Afr­icap­i­tal­ism, Gov­er­nance & Sus­tain­abil­ity

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Di­rec­tors have sim­i­larly been ac­knowl­edged as be­ing among, if not the key par­tic­i­pants and stake­hold­ers in the cor­po­rate gov­er­nance value chain.

It is no longer news that good cor­po­rate gov­er­nance has di­rect cor­re­la­tion to board ef­fec­tive­ness, firm success and sus­tain­abil­ity.

Di­rec­tors have sim­i­larly been ac­knowl­edged as be­ing among, if not the key par­tic­i­pants and stake­hold­ers in the cor­po­rate gov­er­nance value chain. In Nige­ria, the aware­ness of cor­po­rate gov­er­nance and the im­por­tance at­tached to it is tak­ing on in­creas­ing sig­nif­i­cance. Thus, the roles of di­rec­tors as a col­lec­tive, that is as the board of di­rec­tors and as in­di­vid­u­als in the life of a com­pany, can­not be over-em­pha­sised. Given their joint as well as sev­eral re­spon­si­bil­i­ties, it is no sur­prise that di­rec­tors take in­ter­est in bet­ter un­der­stand­ing their roles as well as what makes for en­hanced board ef­fec­tive­ness, hence the in­creas­ing at­ten­tion to cor­po­rate gov­er­nance aware­ness and train­ing.

Defin­ing di­rec­tors

Nige­rian law de­fines di­rec­tors as ‘per­sons duly ap­pointed by the com­pany to di­rect and man­age the busi­ness’ (sec­tion 244[1] the Com­pa­nies and Al­lied Mat­ters Act Cap C20 Laws of the Fed­er­a­tion of Nige­ria 2004 [CAMA]). How­ever, by virtue of sec­tion 245(1) CAMA, notwith­stand­ing that they were not ‘duly ap­pointed by the com­pany,’ a per­son in ac­cor­dance with whose di­rec­tives the di­rec­tors of a com­pany are ac­cus­tomed to act, is also deemed to be a di­rec­tor of the com­pany al­beit a ‘shadow di­rec­tor’.

In ad­di­tion to th­ese, how­ever, CAMA makes fur­ther pro­vi­sions re­gard­ing those who either hold them­selves to be, or are held by the com­pany to be di­rec­tors, lead­ing un­sus­pect­ing third par­ties to be­lieve that they were in­deed duly ap­pointed by the com­pany. Sec­tion 244(2) states: “in favour of any per­son deal­ing with the com­pany there shall be a re­but­table pre­sump­tion that all per­sons who are de­scribed by the com­pany as di­rec­tors, whether as ex­ec­u­tive or oth­er­wise, have been duly ap­pointed’. Sec­tion 244(3)(4) makes it an of­fence for a per­son not duly ap­pointed to act as though he/ she had been and for the com­pany to hold him/her to be as such. It also em­pow­ers mem­bers of the com­pany to take ac­tion against both the di­rec­tor and the com­pany to stop the il­le­gal­ity. Sec­tion 250 ex­on­er­ates the com­pany from li­a­bil­ity or con­se­quences for the acts of a per­son who, though not duly ap­pointed, pur­ports to act on be­half of the com­pany; the per­son is per­son­ally li­able in such a case. The sec­tion, how­ever pro­vides that if it is the com­pany that holds him/her to be a di­rec­tor then his/her ac­tions shall bind the com­pany.

The def­i­ni­tion of di­rec­tors, as per sec­tion 244(1), en­vis­ages two el­e­ments. The first re­lates to the ap­point­ment or mode of ap­point­ment of the di­rec­tors, which must have passed through due process. Thus, they must be ‘duly’ ap­pointed by the com­pany. This, there­fore, raises the ques­tion, ‘what is due process in the ap­point­ment of di­rec­tors or how can a di­rec­tor be duly ap­pointed by the com­pany?.’

Ap­point­ment process

In prac­tice, apart from the first di­rec­tors –whose names are usu­ally men­tioned in the com­pany regis­tra­tion doc­u­men­ta­tion – the ap­point­ment of di­rec­tors is usu­ally down to the board. The ar­ti­cles sec­tion of the mem­o­ran­dum and ar­ti­cles of as­so­ci­a­tion of a com­pany (MemArt) usu­ally stip­u­late the min­i­mum and max­i­mum num­bers of board mem­bers a com­pany can ap­point. Pro­vided that the max­i­mum board size has not been at­tained, the board of di­rec­tors is em­pow­ered by virtue of sec­tion 249(1) CAMA to ap­point di­rec­tors to fill any ‘ca­sual va­cancy’ aris­ing on the board due to death, res­ig­na­tion, re­tire­ment or re­moval. In­deed, sec­tion 249(3) CAMA em­pow­ers the di­rec­tors to make fresh ap­point­ments to the board not oc­ca­sioned by any of th­ese events, but within the lim­its set in the ar­ti­cles. How­ever, the ap­point­ments so made by the board are sub­ject to ap­proval by the next an­nual gen­eral meet­ing (AGM) of the share­hold­ers (sec­tion 249[2]). Any di­rec­tor whose ap­point­ment is not con­firmed at the next AGM ceases to be a di­rec­tor of the com­pany.

