20 Jun Good Corporate Governance as a Stimulant
Posted at 12:25h in Thought Leadership
As Nigeria engages in economic reforms that would translate it from a third world country into one of first or second status reckoning, various public sector led initiatives have been embarked on, each with varying degrees of success. These are all commendable.
However at a micro-level, good corporate governance must be embraced as a stimulant for economic development. A corporate governance structure that adequately protects public and private shareholder value necessarily engenders investor confidence, thus making it easier to “sell” a business to both local and international stakeholders. Effective corporate governance – not the mere fulfillment of legal requirements – is therefore essentially a good business strategy.
What is Corporate Governance?
Corporate Governance can be defined as a system by which companies are directed and managed. It influences how the objectives of the company are set and achieved; how risk is monitored and assessed, and how performance is optimized.
Good corporate governance structures encourage companies to create value (through entrepreneurship, innovation, development and exploration) and provides for accountability and control systemscommensurate with the risk involved.
The dawning awareness of its huge importance in Nigeria is clearly reinforced by the release in October 2003 of a Code of Corporate Governance in Nigeria by the Securities and Exchange Commission (SEC), and the Corporate Affairs Commission (CAC).
The key here is the attainment of institutional integrity and transparency. It is thus a veritable strategy for attaining a competitive advantage
Some Universal Pillars of Sound Corporate Governance
Deriving from local and international best practices, this article outlines below nine (9) fundamental principles for achieving good corporate governance.
1. Proper Definition of the Roles of the Board and Management
The management and the board should complement one another. The latter is largely responsible for providing the overall strategic direction of the enterprise and in so doing should provide a charter as to what the respective roles and responsibilities of the management and board will be. For instance who is responsible for promotions? A known case in which a board suddenly took up this responsibility was known to draw a lot of ire and create confusion in the system.
2. The Board Structure must Ensure Balance
A Board must have the competence and collective will power to make a positive difference. Key in this regard is an effective selection of Independent (non-executive) Directors. Independent directors must be truly independent of management and free of any existing or past business or other relationship that could be reasonably perceived to materially interfere with the exercise of their unfettered and independent judgment.
It is in fact advised that not only should the Independent directors on the board be more on the balance, but also that the Chairman of the Board be an Independent Director. It is currently advised not to have the positions of Chairman and Chief Executive Officer in one person.
3. The Board Structure must add value
In addition to ensuring objectivity through “Independence”, a board should strive to have a mix of particular skills, experience and expertise that will best complement board effectiveness.
Directors should be assessed and appointed based on their experience and performance track. Also once appointed, plans and programmes aimed developing and enhancing director skills should be continuously implemented. All directors should be aware of the roles and responsibilities of the board, including the consequences and likely sanctions (sometimes criminal) of not faithfully complying with these.
4. Responsible Ethical Decision Making
Good corporate governance requires people of integrity. To ensure this, the company must clarify the standards of ethical behaviour required of company directors and key executives and encourage the observance of those standards and values – while on and off active involvement in the company’s duties. Although personal integrity cannot be regulated, it is a key ingredient towards promoting a culture of corporate integrity.
5. Integrity of Company Reporting
The company must put in place structures and processes that enable effective review and authorization of a factual and truthful presentation of the company’s financial position. This requires the establishment of a competent audit committee (led by an Independent Director), that works closely with both the internal and external directors of the business.
In reporting, it is important to ensure that all investors have equal and timely access to material information concerning the company including the financial situation, performance, ownership and governance.
6. Ensuring Effective Oversight and Risk Management
A Governance framework should establish policies and design systems that enable key players identify, assess, monitor and manage risk. This could be through the establishment of Authorization Processes, with limits for certain decisions. Such processes should nor be unnecessarily onerous but should take into cognizance the stage of development and size of the organisation.
The establishment of board committees greatly facilitates the ability to provide such oversight. Key committees are the Nomination; Reward and Audit Committees – which are, respectively, responsible for appointments; compensation design and financial process reviews.
7. Fair and Responsible Remuneration Systems
Companies need to adopt remuneration polices that attract and maintain talented and motivated directors and employees. This is to encourage persons to truly contribute to the enhanced performance of the company – instead of merely paying lip service to it. It is important that there be a clear relationship between performance and remuneration – both at the executive and board levels. For example, a director who spends his time and resources engaged at the more demanding committee levels should be adequately compensated for this
8. Recognising the Rights of Shareholders
A good Governance Structure recognizes its accountability to its shareholders and thus empowers them by effective and regular communication; providing ready access to balanced and understandable corporate information; and finally making it easy for them to participate in general meetings
9. Catering to the Legitimate interests of all key stakeholders
A company must be conscious of its legal and other obligations to non-shareholders and stakeholders such as employees, clients/ customers, regulators and the community as a whole. In doing this it ensures that it effectively manages its natural, human, social and other forms of capital – all towards enhancing the standing of its enterprise
There is no doubt that the face of corporate Nigeria is likely to be transformed over the next few years in view of anticipated mergers and acquisitions; the commercialization and privatization of government enterprises; and the encouraged growth of SMEs through the injection of capital. However, an important factor in achieving a vibrant and dynamic private sector, as anticipated by these reforms, will be the practice of good Corporate Governance. This therefore must also receive adequate and extensive mention.
The nine (9) principles articulated above are not necessarily exhaustive of the entirety of good corporate governance, but they are a solid beginning.