• Thursday, July 18, 2024
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Corporate Governance: An antidote to corporate failure issues experienced amongst corporate entities!

Corporate Governance: An antidote to corporate failure issues experienced amongst corporate entities!

The recent monumental decline in the growth prospects and stability of most corporate entities and business ventures across the different sectors of our economy is becoming alarming and worrisome too. A closer look at the affairs of some of these corporate entities revealed and, at the same time, linked their respective corporate challenges principally to their non-adherence to basic corporate governance principles and ideologies, which eventually led to the ultimate failure and collapse in the long run.

Within the Nigerian business environment, no doubt there were a series of reported cases of corporate governance violations in the early 1990’s, 2000’s, and even up to 2020 involving some financial institutions and other corporate entities within the country, which further resulted in the untimely dissolution of the bank’s board of directors (BBOD) before the expiration of their term.

Read also: The Trusted Advisors Legal Digest: Code of corporate governance for licensed pension operators

One of the principal reasons given by our apex bank for the early dissolution of those banks’ boards of directors (BOD) was the issue of inefficiency and ineffectiveness on the part of the board members in the effective discharge of their core mandate and responsibilities.

Aside from the above-stated scenario ,there were reported and documented cases of corporate governance infractions in the global business arena, cutting across the US, much of Europe, and Asia too.

History records that in the early 2000’s, executives (top management) at Houston, Texas-based energy company Enron partnered and also collaborated with the then global accounting firm of high repute, Messrs Arthur Andersen, to hide billions of debts generated from numerous failed projects and deals over the years. Its resulting bankruptcy was one of the largest to be recorded ever in the history of the United States of America’s existence.

Other reported corporate governance infractions in the global hemisphere included the likes of: MCI Telecom giant company, Tyco, Adelphia, Peregine Systems, WorldCom, ES Bankest, Cadbury Schweppes Confectionary, Freddie Mac, Maxwell, PollyPeck, BCCI, Saytam, Bernie Madoff, Lehman Brothers, A Hold supermarket, Parmalat, Xeros, and Wal-Mart Stores Inc., to mention but a few.

Before advancing further on this crucial subject matter that is seriously ravaging the world’s business landscape, there is a need for me to take a holistic view of what is meant by corporate failure and, in addition, explain to us what is termed corporate governance.

In simple terms, corporate failure refers to a situation where a business, such as a corporation, bank, or insurance company, is heading towards closure or stopping its operations. Essentially, it’s like saying the company is becoming unhealthy or sick.

Several warning signs can indicate that a company is failing, including but not limited to high levels of debt, a mismatch in capital, or negative working capital. Manipulation of share prices and falsification and manipulation of accounting information are also significant red flags. Unethical behaviour by the board and management team can severely impact the company’s health, as can poor risk management and weak or absent internal controls.

Other indicators of corporate failure include repeated losses in operations and declining profitability. Executives being overly authoritative and massive theft by management are clear signs of trouble. Additionally, granting unauthorised loans, issues with fraud, abuse of office, corruption, and embezzlement can further damage a company’s stability. Inflating the company’s revenue, reporting fictitious assets, a weak board system, and misconduct at the top levels also contribute to the decline.

Finally, audit failures by the company’s external auditors are critical warning signals that the corporate entity is in serious trouble. All these factors together paint a comprehensive picture of corporate failure, emphasising the importance of vigilance and strong governance to maintain corporate health.

One of the possible solutions to the problem of corporate failure is the complete acceptance and adoption of the principles and practices of good corporate governance.

Read also: Recapitalisation: Drawing a nexus between corporate governance and investor confidence

Corporate Governance Examined: It is important to note that the principles of corporate governance vary from one country to another. Corporate governance primarily focuses on the proper management of a company’s affairs in the best interests of all relevant stakeholders. These stakeholders include shareholders, lenders, government, regulators, creditors, competitors, and the community at large.

Before the early 2000s, corporate governance principles were largely unfamiliar to the Nigerian corporate landscape, as much of its early guidance came from the United States, Canada, and Europe. Based on this, corporate governance can be defined as the system or process by which a corporate entity’s affairs are directed and controlled by those responsible for its governance.

An ideal corporate governance ideology focuses on several essential principles. These include protecting the rights and privileges of shareholders, demonstrating a high level of accountability at all times, and avoiding any conflict of interest to maintain independence in judgement. It also involves upholding the integrity of the entity’s financial records and statements, living up to its responsibilities to various stakeholders, and complying with the diverse rules and regulations governing its line of business. Additionally, it entails keeping service promises to boost credibility ratings, maintaining the accuracy of all relevant information, and standing on the principles of equity and justice to promote inclusive governance. Providing an enabling environment for growth, promoting transparency and openness, and respecting the timelines for information disclosure are also key components of effective corporate governance.

When a corporate entity implements a well-structured corporate governance ideology, it brings several benefits. These include promoting healthy behaviour among corporate leaders, especially those at the top, and enhancing the corporate image, which can boost brand loyalty and sales. It facilitates a smooth decision-making process, leading to robust outputs, and lends credibility to effective and efficient reporting processes. Strategically, it supports the organisation’s long-term aspirations, significantly reduces labour turnover by guaranteeing job security, and ensures compliance with rules, regulations, and best practices.

Furthermore, good corporate governance erases conflicts of interest that could hinder business operations, promotes a healthy internal control mechanism to prevent fraud, and helps retain competent board members who add value to the organisation. It addresses business risks through effective mitigation, creating a safe business environment for all. Additionally, it improves and supports the free flow of capital, and ultimately assists an organisation in meeting its goals, objectives, and expectations.

 

Kingsley Ndubueze Ayozie: MSc (Finance) Lagos, MBA, KJW, ACSI (UK), FCTI, FCA is a Public Affairs Analyst cum Chartered Accountant by profession.