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CORPORATE GOVERNANCE IN NIGERIA; THE GROWING NEED

TO DEEPEN INVESTOR CONFIDENCE

By Harrison Ogalagu1

“At the start, boards of directors were generally weak, executive management was in

charge and shareholders were dispersed. Gathering investor pressure on the directors

of under-performing companies, however, led to a strengthening of boards at the

expense of management. This in turn developed into the present position whereby the

concentration of shares in the hands of institutional investors has increased their power

in relation to boards and management and, at the same time, drawn attention to their

responsibilities in matters of governance”

Sir Adrian Cadbury

1.0 Introduction

The potential of an economy to attract investment depends largely on the state of governance

of the economy and the policy thrusts of the managers of the economy. The primary duty of

the managers of an economy is to use and maximize the limited resources of the economy

efficiently to achieve the objectives of the economy. Such is the case with companies or

corporations. The world has witnessed, in the recent past, an endemic financial crisis and

gradual collapse of most multinational corporations. Recent cases of corporate governance

failure in large companies have drawn the ire of investors, boards, companies, regulators and

indeed governments on the threat posed to the integrity of financial markets and economic

development2.

Investor sentiments are a crucial issue for any company. If the investor confidence is high, the

share price of the company soars. If the investor confidence weakens, the value of the stock

plummets. Therefore, it is crucial for a company to keep its investors in mind before taking

important decisions and to maintain a flawless management quality.

The recent spate of corporate scandals has drained investor confidence to an all time low.

Many investors use their savings, including pension funds, profits or capital reserves to invest

1. HARRISON OGALAGU, LLB (HONS), BL, Senior Associate, Tope Adebayo LLP

2. F. Ajogwu, Corporate Governance in Nigeria: Law & Practice, Lagos, 2007

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in the equity of a company. They are set to lose a lot in case of financial mismanagement by

the company. Therefore, the quality of corporate governance is a key issue for them. In recent

years, corporate governance has received increased attention because of high-profile scandals

involving abuse of corporate power and, in some cases, alleged criminal activity by corporate

officers.

As the role of capital market in the Nigerian economy evolves, greater corporate transparency

is required to allow governments, companies, investors and entrepreneurs to react to

underlying economic problems and/or challenges more proactively. Lack of effective

corporate governance in Nigeria has worked to the detriment of shareholders and created a

class of shareholders who have lost interest in the system. The corporate governance culture in

Nigeria has consistently failed to be responsible to the stakeholders, accountable to the

shareholders and has no deep-rooted mechanism to maintain a balance among the major

players (board of director, shareholders, and management) in corporate governance. These

have occasioned renewed calls for total revamp of corporate governance principles to ensure

more efficient use of company assets which in turn will translate into higher profitability of

investments.

This paper critically x-rays the telling effect of corporate governance principles on investor

confidence with particular emphasis on the Nigerian experience; the challenges and failure of

corporate governance in Nigeria. It also seeks to offer recommendations on policy framework

in respect of how good corporate governance guidelines and practices would boost investor

confidence, enhance the credibility of regional businesses leading to lower capital costs,

increased foreign direct investment (FDI), greater financial stability and long-term growth.

2.0 Corporate Governance: An overview

Corporate governance is defined as the set of laws, policies, customs, processes and institutions

designed to control the way a corporation is administered3. Corporate governance is largely

concerned with organizational and management performance in a company. It is a term that

refers broadly to the rules, processes, or laws by which businesses are operated, regulated, and

controlled. The term can refer to internal factors defined by the officers, stockholders or

3. Lead Capital, Guardian Newspapers, March 21, 2011.

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constitution of a corporation, as well as to external forces such as consumer groups, clients,

and government regulations.

Corporate governance has also been seen to be concerned with ways in which all parties

interested in the well-being of the firm (the stakeholders) attempt to ensure that managers and

other insiders take measures or adopt mechanisms that safeguard the interests of the

stakeholders. Such measures are often necessitated by “the separation of ownership from

management, an increasingly vital feature of the modern firm”4 Corporate governance is also

defined as “the system by which companies are directed and controlled”5.

In a nutshell, corporate governance revolves round how an organization is managed, its

corporate and other structures, its culture, policies and the ways it deals with its various

stakeholders. The plank of corporate governance is how to harness the structures and

processes of decision-making in a company in the light of the control and behavior that

support effective accountability for performance outcomes.6 It is also concerned with the

interplay of the elements which encourage companies to produce good quality and timely

information and to have a formal and thorough evaluation and decision-making process that

is robust and credible, which will ultimately make them transparent and accountable.

According to Ajogwu7, corporate governance is used to monitor whether outcomes are in

accordance with plans, and to motivate the company to be more fully informed in order to

maintain or alter organizational activity.

Corporate governance can also be seen in terms of the ways in which a firm safeguards the

interests of its financiers (investors, lenders, and creditors). The modern definition calls it the

framework of rules and practices by which a board of directors ensures accountability, fairness,

and transparency in the firm's relationship with all its stakeholders (financiers, customers,

management, employees, government, and the community). This framework consists of:

4. Martha Bruce, Rights and Duties of Directors 9

th Ed., London, 2009

5. A. Sanda, et al, (2005) Corporate Governance Mechanisms and firm financial performance in Nigeria

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1. explicit and implicit contracts between the firm and the stakeholders for distribution

of responsibilities, rights, and rewards,

2. procedures for reconciling the sometimes conflicting interests of stakeholders in

accordance with their duties, privileges, and roles, and

3. procedures for proper supervision, control, and information flow to serve as a

system of checks and balances.

Modern conglomerates are characterized by numerous owners having no management

function and managers without equity interest in the company whatsoever. Shareholders, or

owners of equity, are generally large in number, and an average shareholder controls a minute

proportion of the shares of the firm.

