• Saturday, July 13, 2024
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A Case for Corporate Governance


Corporate Governance has been defined as the system of rules, practices and processes by which a company is directed and controlled. Corporate Governance essentially involves balancing the interests of the many stakeholders in a company – these include its shareholders, management, customers, suppliers, financiers, government and the community. Since Corporate Governance also provides the framework for attaining a company’s objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.

A good Corporate Governance policy promotes the long-term interests of shareholders, strengthens board and management accountability and helps build public trust in the Company. The need for Corporate Governance became increasingly pertinent following the 2002 introduction of the Sarbanes-Oxley Act in the U.S., which was introduced to restore public confidence in companies and markets after the discovery of accounting fraud bankrupted and led to the eventual collapse of high-profile companies such as Enron and WorldCom. In Nigeria, we have also observed how weak Corporate Governance framework has been responsible for some recent corporate failures. An instance being the revealed bad Corporate Governance practices by senior managements of some commercial banks.

Regulatory Framework

Governments recognize the importance of Corporate Governance and corporate supervision. To this end, Legislations and policies have been rolled out to ensure good practice and integrity in the way companies are run. In a bid to ensure the highest standards of transparency, accountability and good Corporate Governance, the Securities and Exchange Commission of Nigeria (‘the Commission’) introduced the Nigerian Code of Corporate Governance Practices in 2003 and a revised version in 2011 (‘the Code’). The Code is consistent with international best practices on Corporate Governance. Whilst the Code is limited to public companies, the Commission encourages other companies not covered by the Code to use the principles set out in the Code, where appropriate, to guide them in the conduct of their affairs.

The Code is not intended as a rigid set of rules, it is expected to be viewed and understood as a guide to facilitate sound corporate practices and behaviour. The SEC enjoins the Code to be seen as a dynamic document defining minimum standards of Corporate Governance expected particularly of public companies with listed securities.

The responsibility for ensuring compliance with or observance of the principles and provisions of the Code lies primarily with the board of directors. However, shareholders, especially institutional shareholders, are expected to familiarise themselves with the letter and spirit of the code and encourage or whenever necessary, demand compliance by their companies. The SEC also ensures that there is compliance with the Code. Hence, whenever the SEC determines that a company or entity required to comply with or observe the principles or provisions  of the Code is in breach, the SEC shall notify the company or entity concerned specifying the areas of non-observance and the specific actions needed to remedy the non-compliance or non-observance.

Among other provisions of the Code, the board and the company are enjoined to observe the following tenets of Corporate Governance:

Board composition: Ensuring independence and objectivity of the board at all times; providing rules for interlocking and family directorships and avoidance of conflict of interest situations.

Board committees: The board determines the extent to which its duties and responsibilities are undertaken through committees. These committees include the audit committee, remuneration committee, risk management committee and others as the board may deem fit to create. Only directors are committee members, however, senior management may be in attendance.

Meetings of the board: Its frequency and attendance.

Appointment to the board of directors: The board is tasked with developing a clearly defined, formal and transparent procedure for appointment to the board.

Disclosure and transparency: The Code provides for certain items that should be included in annual reports of public companies, e.g. the capital structure of a company, its Corporate Governance report, accounting and risk management issues, director’s interests in contracts with the company, contracts with controlling shareholders, director’s loans from the company, the company’s remuneration policy and all material benefits and compensation paid to directors, the audit committee’s report and a statement from the board with regards to the company’s degree of compliance with the provisions of the Code.

Remuneration of the board: Companies should develop a comprehensive policy on remuneration for directors and senior management. The board should approve the remuneration of each board member and senior management taking into consideration direct relevance of skill and experience to the company at all times.

Performance evaluation of the board: The board should establish a system to undertake a rigorous annual evaluation of its performance, that of its committees, the chairman and individual directors. The board should also provide for procedures where a director’s performance is deemed unsatisfactory.

Protection of shareholder rights: The board should ensure that shareholders preserve their rights to appoint and remove directors of the company at general meetings. It should also ensure that all shareholders are treated equally and that minority shareholders are treated fairly at all times.

Risk management and audit: The board should oversee the establishment of a framework that defines the company’s risk policy, risk appetite and risk limits. The board should also undertake at least annually, a thorough risk assessment covering all aspects of the company’s business.

