Corporate governance failures in Nigeria: Issues, challenges & prospects (1)

With the last week sacking of the board of directors of both First Bank of Nigeria Holdings Plc (FBH) and First Bank of Nigeria (FBN) by the Central Bank of Nigeria (CBN), issues of failures of corporate governance returned to the main discussions of corporate Nigeria. This is principally due to reasons of board ineffectiveness and insider related loans adduced by the CBN as justifications for its actions. A very senior and experienced friend is of the view that with litany of codes of corporate governance in Nigeria with the latest being the one from the Financial Reporting Council of Nigeria (FRC) and even the revised CAMA 2020, issues of persistent corporate governance failures particularly board ineffectiveness and insider related conflicts of interest should not be a regular problem in Nigeria again.

Remember also that most past governors of CBN including Professor Charles Soludo and Mr Sanusi Lamido Sanusi did their best to address corporate governance failures in Nigerian banking sector. With all these efforts, the question is why the persistent recurrence of corporate governance failures in Nigeria particularly in the banking sector, remember Oceanic and Intercontinental banks and many other financial institutions!

The Anglo-American model of corporate governance adopted and used in Nigeria is unsuitable to our culture and preferred nature of business ownership

But what is Corporate Governance and its origin? Corporate governance is generally defined as a set of rules, regulations and values used in the management and governance of a firm. According to OECD, it is a mechanism through which boards and directors are able to direct, monitor and supervise the conduct and operation of the corporation and its management in a manner that ensures appropriate levels of authority, accountability, stewardship, leadership, direction and control. In terms of its origin, corporate governance can be traced to the challenges of managing the divergent interests of owners of business (shareholders or principals) and that of managers of business (agents). With the observation that the interest of shareholders is more for profit maximization to guarantee payment of dividends, while that of the managers is interests such as sales maximization and managerial incentives, organization and firms were encouraged to form board of directors involving both groups (shareholders and managers) to manage the differences in their interests for the overall benefit of the organization. As the differences persisted and other important stakeholders emerged, further additions were made to the board of directors.

Business organizations were further encouraged and demanded to add independent non-executive directors to the board. With independent non-executive directors described as individuals of high expertise and integrity with no financial interest or ownership of the organization, their main interest therefore is the due consideration of the interests of all the key stakeholders to ensure proper management and governance of the organization. This is the reason why organizations are increasingly being encouraged to appoint many independent non-executive directors on their board and for such independent directors to chair important board committees.

The essence of the above illustration is to point out certain issues- first is that at the heart of corporate governance is the problem of trust particularly between the shareholders and managers. Second is that the inherent lack of trust resulted in the creation of a set of rules and regulations described as corporate governance framework to manage the trust issues and interests. Third is that to achieve the aims of corporate governance, an effective legal system is required. At the centre of corporate governance therefore is an effective legal system. But what makes a legal system effective?

Recalling that a legal system is a set of rules, regulations, norms and values, its effectiveness depends on the extent to which the legal system is understood, accepted, and internalised to ensure or enhance compliance. Interestingly, what helps a legal system to be better understood, accepted, internalised, and complied with is the way or process through which the legal system was created or formulated. As every society is endowed with a set of informal norms and values (culture), the understanding, acceptance, internalisation, and compliance are normally a lot easier when the formal legal system is developed and created through the informal norms and values. In situations where the legal system is externally adopted and its origin cannot be traced to the informal culture (norms and values) of the society, the understanding, acceptance, internalization and compliance to the legal system are normally weak and the legal system used mainly for instrumental purposes instead of both instrumental and intrinsic purposes required of a legal system. Moreover, in situations where the formal legal system is used mainly for instrumental purposes, it is normally open to manipulation and erosion of the inherent trust needed of a legal system.

The Nigerian situation particularly failures in both corporate and public governance can be better analysed and understood with the above illustration. The understanding, acceptance and internalisation of Nigeria’s formal legal system can be described as weak due to its external adoption with very limited input or incorporation of our informal norms and values. The situation is even worse with corporate governance. It is a kind of double jeopardy. In addition to the limited understanding, acceptance and internalization of the formal legal system, the Anglo-American model of corporate governance adopted and used in Nigeria is unsuitable to our culture and preferred nature of business ownership. While the Anglo-American model is rooted and advocates for dispersed ownership of a business, our norms and values (culture) are more inclined to concentrated ownership. This is the reason why succession is a big problem in Nigeria and owner managing-directors normally return as chairmen of boards of such firms.

With the double jeopardy of limitedly understood, accepted and internalised legal system and unsuitable model of corporate governance, failures persist. While the formal legal system is used mainly for instrumental purposes, the practice of the Anglo-American model is poor and used just to fulfil regulatory requirements. Is there a way out?

To be continued next week…