This gives rise to the tendency for such a shareholder to take no interest in the monitoring of

managers, who, left to themselves, may pursue interests radically different from those of the

owners of equity. Oftentimes, managers take steps to increase the size of the firm which may

translate into increased pay for them without a corresponding increase in the profit of the firm

which is the major concern of the shareholders and stakeholders. Concerns have, therefore,

been raised to resolve the perceived incongruence in the interests of the equity owners and

managers of the firm in respect of which codes of corporate governance have evolved.

Although codes of corporate governance may differ as dictated by its goals which vary from

country to country but there is a confluence of opinion that effective corporate governance

relates to the promotion of the shareholders and stakeholders of a company. When

governance procedures are operating successfully, the needs of the shareholders and

stakeholders are being effectively met through the directing and controlling of management

activities7. An indispensable ingredient of corporate governance is the nature and extent of

accountability of certain individuals in the organization, and mechanisms that try to eliminate

the principal-agent problem associated with corporations.

Well-defined and enforced corporate governance provides and structure that, at least in

theory, works for the benefit of everyone concerned by ensuring that the enterprise adheres

6. Lead Capital, op cit.

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to accepted ethical standards and best practices as well as to formal laws in management and

operation. This is the goal of international best practices for corporate governance.

3.0 DEVELOPMENT OF CORPORATE GOVERNANCE

Corporate governance has started gaining popularity when directors were increasingly

required to demonstrate and report to those with an interest in the company about the

procedures, systems and controls they have put in place to achieve results, improve

accountability and prevent malpractice or fraud.

The origin of corporate governance has a long history but a recent past. In so many

jurisdictions, several reasons have been adduced as responsible for the development of

corporate practice and its role in modern corporations. Some of the experiences include the

Wall Street Crash of 19298, the East Asian Crisis of 1997

10,

7. The crash followed a speculative boom that had taken hold in the late 1920s, which had led hundreds of thousands

of Americans to invest heavily in the stock market. A significant number of them were borrowing money to buy more

stocks. By August 1929, brokers were routinely lending small investors more than two thirds of the face value of the

stocks they were buying. The rising share prices encouraged more people to invest; people hoped the share prices

would rise further. The speculation thus fuelled further rises and created an economic bubble. Because of margin

buying, investors stood to lose large sums of money if the market turned down—or even failed to advance quickly

enough. The Roaring Twenties, the decade that led up to the Crash, was a time of wealth and excess. Despite caution

of the dangers of speculation, many believed that the market could sustain high price levels. However, the optimism

and financial gains of the great bull market were shattered on "Black Thursday", October 24, 1929, when share prices

on the New York Stock Exchange (NYSE) collapsed. Stock prices plummeted on that day, and continued to fall at an

unprecedented rate for a full month.

8. The causes of the Asian crisis include governments' futile attempts to keep their currencies at artificially high levels;

government-directed banking systems and lending decisions; unregulated capitalism; massive overinvestment by

corporations funded by excessive borrowing; the lack of transparency that masked the extent of problems they

developed; inadequate financial regulation and supervision; labour market "rigidities", and a pronounced mismatch

in the duration of assets and liabilities in both the corporate and banking sectors. Perhaps the biggest contributor to

the Asian financial crisis of 1997 is its gross misallocation of capital and human resources, combined with a flagrant

disregard for the bottom line. This misallocation of capital and human resources caused by the lack of corporate

governance had resulted in the widespread value destruction by Asian companies, which in turn had led to a lower

value for the overall economy and weakened the banking sector. Underlying all of these weaknesses were pervasive

moral hazards -- "heads I win, tails someone else loses" philosophy. Banks, investors, and business firms assumed

that governments and international organizations would bail them out in the event of financial catastrophe. Such a

moral hazard had created incentives for risky behavior on the part of developing countries and international

investors.

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the American corporate crises9 , etc.

In Nigeria, the scary complaints of lapses in the senior management team of corporations, e.g.,

Cadbury, and the apathy of boards of directors to ensure adequate review of system of

corporate governance in compliance with the laws and regulations guiding their different

industries, coupled with inadequate systems to review and approve material changes in

accounting principles have continued to put corporate governance in the front burner12.

Research has shown that in the Nigerian context, board members (executive or non-executive)

are handpicked, not independent and are not necessarily bound (legally or by default) to

place higher value on shareholders interest nor protect the business interest , let alone the

interest of stakeholders13. Preponderance of opinion indicates that in Nigeria, too much power

is concentrated on the Chief Executive Officer (CEO), and CEOs, more often than not, are also

the Chairmen of the Boards of Directors. This lack of checks and balances compromises the

ability to make independent decisions on behalf of the shareholders. There is also lack of law

enforcement capacity to implement the corporate governance codes of conduct in Nigeria,

lack of thorough selection, evaluation and replacement of CEOs. Pathetic also is the fact that

retired or replaced CEOs are graduated to membership of the board which creates not only

lots of conflict and tensions with the new CEOs, but also, presents an opportunity for

continuous connivance or conspiracy to perpetuate corporate mischief.

According to Mallin10, the practical lesson to be learnt from the collapse of one of the major

players in corporate governance, i.e., when the agent is not acting in the best interest of the

9. U.S. firms, e.g., Enron and WorldCom, enjoyed boom for a long time and their operations approached maturity and

profits were diminishing. From this point onwards — accounting scandals generated, when the firms inflated real

profits and even exaggerated projections for the profits only to attract both local and global investors and to support

stock prices. But when the reality surfaced, big giants lost credibility and some of them filed bankruptcies.

Subsequently, American stock markets were hit hard. In the wake of this, both local and global investors pulled out

capital from the U.S. assets and invested somewhere else in search of higher returns at low risks.