It is note­wor­thy that al­though their ap­point­ments are re­quired to be ap­proved by the next AGM, such di­rec­tors, when ap­pointed by the board, are deemed to be duly ap­pointed and can act on be­half of the com­pany for any pe­riod prior to the next AGM. Fur­ther­more, even if a par­tic­u­lar di­rec­tor is not ap­proved and there­fore re­moved by the AGM, the acts of the di­rec­tor on be­half of the com­pany prior to the AGM re­main bind­ing on the com­pany.

Al­though the board of di­rec­tors can­not ex­pand the board size be­yond the pro­vi­sions of the ar­ti­cles, the share­hold­ers at the AGM can in­crease or re­duce the num­ber of di­rec­tors gen­er­ally (sec­tion 249[3]) and can in­deed amend the pro­vi­sion of the ar­ti­cles.

Thus, the process of ap­point­ment to the board com­mences with the board and ends with the AGM. In some in­dus­tries/sec­tors in Nige­ria, di­rec­tors’ ap­point­ments are also sub­ject to the ap­proval of a reg­u­la­tor. A case in point is the fi­nan­cial ser­vices sec­tor, where the ap­point­ment of board mem­bers is sub­ject to the ap­proval of the Cen­tral Bank of Nige­ria (CBN). In­deed, notwith­stand­ing any other process that the com­pany may have un­der­taken in that re­gard, no di­rec­tor of a bank can be ap­pointed with­out meet­ing the CBN guide­lines on fit and proper per­sons regime (CBN Code of Cor­po­rate Gov­er­nance for Banks and Dis­count Houses in Nige­ria 2014) as well as the writ­ten ap­proval of the CBN. Where any bank pur­ports to ap­point a di­rec­tor, or any di­rec­tor holds out him­self/her­self as hav­ing been so ap­pointed with­out CBN ap­proval, strin­gent con­se­quences will flow against the bank and the di­rec­tor from the reg­u­la­tor.

The sec­ond el­e­ment of the def­i­ni­tion in sec­tion 244(1) CAMA deals with the pur­pose for which di­rec­tors are ap­pointed; ‘to di­rect and man­age the busi­ness’.

Com­pa­nies are cre­ated to be run on a go­ing con­cern ba­sis, which out­lives even their founders. They are ex­pected to de­liver spe­cific ser­vice for which they were set up to their stake­hold­ers and to pro­vide re­turns and ben­e­fits to their share­hold­ers. To achieve th­ese ob­jec­tives, com­pa­nies must be run ef­fi­ciently and in a sus­tain­able man­ner. As stated ear­lier, the sus­tain­abil­ity of a com­pany is di­rectly cor­re­lated to cor­po­rate gov­er­nance prac­tices in the en­tity and the ef­fec­tive­ness of its di­rec­tors and the board. So, what is board ef­fec­tive­ness?

Board ef­fec­tive­ness

To con­tex­tu­alise board ef­fec­tive­ness in this dis­course, we take no­tice of the two key words that make up the phrase. The word board refers to a board of di­rec­tors or other gov­er­nance body by what­ever name it is called. The King IV Re­port on Cor­po­rate Gov­er­nance for South Africa 2016 adopted cor­rectly, in this writer’s view, the ex­pres­sion ‘gov­ern­ing body’ to mean ‘the struc­ture that has pri­mary ac­count­abil­ity for the gov­er­nance and per­for­mance of the or­gan­i­sa­tion’. This in­cludes a board of di­rec­tors, a board of gov­er­nors, a gov­ern­ing coun­cil or any other phrase that an or­gan­i­sa­tion or in­sti­tu­tion may use in ad­dress­ing its gov­ern­ing body.

Sim­ply put, a board of di­rec­tors is a group of per­sons elected or ap­pointed with the re­spon­si­bil­ity for pro­vid­ing over­sight and di­rec­tion in the man­age­ment of a com­pany.

