CORPORATE GOVERNANCE EXPLAINED (UPDATED)

SMEs are essential to economic growth all over the world as they are a major source of employment and contribute towards the gross domestic product. Statistics however show that 50% of SME’s fail within the first five years of existence and one of the main reasons for this abysmal statistic is the lack of proper business structure also known as Corporate Governance.

Corporate or company governance is a term that has been trending recently and it is now proven that it is a key ingredient in the formula for achieving sustainable growth, yet many entrepreneurs do not know what the term actually means, and its effect on their business.

Corporate governance  is the system of rules, practices and processes by which a company is run and this week we consider the provisions of the Nigerian Code of Corporate Governance 2018, the effect of adopting corporate governance ethos in a company and steps necessary to implement corporate governance.effects and steps necessary to implement corporate governance.

The Nigerian Corporate Governance Code 2018

Following the controversy that met the issuance of the Corporate Governance Code of 2016,  the Financial Reporting Council of Nigeria (FRC) issued fresh National Codes of Corporate Governance for the private sector and public sector which took effect from January 2019.

The Code is aimed at enhancing management credibility, preserving long-term investments, improving access to new capital and lowering cost of capital amongst other things. 

Key Highlights of the 2018 Code.

1. The Code adopts the “Apply and Explain” Model as against the more aggressive “Comply or Else” Model enshrined in the 2016 Code
2. The Code recommends a balanced, diverse and independent Board of Directors who can objectively discharge its functions. The Board retains the power to make its decisions regarding membership and composition.
3. The Code recommends that the remuneration for Non-Executive Directors be fixed by the Board and approved by shareholders in a general meeting.
4. The Code mandates that companies set up an internal audit function to be headed by a member of senior management
5. The Code provides for the development and integration of a Whistle-blowing policy.
6. The Code allows the appointment of External Auditors but limits the retainership to a period of 10 years and they may not be reengaged until after a cool off period of 7 years.
7. The Code requires that meetings of the Board be held at least once every quarter.
8. The Code recommends a cool off period of at least 3 years before a Managing Director/Non-Executive Director/Chief Executive Officer of a Company can be appointed as Chairman of that Company.
9. The Code provides that the Risk Management Committee shall meet at least twice every financial year
10. The Code recommends an Evaluation of the Board by an external consultant at least once in three years. Where the performance of a director is considered unsatisfactory, the Board is to provide appropriate training to address the identified gaps.

Effects of Corporate Governance

The adoption of basic practices such as keeping proper financial accounts, establishment of a formal board of directors and the disclosure of remuneration and company information can produce some or all of the following benefits:

Shareholder/Investor Confidence-

Effective corporate governance can have a positive effect on shareholder/investor confidence by reassuring them that the company is making smart business decisions and is well organized internally  which would possibly encourage them to invest larger amounts of money in the company.

Regulatory Compliance-

Corporate governance includes instituting policies that require the company to take specific steps to stay compliant with local, state and federal regulations thus limiting the occurrence of penalties, fines and lawsuits.

Positive Public Perception-

Corporate governance strategies can have an impact on the public perception of a Company. A company with strong corporate governance strategies relating to responsible spending, treatment of workers and environmental concerns can generate a large amount of good will among the people.

Decreased Conflicts and Fraud-

Corporate governance limits the potential for bad behavior of employees by instituting rules to reduce potential fraud and conflict of interest. For example, the company might draft a conflict of interest statement that top executives must sign, requiring them to disclose and avoid potential conflicts, such as awarding contracts to family members or contracts in which an executive has an ownership interest.

Steps to Implement Corporate Governance

1. Create simple internal policies such as a code of conduct that clearly sets-out duty of care, skill and diligence.
2. Separate roles and responsibilities of the shareholder, director and manager to limit liability and ensure effective division of labour and function.
3. Create set of policies and procedures the business follows in carrying out its daily activities.
4. Do your bit for your local environment and community.
5. Demonstrate effective leadership characterized by ethical values of responsibility, accountability, fairness and transparency.

CONCLUSION

In a nutshell, every Company desirous of sustainable growth should have a Corporate Governance Manual that defines the rights, roles and responsibilities of different groups within an organization. This system and framework is particularly important in other to minimize and manage the conflicting interests between insiders and external stakeholders.

The content of this document is solely for information purposes only and should not in any way be construed as a legal opinion.  If you require specific legal advice on any of the matters covered in this article please contact a professional.