10. H. A. Quadri, (2010), Conceptual Framework for Corporate Governance in Nigeria – Challenges and Panaceas.

11. Oyejide T. A. and Soyibo A. (2001), Corporate Governance in Nigeria, Development Policy Centre, Ibadan

12. Mallin C. A. (2010), Corporate Governance, 3rd

Edition, New York, Oxford University Press

13. Terms of reference of Asset Management Corporation of Nigeria Act, 2010

14. F. Ajogwu op.cit

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principal by taking inappropriate risks, because the board is not providing the oversight to

minimize agency problems or colluding with the agents to take inappropriate risks, the result is

huge agency cost, incidence of which causes economic bleeding to the organization. Across the

world, the ongoing global financial crisis has compelled governments to pay the huge agency

cost with the bail-out payments which further plunged the global economy into more deficit,

as witnessed in the Nigerian Banking industry and the attendant establishment of AMCON15.

4.0 FUNDAMENTAL PRINCIPLES OF CORPORATE GOVERNANCE

Despite the propagation of several theories of Corporate Governance, aggregate of opinion

recognizes fundamental elements of good corporate governance. These ingredients include:

(A). EQUAL RIGHTS AND TREATMENT OF SHAREHOLDERS.

An attribute of good corporate governance is the recognition of equal rights and privileges to

all shareholders irrespective of class and provision of adequate framework to ensure the

protection of the rights16. This implies that companies should not have classes of shares with

disparate or weighted voting rights. To foster the protection of the rights of shareholders,

effective system of information dissemination and accessibility should be set in place to

encourage participation of shareholders in general meetings where most business operations

and financial management policies are discussed and poll conducted in deserving cases.

(B). THE ROLE AND RESPONSIBILITIES OF THE BOARD OF DIRECTORS

Corporate governance is a board priority as directors are increasingly required to demonstrate

and report to those with an interest in the company about the procedures, systems and

controls they have put in place to achieve results, improve accountability and prevent

malpractice or fraud. A fundamental principle in common law is that the directors‟ duties are

owed to the company as a whole and not to individual members11. This implies that the duties

of the directors are to be discharged in the interest of stakeholders in the company as the

interest of the company cannot be divorced from the interest of the stakeholders18. The all-

15. Percival Vs. Wright (1902) 2 Ch 421; Perskin Vs. Anderson (2001) 1 BCLC 372

16. Brady Vs. Brady (1988) BCLC 20 @ 40; Gower, (2003), Principles of Modern Company Law, (7th

Edition)

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inclusive duties of the directors are also owed to the employees, creditors and shareholders of

the company.

Thus, the Board of Directors should be composed in a manner that will reflect core

competence, skill and understanding of various business strategies or policies with the requisite

expertise to review and challenge management performance. The Board should have sufficient

spread and size with an appreciable level of commitment to fulfill its duties and

responsibilities. The Board should respond promptly to communications from shareholders

and often times seek shareholder views on important governance, management and

performance matters. The Board should also take actions recommended in shareholder

proposals that receive a majority of votes cast for and against. If shareholders‟ approval is

required for the action, the Board should submit the proposal to a binding vote at the next

shareholder meeting.

The Board should neither be too small to maintain the needed expertise and independence,

nor too large to be efficiently functional12. In the absence of compelling or unusual

circumstances, a board should have no fewer than 5 and not more than 15 members.

Shareholders should be allowed to vote on any major change in board size.

There should also be guidelines on share qualification of persons who are to serve on the

board and limits should be set as to how many companies a single individual can serve on

their board as a director or chief executive officer (CEO) 20

. Directors should receive training

from independent sources on their fiduciary responsibilities and liabilities as there is an

obligation on the board to remain independently familiar with company operations without

the necessity of relying on information provided by the CEO. There should be a regular forum

for the board and management to discuss board issues and management policies.

The board should be composed as to have both independent and non-executive directors. The

importance of a board with majority independent members is that it translates into more

power in the board to implement board decisions, even where such go against the wishes of

17. F. Ajogwu, Op cit

18. Sections 275, 276 & 277 of CAMA

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the management or majority shareholders. This does not only create a desirable board culture

but also imposes a responsibility on the board to be diligent in making decisions. Moreover,

an independent board majority is a key structure to assure shareholders that their investment

will be protected as the company is run competently in the best interest of the shareholders. It

also reduces the risk of conflict of interest as well as diminishes agency costs.

(C) INDEPENDENCE OF THE AUDITOR/AUDIT COMMITTEE

This element of good corporate governance is to ensure that auditors are limited to

performing services required by statute or regulation, company‟s management and the audit

committee of the board of directors should evolve an audit independence policy and

compliance should be monitored by the board of directors. Audit committee of the board

should be composed of independent directors. Furthermore, in engaging external auditor‟s

services, the audit committee or the full board, not the company, should be designated as the

auditor‟s client. This is to avoid the management of the company from compromising the

auditor or engaging the auditor in the performance of non-audit services.

(D) INTEGRITY AND ETHICAL BEHAVIOUR

Ethical and responsible decision making process is pivotal in not only public relations, but it is

also a necessary recipe in risk management and avoidable agency problems. Organizations

should develop a code of conduct for their directors and executives that promotes ethical and

responsible decision making. This code of conduct should be regularly reviewed to meet

changing circumstances and strictly enforced to ensure compliance. It is important to

understand that reliance by a company on the integrity and ethics of individuals without any

framework to ensure same is bound to disappoint. Because of this, many organizations

establish Compliance and Ethics programs to minimize the risk that a firm steps outside of

ethical and legal boundaries.