The word ‘ef­fec­tive­ness’ is usu­ally and most ap­pro­pri­ately de­fined through a com­par­i­son be­tween out­put and pur­pose. Thus, Wikipedia de­fines ef­fec­tive­ness as ‘the de­gree to which some­thing is suc­cess­ful in pro­duc­ing a de­sired re­sult’. Some of its syn­onyms are success, ef­fi­cacy, pro­duc­tive­ness, fruit­ful­ness and po­tency.

In the con­text of the board of di­rec­tors, there­fore, ef­fec­tive­ness must take into ac­count the pur­pose of the com­pany. Given the go­ing con­cern ba­sis that is foun­da­tional to com­pany law, in­clud­ing Nige­rian com­pany law, the ex­tent to which the board is able to en­hance and as­sure the com­pany’s sus­tain­abil­ity would, in this writer’s view, point to the ef­fec­tive­ness of the board. Sus­tain­abil­ity con­notes sev­eral con­cepts, chief among which, is longterm vi­a­bil­ity – the abil­ity to sup­port or main­tain an ac­tiv­ity or process over the long term. In busi­ness, the con­cept of sus­tain­abil­ity is of­ten looked at from the per­spec­tive of the abil­ity to man­age the triple bot­tom line of peo­ple, planet and prof­its (Fi­nan­cial Times).

The pri­mary re­spon­si­bil­ity for di­rec­tors to main­tain sus­tain­abil­ity of their com­pany places on them the duty of im­ple­ment­ing the key cor­po­rate gov­er­nance con­cepts in­tro­duced by the Cad­bury Re­port 1992, es­tab­lished and adopted by the Or­gan­i­sa­tion for Eco­nomic Co­op­er­a­tion and De­vel­op­ment (OECD) (1999 and 2004), which are: Ac­count­abil­ity Re­spon­si­bil­ity Trans­parency/hon­esty/open­ness In­tegrity and eth­i­cal con­duct In­de­pen­dence/ob­jec­tiv­ity and ab­sence of in­flu­ence Rep­u­ta­tion/rep­u­ta­tional risk Fair­ness Var­i­ous pa­ram­e­ters aid the as­sess­ment of whether a board is ef­fec­tive and how ef­fec­tive it is. Whether the board meets all or any of th­ese pa­ram­e­ters helps in as­sess­ing its ef­fec­tive­ness. They in­clude the fol­low­ing. An ef­fec­tive board:

De­vel­ops and pro­motes its col­lec­tive vi­sion of the com­pany’s pur­pose, its cul­ture, its val­ues and the be­hav­iours it wishes to pro­mote in con­duct­ing its busi­ness

Pro­vides di­rec­tion for man­age­ment

Demon­strates eth­i­cal lead­er­ship, dis­play­ing and pro­mot­ing through­out the com­pany be­hav­iours that are con­sis­tent with the cul­ture and val­ues it has de­fined for the or­gan­i­sa­tion

Cre­ates a per­for­mance cul­ture that drives value cre­ation with­out ex­pos­ing the com­pany to ex­ces­sive risk of value de­struc­tion

Makes well-in­formed and high­qual­ity de­ci­sions, based on a clear line of sight into the busi­ness

Cre­ates the right frame­work for help­ing di­rec­tors meet their statu­tory du­ties un­der the Com­pa­nies & Al­lied Mat­ters Act, and/or other rel­e­vant statu­tory and reg­u­la­tory regimes

Ac­count­able to stake­hold­ers, par­tic­u­larly those that pro­vide the com­pany’s cap­i­tal

Thinks care­fully about its gov­er­nance ar­range­ments and em­braces eval­u­a­tion of their ef­fec­tive­ness

A crit­i­cal fac­tor that as­sists in en­sur­ing board ef­fec­tive­ness is board eval­u­a­tion and ap­praisal. Ex­pe­ri­ence shows that board eval­u­a­tion ex­er­cise when de­ployed by in­de­pen­dent pro­fes­sion­als tends to be much more ob­jec­tive and ef­fec­tive in de­ter­min­ing the way for­ward for the board, in­clud­ing ar­eas for im­prove­ment, than when con­ducted by in-house per­sons. How­ever, due to the fact that the Se­cu­ri­ties and Ex­change Com­mis­sion Code of Cor­po­rate Gov­er­nance for pub­lic com­pa­nies in Nige­ria 2014 (SEC Code), re­quired that boards con­duct an an­nual eval­u­a­tion ex­er­cise of their per­for­mance but did not ex­pressly stip­u­late that the ex­er­cise should be con­ducted by in­de­pen­dent con­sul­tants, some com­pa­nies are more in­clined to carry out in­ter­nal eval­u­a­tion of their boards by the com­pany sec­re­tary or other of­fi­cer. They do this in or­der to be seen to have ful­filled the let­ter of the code, thereby treat­ing the is­sue as a mere check­box ac­tiv­ity.

