Corporate Governance

Principles and Practice

Kabir Tahir Hamid, B.Sc., M.Sc., PhD., MBA, CPA, ATM,
FCIFC, FCDRPN
Department of Accounting
Bayero University, Kano-Nigeria
GSM: 08028376563, 08168743809
Email: khtahir2004@yahoo.com

Being a Paper Presented at a Workshop for Staff of the Federal

Mortgage Bank of Nigeria at Green Desert Palm Hotels Limited
Kano, on Monday 11th November 2013
1
Outline of the Presentation
 Introduction
 Meaning and Origin of CG
 CG in Other Entities, CG Parties, Mechanism
and Model
 Benefits, Effects/Consequences and Pillars of
CG
 Elements and Triggers of CG
 Legal Framework of CG in Nigeria
 Challenges of CG in Nigeria
 Conclusion 2
Introduction
• Contemporary CG started in 1992
with the Cadbury report in the UK.
• Cadbury was the result of several
high profile company collapses.
• is concerned primarily with
protecting weak and widely
dispersed shareholders against
self-interested Directors and
managers.
3
Introduction… Cont’d
 CG has become topical globally in the light of huge
corporate mismanagement in Europe and America.
 This has led to the collapse of several companies, including:
- Barings Bank (1997)
- Worldcom (2002)
- Peregrine Systems Limited (2002)
- Adelphia Communication Company Limited (2002)
- Tyco International Limited (2002)
- Enron (2001)
- Lehman Brothers (2008)
- Northern Rock (2008)
- 50 commercial banks in Nigeria between 1994 to 2006

4
Introduction… Cont’d
The Cadbury (Report) Code (1992) which was developed by Sir
Adrian Cadbury Committee at the instigation of the London Stock
Exchange was the first attempt to formalize CG best practice in a
written document, which was aimed at raising the standard of
financial reporting and auditing. This was followed by the
Greenbury Report (1995), developed by Sir Richard Greenbury
Committee which aimed at check-mating directors’ remuneration
policy and the Hampel Report (1998). The three distinct reports
were combined together into combined code of 1998. Other reports
were the Turnbull Report (1999), which specifically address the
issue of internal control, the Higgs Report (2003), aimed at
developing guidelines for making NED’s more effective, and the
Smith Report (2003), which was concerned with the relationship
between the external auditors and the companies they audit. In
2003 the Combined Code was revised to incorporate all the
previous reports developed after 1998 into it. 5
Introduction… Cont’d
In recognition of the need for effective CG, OECD
came up with principles of CG 1999 and have
since become an international bench mark in CG
worldwide, thus serving as the basis for the CG
component of the World Bank/IMF reports on
observance and codes. Many countries have
similar CG documents. Sarbanes- Oxley Act 2002
was developed in the US and Kings Report in
South Africa. Similarly, Nigeria has developed the
SEC, CBN, PENCOM and NDIC Code of Best
Practices.
6
MEANING AND ORIGIN OF CORPORATE GOVERNANCE
CG is a new phenomenon in many jurisdictions
and thus is defined variously by experts. The
various definitions include;
- The word governance was derived from a Latin
word “gubernare” which means to steer or to
govern (Cadbury, 2002).
- A structure through which objectives are set (in
the interest of the company and its
shareholders), determination is made as to how
to attain the objectives and performance
monitored (Basel, 1998).
- A framework for rules, relationships, systems
and processes by which fiduciary authority is
exercised (Wikipedia, 2004).
7
CG Definition (contd.)
• The instrument used to guaranty that
processes, process designs and strategy
perform well, and to ensure alignment
among all the three (Jeston & Nelis, 2008).
• The structure, metrics, roles and
responsibilities necessary to measure and
improve performance and to manage an
organization’s processes, and regard it as
optimal, workable process improvement in
the organization (Spanyi & Dwyer, 2008)
8
CG Definition (contd.)
- A vehicle for building partnership with key
players in managing divergent aspects of risk-
prone sectors of an entity (Greuning and
Bratanovic, 2003).
- A process and structure employed to direct and
manage a business, enhance shareholders value
and ensure financial stability (Roberts, 2003).
- The act of entrenching accountability, credibility,
transparency, integrity and trust in an organization
(Roberts, 2003).
- A system by which companies are directed and
controlled in order to align economic and social
goals with those of the individuals and the
community (Cadbury, 1999).
9
CG Definition (contd.)
 The OECD Code of CG was the first
comprehensive code of CG issued for
companies (2000).
 In that code the board and executive
management are central to effective
implementation of any code of governance.
 For any governance standard to thrive, there
must be cordial relationship among
stakeholders.
 The relationship of the board with shareholders
should be one of candour, the one with
employees should be characterized by fairness
while that with the community/government
should symbolize good citizenship and
compliance, respectively.

