Company Law and Corporate Governance: Squaring the Virtuous Circle

By ‘Femi D. Ojumu

Defying an all-embracing definition, corporate governance is the internal regulatory regime of a business entity, corporation, public or private institution. It seeks to address questions regarding how an entity is run by its board of directors, the effectiveness thereof, the completeness and correctness of its financial stewardship; the modus operandi of its internal and external accountability to shareholders, investors, and regulators and, as necessary, law enforcement agencies.

It also aims to address the extent to which the entity’s strategic priorities have been, or are likely to be, achieved; strategic, operational and reputational risk management strategies and mitigation approaches.

Essentially, it is the mechanism by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies/organisations. And the shareholders’ (the owners of the company) role in governance is to appoint the directors and the auditors whilst satisfying themselves that a relevant governance structure exists.

Because every business, public or private, aims to either make a profit, account to shareholders, stakeholders and, depending on the context, taxpayers, corporate governance philosophy reinforces 10 fundamental interconnected canons: 1) Organisational strategy; 2) Accountability; 3.) Transparency; 4.) Fairness; 5.) Responsibility; 6.) Independent Assurance; 7.) Security; 8.) Stakeholder Engagement; 9.) Leadership; and 10. Adaptability.

Irrespective of its size and whether or not it is a public, private or not-for-profit organisation, every corporate organisation should have a clearly articulated corporate strategy. What is its raison d’etre? How will it achieve it? What are its critical success factors? Performance management performance methodologies?

Every organisation is accountable to its key stakeholders. Public sector organisations are accountable to taxpayers and regulators. Private sector entities are accountable to their Boards of directors, investors and regulators. Accountability enhances investor and stakeholder confidence and implies proactively embedding effective risk management methodologies, proper internal control systems, robust business continuity, segregation of financial responsibilities and reporting processes.

Likewise, transparency reinforces stakeholders’ confidence not least as it pertains to organisational leadership, competitive advantage, competitive threats, performance gaps, and, importantly, enables informed decision making. Fairness implies a commitment to equity, justice and the rule of law in an organisation’s modus operandi. That way, all its decisions can be objectively justified before stakeholders and, in extremis, before an external tribunal.

Responsibility in this context implies owning simple decisions and tough decisions taken by an organisation, exemplified by its corporate leadership. It is for these reasons that a Permanent Secretary/Chief Executive will appear before a Parliamentary Select Committee to account for budgetary allocations to his/her department to factually justify the capital and current expenditure funded by taxpayers. A similar logic governs public limited companies. The CEO exercising the Board’s mandate will have to justify strategic and operational decisions, and financial expenditures to shareholders. Effective corporate performance, positive results owning decisions, robust governance, risk management and regulatory compliance, and corporate responsibility heightens stakeholder confidence.

The American management guru, Peter Drucker (1909-2005), opined that “you can’t manage what you can’t measure.” That notion applies in corporate governance as it does in quantitative and qualitative evaluative methodologies. In other words, the performance of a corporate entity has to be evaluated to ensure alignment with its strategic goals, budgetary allocations in the case of public entities, and within the boundaries of delegations positively accorded to the Board by its shareholders. And this is where precisely independent/external assurance comes in. Here, the aphorism “physician heal thyself” has little or no application. External assurance, and audits, reinforce integrity and transparency in corporate governance.

Often ignored, but no less important, as a corporate governance canon, is corporate security. For instance, data security is vitally important not least because it often contains materially significant personal information, concerning customers, citizens, competitors and commercially sensitive secrets. The loss thereof can compromise personal safety, and strategic alliances and undermine investor confidence risking significant reputational damage. A chilling example was the 2017 Equifax data breach, which resulted in the hacking of the accounts of over 147 million people. This significant breach compromised peoples’ dates of birth, social security numbers, and credit card details causing extensive reputational damage to the company. The firm faced extensive Congressional inquiries and paid approximately $700 million in damages.

Advancing, stakeholders are those affected by the actions and decisions of a corporate entity. They include shareholders, the equity owners of businesses; regulators, law enforcement agencies, bondholders, pension funds and related financial institutions. They also include corporate social responsibility partners and beneficiaries. These stakeholders must be proactively engaged in the affairs of the business in part, driven by regulatory compliance obligations, contractual and legal necessity, business logic, and reputational competitive advantage. It reinforces corporate governance and its aforementioned interwoven canons.