(E) DISCLOSURE AND TRANSPARENCY

Organizations should clarify and make publicly known the roles and responsibilities of board

and management to provide shareholders with a level of accountability. They should as well

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implement procedures to independently verify and safeguard the integrity of the company‟s

financial reporting. Disclosure of material matters concerning the organization should be

timely and balanced to ensure that all investors have access to clear, factual information.

5.0 CORPORATE GOVERNANCE IN NIGERIA

As stated earlier, the history of corporate governance in the world is of a recent origin. Prior

to 1996 when the first lecture on corporate governance was delivered at Harvard, there was

no code of corporate governance principle. The recent collapse of the stock market and

uncovering of flagrant abuse of loans and other facilities in the banking sector and the high

incidence of corruption in the Nigerian economy generally are enough to pose the question

indeed of whether there is a code of corporate governance in this country. The massive fraud

and cooking of the books in companies, a notable example of which is Cadbury, not to

mention insider dealings and compromised boards in many companies as well as spineless

shareholders‟ associations, audit committees and rubber stamp Annual General Meetings

suggest the collapse of corporate governance in Nigeria.

Investors in Nigeria have lost several billions of dollars through the collusion of accountants

and external auditors with companies‟ management and directors to falsify and deliberately

overstate companies‟ accounts. As a consequence of unethical practices by accountants and

auditors, which have resulted in the distress or occasioned the closure of companies, some

indigenous Nigerian Managing Directors of multinational corporations such as Lever Brothers

Nigeria Plc, Cadbury Nigeria Plc, Bank PHB Plc, Oceanic Bank Plc, Intercontinental Bank Plc,

etc, have been sacked and replaced with new Managing Directors. Some companies placed

under receivership have also lost billions of dollars due to professional misconduct by their

receivers. Contrary to the claim of „protecting the public interest,‟ accountants and auditors

may be partly responsible for cases of distress and closure of companies and banking

institutions in Nigeria

The advent of democratic dispensation in 1999 increased the need for policies that will attract

new and sustainable foreign investments. This heralded several reforms including an

established commission to review the existence, adequacy and relevance of corporate

governance in Nigeria in the light of the international best practices in response to the New

International Economic Order (NIEO).

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Thus, the Securities and Exchange Commission (SEC) set up a Committee on Corporate

Governance which mid-wifed the first Nigerian Code of Corporate Governance Practice in

2003. The Code adopted with little modifications a unitary board structure reminiscent of the

practice in United Kingdom and United States of America with emphasis on identified triple

constraints, namely, the role of board of directors and management, shareholders‟ rights and

privileges, and the audit committe13. The Code is however voluntary and is designed to

entrench good business practices and standards for boards and directors, CEOs, auditors, etc of

listed companies, including the banks. The 2003 code was expected to enhance corporate

discipline, transparency, fairness and accountability. The goal of the code was to be achieved

through the culture of checks and balances where each of the stakeholders is equipped to

check all principal actors in the management of the company by ensuring that due process is

followed. In 2006, Central Bank of Nigeria issued a Code of Corporate Governance for Banks

in Nigeria post-consolidation, which makes compliance thereto compulsory. The key highlights

of the SEC and CBN Codes include:

(a) Separating the Roles of the CEO and the board chairman;

(b) Prescription of non-executive and executive directors on the board;

(c) Improving the quality and performance of board membership;

(d) Introducing merit as criteria to hold top management positions;

(e) Introducing transparency, due process and disclosure requirements;

(f) Transparency on financial and non-financial reporting;

(g) Protection of shareholder rights and privileges; and

(h) Defining the composition, role and duties of the audit committee, etc.

The effectiveness of the Code of Corporate Governance Practice, 2003 and Code of

Corporate Governance for Banks in Nigeria Post-consolidation, 2006 leaves much to be

desired. The intendment of the codes to establish high standards of corporate governance is

ideally based on voluntary compliance with the dictates in an environment of transparency

and openness. The recommendations in the codes are merely directed at establishing best

19. Oyebode, A. (2009), The Imperative of Corporate Management in Nigeria, Nigerian Village Square

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practice and encouraging pressure from shareholders to hasten its widespread adoption, while

allowing some flexibility and initiative in implementation.

The recent insider trading, massive and prevalent frauds in the banks and other organizations,

mandatory retirement of CEOs of banks, due to corrupt practices and inefficient boards are

signposts of the failure of the existing corporate governance structure which the codes have

not been able to eliminate or at least minimize. The codes have also failed to enforce or

indeed encourage compliance with the Companies and Allied Matters Act enacted to regulate

and balance the relationship among the board, shareholders and the management, including

other stakeholders.

Regrettably also, the absence of enforcement capacity of the codes has fueled the existing

insensitivity of the regulatory institutions whose responsibility it is to ensure compliance to the

code. The Securities and Exchange Commission (SEC), Central Bank of Nigeria (CBN),

Corporate Affairs Commission (CAC) and the Nigerian Deposit Insurance Corporation (NDIC)

as regulatory authorities are not empowered under the codes to enforce compliance to the

principles. Particularly unattractive is the fact that these institutions are composed of staff with

self-interested executives who easily and readily collaborate with companies‟ senior executives

to compromise shareholders interests.

In utter disregard of the code, Board members are still being picked from the pool of high-

profiled retired senior military officers and civil servants without expertise in basic finance and

business operations. Expertise and core competence have been so relegated to the extent that

the board is often constituted for the sole purpose of perpetuating corrupt practices

particularly fixing unreasonable remunerations of senior executives which compromise

corporate governance etiquette and decorum14. An instance is the Union Bank Plc staff protest

against the management of the bank in February, 2011.