10
CG in Other Entities
• CG applies to all types of
organizations not just companies
in the private sector but also in the
not for profit and public sectors.
• Examples are NGOs, schools,
hospitals, pension funds, state-
owned enterprises.

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Corporate Governance Parties
• Shareholders – those that own the
company
• Directors – Guardians of the
Company’s assets for the Shareholders
• Managers- those who use the
Company’s assets
• Other Stakeholders- Suppliers,
Competitors, Government, Public,
Pressure Groups
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 CG Mechanisms
1. Exogenous (External) CG Mechanisms:
This deals with control and monitoring by
regulators CBN, NDIC, SEC etc through
Laws and Codes.
2. Endogenous (Internal) CG Mechanisms:
This is about mechanisms for the
accountability, monitoring, and control of a
firm’s management with respect to the use
of resources and risk taking. Internal CG
starts with the board of directors. 13
Corporate Governance Model

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 Benefits of Corporate Governance
ON THE
ON THE SOCIETY ON THE ECONOMY
CORPORATION

•Increasing firm • More open, •Revitalizing

value transparent society market economy
•Lowering cost •Corruption •Sustainable
of capital prevention economic growth
•Enhancing •Rule of law : fair & •Positive
capital efficiency orderly development on
•Protection of •Promoting ethical capital market,
shareholders’ wealth creation more globally
rights competitive
•Increasing
competitiveness
through fair
competition
15
 Benefits of CG… Cont’d
More institutional Risks minimized
investors are More equity
over long term
attracted to invest participation
in Public Limited
from Govt.
Liability
Companies agencies
Attract more individual investors for long-term
investments
Higher sustainable market capitalization

More activities in equity market

Capital market reacts positively, and

become more dynamic

More economic activity = EVERYONE

benefits 16
 LOSS OF
REVENGE

JEALOUSY GREED

CORRUPTION BIAS
EFFECTS OF BAD
CORPORATE
DISHONESTY DISCRIMINATION
GOVERNANCE

INCOMPETENCE SELF INTEREST

HYPOCRISY
17
Difficulty Loss of Supplier of
of getting Goods / Services Share price will
Lenders dropped

Other
stakeholders
Unable to
Will suffer repay debts
CONSEQUENCES
OF BAD CG

Shareholders
Employees
financial
pensions
may be Lost
investment
will reduce
Employees will loose
their jobs
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Four Pillars of Corporate Governance
This can be put into a single
‘mantra’ called TRAF
• Transparency
• Responsibility
• Accountability
• Fairness

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Transparency
This requires the management and board to be
completely open and frank for stakeholders to easily
see and recognize the manner in which the affairs of
their companies are being managed. The management
should ensure timely, accurate disclosure on all
material matters, including the financial situation,
performance, ownership and CG.
The corporation’s board is responsible to a wide
spectrum of stakeholders and should objectively
disclose information to enable assessment of its
stewardship, as well as, permit informed judgements
and decisions by the various stakeholders.
20
Responsibility
This requires that the board be responsible for
all its actions and inactions. Individuals
within an organization are required to
subscribe to ethical conducts while carrying
out their assigned responsibilities.
The Management is expected to take all
measures considered necessary to protect and
promote the interest of shareholders, as well
as, other stakeholders.