Whistle blowing policy: Companies should have a whistle-blowing policy which should be known to employees, stakeholders, shareholders and the general public. It is the responsibility of the Board to establish a whistle-blowing mechanism for reporting any illegal or substantial unethical behavior. The whistle-blowing mechanism should be accorded priority and the Board should also reaffirm continually, its support for and commitment to the company’s whistle-blower protection mechanism.

Insider trading: In an effort to address the reoccurrence of insider dealing at the Nigerian Stock Exchange, the Code provided that directors of public companies, their immediate families and other insiders defined in section 315 of the Investment and Securities Act 2007 (the ‘ISA’) and Rule 110(3) of the SEC Rules and Regulations, in possession of price sensitive information or other confidential information shall not deal with the securities of the company where such would amount to insider trading as defined under the ISA.

The Role of the Company Secretary

The Code states that the Company Secretary has the primary duty of assisting the board and management in implementing this code and developing good Corporate Governance practices and culture.

The Company Secretary thus has an important role to play in promoting good Corporate Governance practices and ensuring ethical, open, honest and transparent behaviour by the company in line with established best practices and procedures. His role includes, acting as a primary point of contact and source of advice and guidance for directors as regards the company and its activities in order to support the decision making process; keeping under close review all legislative, regulatory and Corporate Governance developments that might affect the company’s operations, and ensuring that the board is fully briefed on these and take these developments into regard when taking decisions; planning and preparation of meetings of the board, the board committees and general meetings of the company, and ensuring compliance with proper statutory filings and  that required disclosures are made.

The Benefits of Good Corporate Governance Practice

The importance of Corporate Governance is more obvious for large publicly listed companies where the separation of ownership from management is more distinct than that of small private companies. Public companies depend on the stock market to raise capital. Investors are very conscious of the safety of their investments, uncertainties about the integrity or intentions of those in charge of a company can quickly affect the value of such a company’s shares and its ability to raise new capital. Investors look to the corporate governance performance of a company when assessing the viability of an investment in that company.

Improved top level decision-making processes; a reduction in a company’s cost of capital; a positive boost on a company’s reputation; decreased conflicts and fraud; fewer fines, penalties and lawsuits are some of the benefits of a good Corporate Governance policy to an organization.


A major impact of poor Corporate Governance can be the failure of a business to grow in a sustainable way. A study on Corporate Governance and Bank Failure in Nigeria was carried out to investigate issues, challenges and opportunities associated with Corporate Governance and Bank failure in Nigeria, and to ascertain if a significant relationship exists between Corporate Governance and Banks failure. The result of the study not only revealed that the introduced Code of Corporate Governance for banks was adequate to curtail bank distress but that improper risk management, corruption of bank officials and over expansion of banks are the key reasons Banks fail.

There are a number of indicators that point to a company having poor Corporate Governance which range from a weak management to deficient or inadequate accounting systems. Here, the financial reporting systems are inadequate, so that management fail to properly assess performance and hence fail to plan effectively. One of the consequences of not planning effectively is over-gearing. Over-gearing happens when a business borrows more than it is able to service when it comes to the repayment of capital or interest. This means the company can be more at risk from unexpected adverse changes in performance. This may lead to breach of covenants, and create uncertainties about the future sustainability of the company. Also, failure to plan and adapt to necessary changes driven by competition, political, economic or technological issues can result in harmful consequences to the company’s existence.

In conclusion, both publicly listed and private companies are enjoined to develop or adopt a Corporate Governance policy. A brief on the Coca-Cola Company’s Corporate Governance policy in reproduced below:

Here, the Board is elected by the shareholders to oversee their interest in the long-term health and the overall success of the business and its financial strength. The Board serves as the ultimate decision making body of the Company, except for those matters reserved to or shared with the shareowners. The Board selects and oversees the members of senior management, who are charged by the Board with conducting the business of the Company. The Board of Directors have established Corporate Governance Guidelines which provide a framework for the effective governance of the Company. The guidelines address matters such as the Board’s mission, director responsibilities, director qualifications, determination of director independence, board committee structure, chief executive officer performance evaluation and management succession. The Board regularly reviews developments in Corporate Governance and updates the Corporate Governance Guidelines and other governance materials as it deems necessary and appropriate.

Tokunbo Orimobi, LP

TOKUNBO ORIMOBI LP is a full-fledged commercial law firm with offices in Lagos, Ibadan and Abuja.