Na­tional Code of Cor­po­rate Gov­er­nance

Not sur­pris­ingly, when the now sus­pended Na­tional Code of Cor­po­rate Gov­er­nance 2016 came into be­ing on 17 Oc­to­ber 2016 – with its manda­tory pro­vi­sions re­quir­ing boards to un­der­take a ‘for­mal and rig­or­ous an­nual eval­u­a­tion’ of the per­for­mance of the board, its com­mit­tees, the chair­man and each in­di­vid­ual com­mit­tee mem­ber and that the per­for­mance eval­u­a­tion ex­er­cise be car­ried out by external con­sul­tants at least once in ev­ery three years – some or­gan­i­sa­tions started to com­ply. This again con­firms the ten­dency for some boards to adopt a check­list ap­proach to gov­er­nance. They carry out the min­i­mum re­quired ex­er­cises largely due to the fact that it is a reg­u­la­tory re­quire­ment.

How­ever, as this writer has pre­vi­ously opined, a mere check­list com­pli­ance ap­proach to cor­po­rate

to or as­sure board ef­fec­tive­ness. True cor­po­rate gov­er­nance goes be­yond com­pli­ance to adopt­ing the spirit of good prac­tices and en­trench­ing them as an or­gan­i­sa­tional cul­ture with the lead­er­ship – the board of di­rec­tors or other gov­er­nance body, set­ting the tone. The tone at the top is crit­i­cal to cor­po­rate sus­tain­abil­ity and success.

The Fi­nan­cial Re­port­ing Coun­cil of Nige­ria has set up a tech­ni­cal com­mit­tee charged with re­spon­si­bil­ity for re­view­ing the sus­pended Na­tional Code of Cor­po­rate Gov­er­nance. The tech­ni­cal com­mit­tee had un­til 31 March 2018 to present its re­port to the board of the FRC and held var­i­ous pub­lic hear­ings to get the in­put of stake­hold­ers into the process. That

dead­line has now been ex­tended. The ap­proach adopted by the tech­ni­cal com­mit­tee in en­gag­ing with stake­hold­ers so as to get the buy-in from those who will be re­spon­si­ble for im­ple­men­ta­tion of the code when re­leased, is a wel­come strat­egy. Some of the ar­eas of con­cern be­ing ad­dressed by the code re­view in­clude:

Manda­tory vs vol­un­tary The need to aim to ex­ceed mere check-box com­pli­ance and as­pire to at­tain an ap­ply-and-ex­plain phi­los­o­phy (sim­i­lar to that adopted by the King IV Re­port), which sees cor­po­rate gov­er­nance not merely as a mind­less act of com­pli­ance but as a de­lib­er­ate val­ues-based cor­po­rate cul­ture

Code ap­pli­ca­tion Clar­ity is needed as to which or­gan­i­sa­tions are to be gov­erned by the code, in­clud­ing sec­toral codes, such as pri­vate sec­tor, pub­lic sec­tor and not-for-profit codes

Iden­ti­fy­ing and sit­u­at­ing Ad­dress­ing the con­flict be­tween con­trol­ling share­hold­ers and mi­nori­ties as the dom­i­nant cor­po­rate gov­er­nance chal­lenge in the Nige­rian con­text as dis­tinct from the An­glo-Saxon prob­lem of the agency the­ory, which highlights the con­flict be­tween share­hold­ers and man­agers

Mon­i­tor­ing Em­place ap­pro­pri­ate mech­a­nisms for im­ple­men­ta­tion and mon­i­tor­ing in­clud­ing in col­lab­o­ra­tion with such ap­pro­pri­ate or­gan­i­sa­tions as IoD, ICSAN and IIA

Al­though, in this writer’s view, the ini­tial time­lines that the tech­ni­cal com­mit­tee was ex­pected to work with was rather short, the com­mence­ment of this re­view is very wel­come in­deed as it is ex­pected to pro­duce na­tional codes that will ad­dress gov­er­nance prac­tices and help en­trench val­ues-based cor­po­rate gov­er­nance stan­dards in the coun­try.

Guest Writer NECHI EZEAKO Ex­ec­u­tive Di­rec­tor, In­sti­tute of Di­rec­tors Nige­ria Cen­tre for Cor­po­rate Gov­er­nance

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