In Nigeria, institutional investors are discouraged and not included in governance, and it is not

uncommon to bribe some shareholders to rally support for the board and management at

annual general meetings (AGM), while oftentimes, the meetings are convened at remote

20. H. A. Quadri, Op. Cit

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locations in an attempt to keep away most shareholders who possess requisite expertise in

financial management and business operations.

Worse still, members of the audit committees do not generally possess the requisite skill to

perform their statutory functions. Thus, the critical role of the audit committees and the

shareholders as a check on the management has all but evaporated as a result of the penchant

for filthy lucre by all concerned.

6.0 CHALLENGES AND FAILURE OF CORPORATE GOVERNANCE IN NIGERIA

The challenges and failure of corporate governance in Nigeria can be attributed to the

pervading culture of corruption and lack of institutional capacity to implement the codes of

corporate governance. The common thread that marks monumental corporate failures in

Nigeria includes their poor management, fraud and insider abuse by management and board

members, poor asset and liability management, poor regulation and supervision, etc. Policy

and procedures required to ensure efficient internal controls are disregarded with impunity as

non compliance thereto does not invite any pain of sanction.

Pathetic also is the lack of managerial training and capacity development among Nigerian

business executives to manage business risks which has resulted in avoidable huge agency costs.

The incidence of agency costs have always been passed to the shareholders whose investments

are tasked as the board of directors neglect to deploy their oversight powers of monitoring

agency problems.

Also identified as one of the causes of failure of corporate governance in Nigeria is the absence

of an effective yardstick to evaluate board and management performance. The board of

directors‟ sub-committees are often independent with the attendant effect of compromising

the audit and remuneration committees. The auditors/the audit committee of the board have

provided the conduit for the perpetuation of fraudulent practices and corrupt enrichment for

company executives in return for kick-backs and retention of the audit engagement by “big

clients”15.

21. A. Sanda, et al, Op cit.

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The way and manner corporate governance has been trifled with in Nigeria with one or two

private codes formulated at the instance of a few players and bereft of enforcement

mechanism smacks of mere declaration of intent to apply principles of corporate governance.

of Corporate Governance for Banks in Nigeria Post-consolidation, 2006 issued by the Central

Bank of Nigeria; Code of Corporate Governance for Licensed Pensions Operators, 2008 issued

by the Pension Commission; and Code of Corporate Governance for Insurance Industry in

Nigeria, 2009 issued by the National Insurance Commission.

Recently, the Securities and Exchange Commission rolled out New Code of Corporate

Governance for Public Companies, 2011 which came into force on the 1st day of April, 2011.

The new code sets out the structure, composition, responsibilities and remuneration of the

Board; requirements on insider trading, protection of shareholders right, resolutions, risk

management, audit committee, accountability, reporting formats, communication policy, code

of ethics, statement of business practices, etc. The new Code has not made a radical departure

from the previous codes on compliance.

Few illustrations will suffice. Section 1.3 (a) provides that

“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 behavior. The Code should be seen as a

dynamic document defining minimum standards of corporate governance expected

particularly of public companies with listed securities”

Similarly, Section 1.3 (b) provides thus;

“The responsibility for ensuring compliance with or observance of the principles and

provisions of this Code is primarily with the Board of Directors. However, shareholders,

especially institutional shareholders, are expected to familiarize themselves with the letter and

spirit of the Code and encourage or whenever necessary, demand compliance by their

companies”

In the same vein, Section 1.3 (g) provides as follows; “Where there is a conflict between this

Code and the provisions of any other Code in relation to a company covered by the two

Codes, the Code that makes a stricter provision shall apply”

It is instructive to note that what Nigeria lacks is not the paucity of laws or regulations to

ensure good corporate governance in our corporations. The Companies and Allied Matters

Act, Cap C.20 Laws of the Federation of Nigeria, 2004 and other associated laws have

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adequate provisions to ensure transparent corporate regime. CAMA provides that

shareholders and other stakeholders should exercise control and direct the affairs of a

company. To strengthen the powers of the shareholders, CAMA stipulates certain judicial

remedies for breach of directors‟ duties, namely:

(a) Action in the name and on behalf of the company if the board of directors refuse or

neglect to do so;16

(b) Action in damages and compensation;25

(c) Action in restitution to recover secret profit;26

(d) Relief on grounds that the affairs of the company are being conducted in an illegal or

oppressive manner;17

(e) Winding up proceedings on just and equitable grounds;28

(f) Application to CAC to investigate the company‟s affairs;29

(g) Restoration of the company‟s property.30

In practice, most of the powers highlighted above have not been effectively activated and

utilized by the shareholders as a result of a combination of many factors. These factors include

costs of attending meetings, ignorance of the powers available to them, lack of financial

muscle to seek redress in court, lack of understanding of reports presented at these meetings

and lack of willingness on majority of the shareholders to press the board of directors on

issues, etc.

22. S. 63(5) of CAMA, Ladejobi Vs. Odutola Holdings Ltd (2002) 3 NWLR (Pt. 753) 121; S. 303 of CAMA

23. Georgewill Vs. Ekinne (1998) 8 NWLR (Pt. 562) 454

24. S. 280 (2) (a) of CAMA

25. 310 – 313 of CAMA

26. S. 408 of CAMA, Misfeasance proceedings may be taken under section 507 of CAMA during winding up against

directors who have misapplied company funds or are in breach of duty to the company.

27. Ss. 314 and 315 of CAMA

28. S. 284 of CAMA prohibits substantial property transactions involving directors or persons connected to him while

section 286 regards such transactions entered by the director as voidable at the instance of the company.

