law.

The great crusade of taming the monster would be better achieved, if directors and corporate managers are made to sign personal guarantees for transactions entered into on behalf of the company, especially in high risk transactions. Criminal liabilities and sanctions, should be provided for. This will reduce or prevent malpractices, be it financial or otherwise.

In conclusion, I suggest that the Senate includes the issue of strengthening the integrity of the corporation, as part of their core interest in the ongoing amendment of CAMA, in order to tame the monster.

“THE IMPLICATION OF THE SECOND PROPOSITION, IS THAT CORPORATE DIRECTORS AND MANAGERS, ARE NATURALLY DISPOSED TO PERSONALLY PROFITING FROM CORPORATE WEALTH, BEFORE RENDERING RETURNS IN TERMS OF DIVIDEND TO OWNERS OF RESIDUAL CAPITAL”