21
Accountability
Accountability refers to the obligation of the
of the management and the BOD to provide
information about their decisions and actions
and to justify them to the public and those
institutions of accountability tasked with
providing oversight.
Accountability ensures that management is
accountable to the Board; and in turn, the
Board is accountable to shareholders.

22
Fairness
The quality of being fair and just or
impartial must be imbibed by the
management and BOD. Fairness
require that shareholders rights be
protected; shareholders, including
minorities be treated equitably;
and BOD provide effective redress
for all CG violations.
23
Elements of Corporate Governance
• Good Board practices

• Control Environment

• Transparent disclosure

• Well-defined shareholder rights

• Board commitment
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Good Board Practices
• Clearly defined roles and authorities
• Duties and responsibilities of Directors
understood
• Board is well structured
• Appropriate composition and mix of skills
• Appropriate Board procedures
• Director Remuneration in line with best
practice
• Board self-evaluation and training conducted
25
Control Environment
• Internal control procedures
• Risk management framework present
• Disaster recovery systems in place
• Media management techniques in use
• Business continuity procedures in place
• Independent external auditor conducts audits
• Independent audit committee established
• Internal Audit Function
• Management Information systems established
• Compliance Function established
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Transparent Disclosure
• Financial Information disclosed
• Non-Financial Information disclosed
• Financials prepared according to
International Financial Reporting
Standards (IFRS)
• Companies Registry filings up to date
• High-Quality annual report published
• Web-based disclosure
27
Well-Defined Shareholder Rights
• Minority shareholder rights
formalized
• Well-organised shareholder
meetings conducted
• Policy on related party transactions
• Policy on extraordinary transactions
• Clearly defined and explicit dividend
policy
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Board Commitment
• The Board discusses CG issues and has created a CG
committee
• The company has a CG champion
• A CG improvement plan has been created
• Appropriate resources are committed to CG initiatives
• Policies and procedures have been formalized and
distributed to relevant staff
• A CG code has been developed
• A code of ethics has been developed
• The company is recognized as a CG leader

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Triggers of CG
CG systems have evolved over centuries, often in
response to corporate failures or systematic crises. The
first well- document failure of governance was the South
Sea Bubble in the 1700’s which revolutionized business
laws and practices in England. Similarly, much of the
securities law in the US was put in place following the
stock market crash in the 1920’s.
Each crisis or major corporate failure often as a result of
incompetence, fraud and abuse- was met by new elements
of an improved system of CG. Through the process of
continuous change, countries established a mosaic of
laws, regulations and institutions to balance the
promotion of enterprise with greater accountability.
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Triggers of CG… Cont’d
Similarly, Atedo Peterside Committee
contends that globalization is another
trigger for CG. Thus, Companies
perceived to be adopting international
best CG practice are more likely to
attract international investors than those
whose practices are perceived to be
below international standards.
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Legal Framework for CG in Nigeria

1. The Companies and Allied Matters

Act CAP C20 LFN 2004. This
forms the primary legislation on
corporations in Nigeria and it
contains provisions relating to
disclosure and transparency,
accountability, shareholder rights
and distribution of corporate
responsibilities and powers.
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Legal Framework for CG in Nigeria… Cont’d
2. CG Codes
(i) The CBN Code of CG (2006) post consolidation
(ii) The SEC Code of CG 2003, 208 and 2011,
(iii)The PENCOM Code of CG for Licensed Pension
Administrators 2008,
(iv) The NDIC and NCC (Nigerian Communication
Commission) codes of CG.
Presently, the Financial Reporting Council of Nigeria
(FRCN) is working towards developing National
Code of CG (NCCG) which will become effective
January 1, 2014.

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Legal Framework for CG in Nigeria… Cont’d

Codes of CG are a set of best practices’

recommendations regarding boards issued to
address deficiencies in a country’s governance
systems by recommending a set of norms aimed at
improving transparency and accountability among
top managers and directors. The codes of good
governance were issued mainly by the stock market
or by Managers’ Associations. Thus, Directors’ and
Investors’ Associations and the government do not
normally play a key role in developing national
governance practices.

