Corporate Governance: Entrenching Voluntary Compliance

Good corporate governance is about ‘intellectual hon¬esty’ and not just sticking to rules and regulations, capital flowed towards companies that practiced this type of good gov¬ernance.“

– Mervyn King (Chairman: King Report)

A lot has been said about the desirability of institutionalizing a mandatory regime of Corporate Governance as the optimal pana¬cea for corporate failure. How¬ever, it has become increasingly apparent that many companies in emerging economies would prefer to adopt the voluntary approach to Corporate Gover¬nance, acknowledging its ideals as “lofty” and “best practice” to which they hope to one-day aspire whilst altogether paying lip-service to the underlying principles upon which these guidelines have been established for their ultimate benefit.

The pervasive attitude is to select the preferable guidelines that may be relatively easy to comply with and discard of those perceived as being more oner¬ous or of less relevance by these companies.

The challenge of institutional¬izing Corporate Governance prin¬ciples without the introduction of a mandatory enforcement regime lies in continuous education and putting in place the structures that encourage companies to ap¬preciate how adopting a ‘comply or explain’ regime would serve their corporate interests, in the final analysis. The following will also go a long way in institution¬alizing Corporate Governance:

• Improved clarity of purpose – The Codes need to be clearer in terms of the objectives they are intended to achieve with reduced emphasis on sanctions for non-compliance, a measure oftentimes construed as revenue-generation by many companies, with the intended purpose lost on them.

• Legal underpinning – A recent study has revealed that very few countries including the United Kingdom have been able to successfully implement the comply-or explain regime without recourse to legal un¬derpinning. The existence of a legal foundation for entrenching good Corporate Governance has proven to be particularly impor¬tant in the emerging markets, where companies have a stronger tendency to “game the system” and take advantage of regulatory lapses.

• The “Ownership” Principle – Perhaps the most difficult to achieve, yet the most practical method for encouraging a vol¬untary comply or explain regime would be to entrench amongst corporate entities the notion that the ownership and maintenance of Corporate Governance best practice remains their primarily responsibility and that a failure of adherence thereto is tanta¬mount to an inherent failure of themselves. According to Mervin King S.C. (Chairman, King Report of South Africa) “you cannot leg¬islate good behaviour’. In practic¬ing good corporate governance lies its own reward which easily manifests in the growth, progress and sustainability of a company on the long term.

It is in this context that the recent launch of the Corporate Governance Rating System (CGRS) by the Nigeria Stock Exchange is to be commended. The CGRS seeks to promote notable com¬panies that are leaders in their respective sectors, that adhere to the highest CG standards, as well as meet stringent listing require¬ments, by providing them greater global visibility, making it easier for these companies to attract global capital flows, reduce bor¬rowing costs, lay the foundation for new products and increase market liquidity. It is however trite to caution that the emerging “Premium Board” should truly comprise companies that have adopted Corporate Governance best practice as a way of life and not merely as a “good to have”. The NSE should also consider finding a place on the Premium Board for those companies with market capitalization of less than $1billion who have truly demon¬strated sincere commitment to the principles and practice of good corporate governance.