The corporate structure is perhaps the most innovative creation of law it revolutionised trade and commercial transactions all over the world. Through companies, people can combine resources, pursue and realise set business objectives and limit their risks.
Interestingly, the company remains a distinct legal person, capable of exercising all the powers a natural person could. As an artificial entity however, a company cannot direct and manage its own affairs. This, it can only do through natural beings.
The shareholders who own equities in the company cannot effectively manage the affairs of their company due to their large numbers. Hence, they appoint a few directors to manage and direct the affairs of their company.
By appointing the directors to manage the affairs of their company, the shareholders put the fate of their investments in the hands of these directors and they would typically have certain expectations from these directors.
At the minimum, they expect the directors to be honest, truthful, open, transparent, accountable, responsible, just and fair in the management of their company.
The interest of the shareholders is to after all maximise the value of their investments and a sound management by the directors would have this guaranteed.
Experience has however shown that the interests of the directors are not necessarily always aligned with that of their appointers the shareholders.
Rather than uphold their fiduciary duties and enhance shareholders’ investments, many directors are keen on achieving their own self interests at the expense of the company and the shareholders.
Sometimes, the desire to build corporate empires, particularly where directors’ remunerations are tied to corporate results, drive directors to pursue short-term gains at the expense of sustainable
corporate growth.
At another extreme, they arbitrarily award salaries or out-of-pocket expenses to themselves or prepare false accounting statements to hide the true financial position of the company.
Embezzlement o f the company’s funds and engaging in transactions where their personal interests conflict with those of the company, and making secret profits at the expense of the company are typical shenanigans many directors indulge in.
The 2001 Enron corporate scandal in the United States (US) is the textbook example of directors abusing their position. The executives of Enron, one of the biggest energy companies in the US, connived with the company’s auditors to hide the financial troubles of the company.
Incorporating unrealised future gains into current accounting statements and toxic debt through special purpose vehicles, they posted dizzying profits.
The scandal eventually led to the insolvency of Enron. Nigeria has also had its own fair share of corporate scandals triggered by directors’ abuse of position.
The 2007 scandal of Cadbury Nigeria Plc. is still fresh in mind. The then CEO and Finance Executive Director of Cadbury had also connived with Cadbury’s auditors to overstate the company’s financial position from 2002-2005 by over 13 billion naira.
In the banking sector, banks’ executives have been removed by the Central Bank of Nigeria (CBN) while some are facing criminal trials for abusing their positions. These examples clearly demonstrate the attendant risks of weak governance.
The mechanism in which a company is managed and directed is what corporate governance is all about. 21st Century development has however shown that the interests of the shareholders are not the only paramount consideration in corporate governance.
The interests of other stakeholders including customers, creditors, employees, the environment, host communities, government and the public at large have become relevant.
This is largely because these stakeholders are also directly impacted by corporate actions. As such, weak governance, capitalistic shorttermism and profiteering may have adverse effect on creditors ability to recover, erosion of sustainable environmental practice, systemic decline in flow of foreign capital and ultimately corporate or economic disaster.
Rather paradoxically, regulatory efforts to curb abuse of corporate powers are always after the fact, with the government and its agencies scrambling to save a crashing capital market or prevent run on banks and systemic contagion, and in the process creating bigger problems by enacting laws born of emotional political reaction.
Following the Enron debacle, the US Congress passed the Sarbenes-Oxley Act to ensure accuracy of financial reporting and to punish fabrication of accounting records.
In Nigeria, the Codes of Corporate Governance issued by the Securities and Exchange Commission, the Central Bank of Nigeria, Nigerian Communications Commission, National Pension Commission, National Insurance Commission and the Financial Reporting Council of Nigeria are all tailored at ensuring that the affairs of companies are run in a transparent and honest manner, enhancing market integrity, stakeholders’ confidence and above all, shareholders’ value.
Companies, especially public companies, are required to comply with the relevant Codes and report compliance with the relevant regulatory body. The Codes recognise and restate the timeless fiduciary duties of directors to be loyal and transparent in the best interest of all stakeholders.
To minimise the negative incentives which tend to drive abuse of powers, the Codes now require that boards must be comprised of uneven blend of executive and non-executive directors, such that non-executive directors are in the majority.
The Codes also require the presence of independent directors who are neutral persons with no interest in or connection to the company. This way, the likelihood of corporate collusions at board level to pursue selfish gains, is significantly reduced.
One consistent denominator in corporate scandals is the connivance between directors and the auditors to conceal a company’s true financial position.
The Codes have sought to address this by clearly outlying the roles of audit committees and limiting the tenure of auditors, thereby forestalling unwholesome quid-pro-quo between directors offering security of tenure to auditors in exchange for concealment of misconducts.
Importantly, companies are now required to put in place whistle blowing policies known to all stakeholders for reporting unethical or illegal activities and behaviours.
The existence of these policies is consistent with the need to ensure that illegal or unethical dealings by directors are reported to the regulators and reporters are adequately protected.
Needless to emphasise, weak corporate governance is detrimental to the growth of a company, which in turn impacts the economic growth of a country.
As a frontier market in need of constant foreign investments, sound corporate governance must be woven into the operational fabrics of Nigerian companies. To achieve this, directors must act transparently and honestly at all times.
Olayimika is a Partner in the law firm of Olaniwun Ajayi LP and has over 34 years of professional experience. She specializes in corporate governance, providing pragmatic solutions to the diverse challenges which confront corporates at different growth stages and serves on the board of several companies (listed and privately held).”