34
Legal Framework for CG in Nigeria… Cont’d
3. Banks and Other Financial Institutions Act (BOFIA) CAP B3
LFN 2004
4. Investment and Securities Act (ISA) of 2007
5. Investment Trustees Act, 2004
6. Code of Conduct for Shareholder Associations in Nigeria
2007
7. NDIC Act of 2006
8. CBN Act of 2007
9. Prudential guidelines issued by the CBN
10. Listing requirements of the NSE
11. SEC Rules
12. Compliance with SASs, IAS and IFRS in financial reporting

35
Challenges of CG in Nigeria
1.Shareholders’ Neglect of their Right: CAC has the
powers to investigate the affairs of a company upon
application by a member. Regrettably, this right has
been very much overlooked or neglected by the
members.
2. Weak civil and judicial systems: Nigerian courts
remain slow and expensive and not effective in
resolving commercial disputes. As the courts remain
slow, inefficient and expensive, shareholders are
hesitant to use the courts and as a result the directors
continue to rule with impurity.
36
 Challenges… Cont’d
3. Weak structure of ownership and control: In Nigeria,
there is a preponderance of closely- held family owned
and managed businesses. A lot of companies (close to
80%) or businesses are outside the scope of the stock
exchange regulations and as such not covered by SEC
Code of CG.
4. Limited human resource capabilities: There is a
problem associated with the shortage of skills and lack of
familiarity with board functions and fiduciary
responsibilities. Many corporate board members in
private companies have limited understanding of their
roles, and are usually open to manipulation by
management, chairmen or principal shareholders. Some
are out right incompetent. 37
 Challenges… Cont’d
5. Lack of Independence for NEDs and Less
Shareholders Activism: Some nonexecutive directors
simply act as rubber stamps for decisions taken. Also the
importance of institutional investors has not been
effectively put to use or felt in the country. In the whole,
institutional shareholders have been less proactive in
enhancing, enforcing CG issues in companies they
invest.
6. Ineffective Approach to Redressing CG violations:
CG violations were mostly dealt with through the
imposition of fines on the erring companies instead of
dealing with the individuals involved, therefore making
the measure ineffective to deter future re-occurrence.
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Conclusion

In the Nigerian banking industry, established CG

models and structure are in place. Also, national
law, rules, guidelines and conventions are well
established to ensure that the banking business is
done in the best of interests of all stakeholders.
These measures are not fool proof however, if
individuals do not abide by personal ethical codes
and conducts. Therefore it becomes imperative that
morality or ethical behavior begin at home, the
individual. According to Bertrand Russell “Without
civic morality communities perish; without personal
morality their survival has no value.”
39
Conclusion…Cont’d
The problems caused by corporate
failures and their attendant
consequences have demonstrated in no
mistakable terms that even strong
companies lacking transparent control,
responsible boards and shareholders
rights can collapse quite quickly as
investors confidence collapse.

40
 Conclusion…Cont’d
Good CG helps to prevent corporate
scandals, fraud and potential civil and
criminal liability of the organization. It
is good for business. A good CG
culture enhances the reputation of the
organization and makes it more
attractive to customers, investors,
suppliers and other stakeholders.

41
 Conclusion…Cont’d
Good CG helps to prevent corporate
scandals, fraud and potential civil and
criminal liability of the organization. It
is good for business. A good CG
culture enhances the reputation of the
organization and makes it more
attractive to customers, investors,
suppliers and other stakeholders.

42
Recommendations
1. There is need to institutionalize the practice of good behavior
in enhancing CG and corporate entities must move beyond
rhetoric by imbibing corporate values that are demonstrated
daily through transparent business management practices.
2. A CG rating structure should be established to monitor,
measure, evaluate and publish compliance of corporate
entities to CG ideals and codes in place.
3. The CBN, NDIC, PENCOM, NCC, SEC and FRCN should
pool resources and create a CG institute purposely for the
advancement of CG.
4. Institutional investors should form an association with the
objective of strengthening CG practice within their
association and demanding greater CG practices in their
investee companies.

43
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Thank you for listening.

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