Furthermore, effective leadership and adaptability reinforce sound corporate governance. The corporate leadership seeks to execute the mission, organisational priorities and directions of the Board and ought to be nimble enough to anticipate, properly and effectively, adapt to strategic challenges, outliers and force majeure situations like the 2020 COVID- 19 pandemic.

The majority of the organisations, which outlasted the pandemic and have remained buoyant today, are those, which had, successfully executed and sustained robust business continuity systems and highly effective corporate governance processes.

There are compelling arguments for robust corporate governance. For one, it is a legal requirement aimed at safeguarding investor confidence, taxpayers’ money and the integrity of the financial order. An example is the American, Sarbannes Oxley Act 2002. The Act was enacted in response to the financial scandals of the early 2000s involving public companies like Enron, Tyco International Plc. and World com; and established a tougher reporting regime for accountants, auditors and corporate managers. The Act further established tougher criminal sanctions for infractions of securities law.

The Nigerian Code of Governance 2018, an emanation of the Financial Reporting Council, seeks to embed the global practice in corporate governance in companies in the country. For example, section 2 thereof, recommends a nimble mix of executive directors, non-executive directors and independent non-executive directors reflecting an optimal balance of expertise and skillsets. Section 3 thereof, frames the basis for the segregation of duties between the Board chairman who provides strategic leadership and direction and executive directors who drive day-to-day operations. Similarly, it recommends more effective interoperability as between the chairman and non-executive directors. The logic is incontestable. Transparency!

Section 7 aims to accord practical meaning to the word “independent” as it pertains to the role of independent directors. What, after all, is the point of an independent director who is not independent? The rationale for a demonstrably independent director is one for who can act as a critical friend, highlight opportunities and robustly flag up critical risks and issues. Such a person is expected to be independent in character and judgment.

Section 120 of the Companies and Allied Matters Act 2020 (CAMA 2020) imposes reporting obligations on persons with substantial shareholdings in public companies. It provides at 120 (1), that “a person who is a substantial shareholder in a public company shall give notice in writing to the company stating his name, address and full particulars of the shares held by him or his nominee (naming the nominee) by virtue of which he is a substantial shareholder.”

Subsection (2) thereof defines a person as a substantial shareholder in a public company: “if he holds himself or by his nominee, shares in the company which entitle him to exercise at least 5% of the unrestricted voting rights at any general meeting of the company.”

A person required to give a notice under subsection (1), shall do so within 14 days after that person becomes aware that he is a substantial shareholder and failure to do so, pursuant to the provisions of 120 (6), shall attract a fine viz: “if any person or company fails to comply with the provisions of this section, the person or the company is liable to such fines as the Commission may prescribe by regulation for each day the default continues.”

Likewise, section 307 (1) CAMA 2020 prohibits a person from exercising the role of a director in more than five companies at any one time. This is a prudent risk management measure to enhance public confidence in corporate governance.

Other statutes aimed at transforming the Nigerian corporate governance landscape and reinforcing corporate governance include the; Anti-Money Laundering Act, Banks and Other Financial Institutions Act, Financial Reporting Council of Nigeria Act, Insurance Act and the Investment and Securities Act, to name a few.

That aside, there is an inescapable moral imperative on companies and corporate organisations to safeguard investors’ funds, and taxpayers’ money (in the case of public corporations), and enhance public confidence that institutions are well run and consistent with best practices in established progressive economies. And, is reasonable to affirm that the expectation that companies aiming to scale up will be impeded by weak corporate governance systems.

In a complex world of volatility, uncertainty, complexity and ambiguity (VUCA), partly evidenced by the aftershocks of the COVID- 19 globally, significant demographic shifts pursuant to the Russian/Ukrainian war; the disruptive, albeit innovative, impacts of technology and implications for knowledge-driven, as opposed to physical work, the conclusion is inescapable. Innovatively squaring the virtuous circle of corporate governance, along the aforementioned foundations, will afford corporations a formidable source of competitive advantage in the years ahead.

Ojumu is Principal Partner at Balliol Myers LP, a firm of legal practitioners in Lagos, Nigeria.

Source: DNLLegalandstyle