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The snag about corporate failures in Nigeria is the almost total absence of effective framework

to enforce compliance. This is more so as the Codes have entrusted the responsibility of

ensuring compliance in the hands of the very organ where most corporate shenanigans are

committed, the Board of Directors. It shuns the stomach that the Code, in absolving the

Commission of every responsibility, has placed onerous duty on the shareholders to demand

compliance with the provisions without setting out the modalities of such demand and

windows of remedy where the demand is flagrantly ignored, as it is the usual practice in

Nigeria. There is no doubt that in Nigeria, the weakest and most neglected organ in a

company is the body of shareholders. The powers provided for this organ in the CAMA have

not been effectively utilized as a result of the inherent bottlenecks in those provisions18. One

had expected that the new Code of Corporate Governance for Public Companies, 2011 would

make adequate provisions to cure the mischief occasioned by the conspicuous lacuna in CAMA

on frameworks for enforcement of compliance and also advance the remedy.

Pathetic indeed is the fact that the 2011 Code has not comprehensively and exhaustively

provided for effective legal framework for corporate governance. It is rather made to give

pride of place to other relevant or incidental frameworks with superior contents for corporate

governance.

If our understanding of a code is anything to go by, a code is a type of legislation that

purports to exhaustively cover a complete system of laws or a particular area of law as it

existed at the time the code was enacted, by a process of codification.

Nonetheless, there are mandatory corporate governance provisions for listed companies,

especially banks which are contained in Companies and Allied Matters Act (CAMA), Banks and

Other Financial Institutions Act (BOFIA) Cap B3 2004, Investment and Securities Act Cap I24

2004, Securities and Exchange Commission Act (and its accompanying Rules and Regulation).

It should be emphasized however, that the failure of corporate governance is, by no means, a

peculiarly Nigerian phenomenon. The failure of Northern Rock, HBOS, Freddie Mac, Fanny

Mae, Lehman Brothers, Bear Stearns, AIG Investment Bank, Washington Mutual and

Wachovia and the Central Bank of Iceland confirms that the need for effective corporate

governance is world-wide. That some of the biggest corporate entities – General Motors,

29. Ss. 301 – 313 of CAMA

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Chrysler and Ford – also recently manifested symptoms of poor corporate governance,

warranting infusion of enormous funds from the US Treasury and loss of managerial

autonomy of their boards is an important teaching moment for all those who had believed

that bad corporate governance was a Third World disease19.

7.0 CORPORATE GOVERNANCE AND INVESTOR CONFIDENCE

Many investors use their savings, including pension funds, to purchase shares in a company. In

Nigeria, for example, there are over twenty million shareholders who own shares in public

and private companies33

. This figure does not include persons or organizations that own other

stakes in public or private companies.

They are set to lose a lot in case of financial mismanagement of the company. Therefore, the

quality of corporate governance is a key issue to them. The greatest asset of any market is its

investors who provide the savings needed for productive investment. It is investors, whether

retail or institutional who provide the savings which are needed for productive investment.

Therefore, if the investors lose confidence in the conglomerates, the ability of the capital

market to mobilize and channel long-term funds which are vital for economic development,

will be marred34

.

The immediate consequence of the loss of faith and confidence of the public has been the

current lukewarm attitude of many Nigerians in the stock market. The vast depreciation in the

value of stock has veered the investing public away from the capital market to real estate,

foreign currencies (forex), gold and more familiar territory like buying and selling of goods.

The lull in the stock market has cast a pall on the entire national economy with companies

putting on hold plans for IPOs and devising all manner of survival strategies. For example,

shrinking profits has meant imminent lay-offs or cut in emoluments of staff lucky to have

escaped being thrown into the labour market.

30. A. Sanda, et al, Op cit

31. F. Ajogwu Op cit

32. Ms Arumah Oteh

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Although protecting investors is not an easy task, enacting laws to enforce high standards of

disclosure, transparency and corporate governance will minimize investor risk. While

corporate laws and regulations may not completely insulate investors against corporate fraud,

it sends a message to investors that steps have been taken to protect innocent investors from

unscrupulous financial conduct. Good Corporate Governance aids Investors in the following

ways;

1) Good corporate governance aids institutional investors get good financial returns.

2) It helps society by taking in social and environmental concerns into consideration.

3) The economy profits from the steady cash flow that sound corporate governance generates.

The ideal corporate governance is based on sound economic and ethical principles. Here are

some ways to boost the investor confidence through corporate governance:

1) Investor strategies should be responsible and sustainable.

2) Where there is a board of trustees that is responsible for investment, then the trustees

should be screened to see if they could offer clean corporate management.

Corporate governance is not only vital to the private sector in the economy of any nation.

Applying corporate governance practices to government-owned companies will further

enhance their credibility; it will also help governments with privatization efforts and

accelerating economic reforms. All these are attainable in an environment where code of

corporate governance is properly implemented and monitored.

Admittedly, the need of the hour is a change in the approach to corporate governance and

financial architecture. But it must be emphasized that corporate laws cannot legislate 'integrity'

or 'corporate conscience'. We also need competent, knowledgeable people, acting honestly

and being prepared to speak out and challenge the corporate rot when occasion demands.

8.0 REGULATORY FRAMEWORK IN CORPORATE GOVERNANCE

Effective corporate governance thrives in an economy with robust regulatory regime.

Regulatory governance is also required for interplay of strong market variables. This is because

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a weak market mechanism coupled with frail regulatory governance could potentially delimit

corporate governance effectiveness through worsening information asymmetry environment

as well as degenerating investor confidence, which will eventually create negative behavioural

effect on share prices of underlying firms.

Many countries have recognized that the abuse of corporate power cannot be adequately

constrained by leaving it to the company‟s members to ensure that the controllers comply and

to take action in the courts if they do not. In countries with weak judicial systems, a regulatory

approach to enforcement of corporate governance principles by an independent and strong

securities commission can be more effective than judicial enforcement. The Nigerian SEC is

vested with power to regulate through its registration requirements and also to discipline listed

companies through its power of suspension and revocation of such registration. The penalty

usually meted out to listed companies found liable by the Administrative Proceedings

Committee (APC) and Investment and Securities Tribunal (IST), all set up by SEC under its

powers in Investment and Securities Act, are inadequate to deter companies from risking non-

compliance with the relevant laws on corporate governance.

The CAC is empowered to appoint investigators to investigate the affairs of the company if an

application supported by satisfactory particulars is made by the company or members holding

not less than one-quarter of the shares issued. Furthermore, the Commission may appoint

investigators to investigate the affairs of the company if a court by an order declares that the

affairs of the company ought to be so investigated.

Similarly, the Central Bank of Nigeria (CBN) is statutorily empowered under the relevant

provisions of the Banks and Other Financial Institutions Act (BOFIA) and the Central Bank of

Nigeria Act 2007 to ensure high standards of conduct and management in the banking system.

Sections 33 - 35 of BOFIA, concerned with a distressed bank, contain provisions for removal

of bank directors and other officers. A failing bank under section 33(1) of BOFIA is a bank

which has informed the CBN of its likely inability to comply with its obligations under the

BOFIA, an insolvent bank or a bank the CBN has determined to be in a grave situation after

carrying out a special examination under section 32. Section 35(2) (c) and (d) provide that the

CBN Governor may remove directors, managers and officers irrespective of anything to the

contrary in any written law or in a bank's memorandum and articles of association. The CBN

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Governor may also appoint any person as a director or adviser of a failing bank. The

reasonable interpretation of section 35, therefore, is that the CBN's power to remove a bank

director, whether or not the CEO, is conditional on the bank's status as a failing bank.

Despite the impressive powers given the regulatory authorities in Nigeria, the essence which is

to ensure good corporate practice is far from being realized. The powers are seldom used and

where they are deployed, the result is often inefficient as the process of activating the powers

does not guarantee secrecy and element of surprise which are necessary to make the powers

potent. The procedure in Nigeria is designed to commence from members of the company,

directors or the company itself which in effect would pre-empt the board of the affected

company to take casual remedial action or as in most cases destroy or fabricate evidence.

In UK, following the amendment of her Company Act20

, the Secretary of State is now

empowered to direct any company to produce to an officer of his any books and documents

prior to the formal appointment of inspectors which appointment will be made if the facts

elicited show that a full investigation is needed. This enables an officer authorized by the

Secretary of State to arrive without warning at the company‟s office or wherever else the

document is believed to be held and demand for the document.36

The UK position is a remarkable improvement on the provisions of CAMA and other sister

laws which require an application to the regulatory institution before a committee of

inspectors or special examination committee is appointed to investigate the affairs of the

affected company. An amendment in our laws is therefore imperative.

Recently, the CBN issued a guideline to banks limiting the tenure of bank Chief Executive

Officers (CEOs) to 10 years. The constitutionality or otherwise of the guideline will be

examined in another essay. Suffice it to state that, section 2(d) of the CBN Act provides that

one of the principal objects of the CBN is the promotion of a sound financial system in

Nigeria. Significantly also, section 33(1) (b) of the CBN Act confirms that the CBN has the

33. Gower & Davies, Principles of Modern Company Law 7

th Edition, (2003), London, Sweet & Maxwell, page 468; S.

447(2)-(3) of the UK Company Act 1967, as amended by the 1989 Act.

34. Failure to comply is an offence punishable by a fine and criminal sanctions are imposed on any officer of the

company who is privy to falsification or destruction of a document relating to the company’s affairs or who

furnishes false information; Gower & Davies, ibid, page 469.

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power to “issue guidelines to any person and any institution under its supervision” Read with

section 2(d), the implication is that the CBN can issue guidelines to any such person and

institution while acting in furtherance of the statutory object of promoting a sound financial

system in Nigeria. What is more! Tenure limit arguably comes within this purview.

Some informed scholars have argued that because banks are private enterprises, there is the

need to encourage free enterprise and entrepreneurial spirit instead of interfering in their

affairs. We submit, with respect, that insisting that banks are private institutions and their

affairs are private is a weak argument. The recent local and global financial crisis, at least, has

clearly demonstrated that this argument is spurious and preposterous. It is akin to saying that

banking profits are for operators of banks while its losses are community or state-owned. It is

evident from the interventions of governments and state agencies including the bailouts of

banks and provision of stimulus packages for the economy that banks are not exclusively

private institutions. This is also the inference from the fallouts of local and global banking

corporate governance failures and other scandals.

9.0 CONCLUSION AND RECOMMENDATIONS

Synoptic analysis of the foregoing reveals that Nigerian companies will be more efficient,

effective, responsive and accountable with the observance of good corporate governance

values. This is the panacea to ensuring that the corporations contribute to the welfare of the

society by creating sustainable wealth, investor confidence, employment, probity and

transparency. Hence, strict compliance with the Codes of corporate governance in Nigeria is

imperative. It is therefore recommended that the policy framework in Nigeria should reflect

the following paradigms:

(A) COMPLIANCE AND ENFORCEMENT

Since corporate governance provides rules for board directors and safeguards for stakeholders,

it is essential that the regulators monitor compliance through an independent authority. It is

necessary to have an integrated approach to any corporate governance reforms. This is against

the backdrop of the fact that laws themselves are insufficient without a will and culture at

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senior government and business levels to have them work. Statements of aspirations and good

intent are insufficient without strong and robust legal, regulatory and enforcement structures.

Regulatory agencies in Nigeria need to evolve clear-cut corporate governance rules and

regulations that should be made mandatory for listed joint stock companies. Furthermore,

compliance with these rules of corporate governance and their proper implementation need

to be strictly enforced. What is needed is Nigeria is a legal framework, monitored and

enforced by fully empowered regulatory agencies and not duplication of spineless codes.

An integral part of an effective corporate governance regime includes provisions for civil or

criminal prosecution of individuals or organizations who conduct unethical or illegal acts in

the name of the enterprise and who constitute abattoirs to flagrant abuse of requirements of

the code of corporate governance. Breach of the provisions of the Code should be made a

strict liability offence with severe penalty.

The regulatory authorities should be mandated to apply the sanction on defaulting companies

at any relevant time such as during filing of returns. The Policy makers should also evolve a

framework that will enable the corporate veil to be lifted more easily where an agent of a

company can be proceeded against in the event of aiding and abetting non-compliance with

extant codes of corporate governance in Nigeria.

(B) BOARD OF DIRECTORS AND ITS COMPOSITION

The responsibilities of the board include balancing the interests of the stakeholders, ensuring

that the company performs to high business and ethical standards and providing sound advice

to management. By appointing the directors, the shareholders confer power in the board to

carry out these functions, subject to existing laws and regulations, the memorandum and

articles of association of the companies and the shareholders in general meeting.

Thus, every company should be headed by a board that can lead the business and hold the

managers accountable. Shareholders should be responsible for electing board members and it

is in their interest to ensure that the board of their companies is properly constituted with the

right spread of executive, non-executive and independent directors. The proportion and

caliber of non-executive and independent members of the board is important in maintaining

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standards of corporate governance. Non-executive and independent directors have the

potential to bring an independent judgment to bear on issues.

There should be a formal selection process that will reinforce the independence of the non-

executive directors and for this purpose, a nomination committee should be used. This

independence should be reflected in the various board committees. Also desirable is that the

Board should be composed in a manner that will reflect core competence and expertise in

business operations and financial management. Moreover, directors should undertake some

form of internal or external training, at the time of appointment to the board and later on a

regular basis. This is particularly important for directors with no previous board experience.

The Companies and Allied Matters Act should be amended to reflect the global trend of best

practices as it affects director‟s service contract which should not exceed three years without

shareholders‟ approval. Since the new Code lacks capacity of enforcement, it is recommended

that terms and conditions of service contracts of directors be provided for and well defined in

our positive laws.

(C) AUDIT COMMITTEE OF THE BOARD OF DIRECTORS

Audit Committees of all listed companies should be composed of independent directors

because of the critical role it plays in ensuring the integrity of the financial management. There

should be a minimum of three members of the audit committee. Membership should be

drawn from the pool of non-executive directors of the company and a majority of the non-

executives serving on the committee should be independent. This rekindles the enthusiasm of

stakeholders that the value of their investments will be protected.

The audit committee should have explicit authority to investigate any matters within its terms

of reference, the resources which it needs to do so, and the full access to information. The

committee should also be able to obtain external professional advice and to invite outsiders

with relevant experience to attend if necessary.

(D) ROLE OF THE REGULATORY AUTHORITIES

The global financial crisis of 2008 was an indictment on regulators the world over and laid

bare the immense consequences of “loose” regulation. All systems of internal control in listed

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companies are subject to limitations and weakness. Irrespective of how good the planning of

the system, no matter how strict and consistent its application, it may not give perfect

protection and safety due largely to human factors e.g. proneness to errors, deceit, collusion

between members of staff, etc.

In a world class market, the regulator‟s involvement transcends the creation of rules and

regulations to enforcement of compliance thereto. The regulatory institutions in Nigeria

should be at the forefront of driving the process of entrenching the requisite corporate

governance framework to elicit the desired market outcome. Effective regulation with respect

to corporate organizations is hinged on 4 pillars:

- Clarity of rules

- Strengthened Self Regulating Organizations (SROs)

- Strong enforcement regimes

- Capacity building

No framework of corporate governance in Nigeria can achieve a strong market or command

investor confidence and public trust if the enforcement machineries are weak. Our greatest

strength is in our ability to take enforcement actions without fear or favour and without

regard for whose ox is gored. The Securities and Exchange Commission (SEC), Central Bank of

Nigeria (CBN), Corporate Affairs Commission (CAC) and the Nigerian Deposit Insurance

Corporation (NDIC), should therefore have zero tolerance for corporate and market

infractions and indeed any act which could undermine the integrity of the corporate

governance.

There is also a duty on the regulatory organs to properly scrutinize the financial statements of

companies. Recent Report on the Observance of Standards and Codes, Nigeria Accounting

and Auditing, (ROSC A&A) reveals, amongst other things, that “there is multiplicity of laws

and bodies for the regulation of accounting, financial reporting, and auditing requirements of

companies. However, accounting and auditing practices in Nigeria suffer from institutional

weakness in regulation, compliance, and enforcement of standards and rules”21 There is

35. Report on Observance of Standards and Codes, Nigeria Accounting and Auditing (ROSC A&A) of June, 2004. The

ROSC Accounting and Auditing (ROSC A&A) review is a joint initiative of the World Bank and the IMF to assess

the degree to which an economy observes internationally recognized standards and codes. An overview of the

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therefore the need to improve the statutory framework of accounting and auditing to protect

the public interest which of necessity would require amending the Nigeria Accounting

Standards Boards Act, 2003.

It is necessary also to ensure the regulatory institutions are not composed of self-serving

executives of corporations or their cronies. Those to be entrusted with the responsibility of

ensuring compliance should declare their interests in any quoted company to ensure a

dispassionate enforcement of the provisions of the Code.

It is also recommended that these regulatory authorities should overhaul their complaint

management systems for better efficiency and alignment with international best practice.

ROSC A&A program and a detailed presentation of the methodology are available at

www.worldbank.org/ifa/roscaa