Corporate Governance in Nigeria: Challenges and the Way Forward

Introduction

There is a general belief that poor corporate governance has been the vulnerable point of numerous companies in both developing and developed countries. This is especially the case with Nigeria, which, despite being vastly blessed with resources such as oil and a large labor force, continues to be adversely affected by corruption. Good governance is a significant step in facilitating market confidence and boosting stable, long-term global investment flows into the nation. Given that business companies are increasingly significant drivers of wealth creation and development — not just in the local economy but also internationally — it is essential for Nigerian companies to function within benchmarks that keep them focused on their objectives and make them accountable to stakeholders for the actions and decisions they make.

Definition of Corporate Governance and Its Role

The critical necessity for corporate governance stems from the separation of ownership and management in the modern corporation. The interests of individuals with effective control over a corporation can differ from the interests of the stakeholders who externally finance the firm. This gives rise to the principal-agent problem, which manifests when management undertakes activities that may be harmful to the corporation's stakeholders (Oman, 2001; Okeahalam and Akinboade, 2003).

The agency problem can only be mitigated through the safeguards that result from good corporate governance. To date, there is no universally accepted definition of corporate governance. In a broad sense, corporate governance refers to the public and private institutions — including laws, regulations, and accepted business practices — that, within an economy, govern the relationship between firm managers and those who invest resources in corporations (Oman, 2001; Okeahalam and Akinboade, 2003). As a concept, corporate governance is understood simply as being concerned with the structures within which a business entity obtains its direction and oversight (Ejuvbekpokpo and Esuike, 2013).

Corporate governance is known as an arrangement of laws and sound practices by which companies are directed and controlled, focusing on internal and external corporate structures with the aim of monitoring the activities of management and executives and thereby mitigating agency risks arising from the misconduct of corporate officers. Conflicts of interest between controlling shareholders and minority shareholders may arise because controlling shareholders, like controlling managers, can divert some of the corporation's resources for their own personal benefit to the detriment of non-controlling shareholders (Islam, 2010).

With regard to the corporation's managers, these personal benefits may take the form of excessive and unwarranted perquisites — such as corporate jets and extravagant headquarters — as well as the postponement of essential restructuring decisions to avoid conflict with employees, labor unions, politicians, and the media (Islam, 2010).

Corporate governance is the manner in which firms are directed and in which those responsible for the direction of the corporation are held accountable to its stakeholders. It is linked to the formation of long-term relationships with both external and internal stakeholders. It is a system used to facilitate the direction and control of a corporation, encompassing relationships between and accountability of the corporation's stakeholders, as well as the regulations, courses of action, procedures, practices, criteria, and principles that may influence the direction and control of the organization (Conyon, 1997).

Effective corporate governance reduces the control given to management by shareholders and creditors, thereby increasing the likelihood that managers invest in positive net present value activities and projects (Morck et al., 1988). Effective corporate governance practices are essential to achieving and maintaining public trust and confidence in corporations, and are also pivotal to corporate performance. Good governance should facilitate successful, effective, and profitable management that delivers stakeholder value over the long term.

Mudashiru et al. (2014) point out that a large board of directors, board skill, management skill, extensively serving Chief Executive Officers (CEOs), audit committee size, audit committee independence, annual general meetings (AGMs), and dividend policy all have a positive correlation with organizational performance.

Based on these findings, it is recommended that corporations adopt good corporate governance practices in order to enhance their performance and safeguard the interests of their various stakeholders. More importantly, regulatory authorities must ensure compliance with good governance and guarantee the application of appropriate sanctions for non-compliance, in order to facilitate the growth and development of the different industries within a nation (Mudashiru et al., 2014).

Corporate governance can be examined through the lens of stakeholder theory, which recognizes that several parties are vested in the welfare of the firm and that these parties frequently have competing interests. On one hand, shareholders may favor high-yield but risky projects; on the other hand, this may not be welcomed by creditors, particularly when the firm is approaching insolvency (Deegan, 2015).

It is essential for firms to undertake stakeholder management in order to survive and achieve long-term success, because every stakeholder group supplies the organization with important resources or makes some form of contribution (Deegan, 2015). In return, every group expects its interests to be satisfied through appropriate incentives. For instance, investors provide the organization with financial capital and expect the organization to maximize risk-adjusted returns on their investment. Similarly, creditors provide finance and expect their loans to be repaid in a timely manner (Fama and Jensen, 1983).

Employees and management provide the organization with their time, skills, and human capital, and in return expect equitable compensation and adequate working conditions. Consumers supply the organization with revenues and expect value for money. Suppliers provide inputs and seek fair prices and reliable buyers in return (Fama and Jensen, 1983).

Local communities provide the organization with sites, local infrastructure, and possibly favorable tax treatment, expecting in return to interact with corporate citizens who improve or at least do not harm their quality of life. Given that the ultimate goal of corporate decisions is to achieve market success, effective stakeholder-firm relationship management is essential to guarantee revenues, profits, and ultimately returns to investors (Fama and Jensen, 1983).

Merits and Demerits of Corporate Governance

Corporate governance is of great significance. When conducting business operations, violations of rules and regulations can occur easily. Establishing and implementing corporate governance policies and procedures helps ensure compliance with these laws, allowing the firm to focus on its success. Corporate governance provides a set of rules and regulations that can be followed to achieve better management of the company while avoiding ethical violations (Fernando, 2010).

Corporate governance involves introducing policies that require the company to take specific steps to remain compliant with local, state, and federal rules, regulations, and laws. It also boosts positive reputation. With a strong reputation, it becomes easier to attract investors and develop strong relationships with other stakeholders. It facilitates compliance with the law, thereby reducing violations and the likelihood of costly fines or litigation (Fernando, 2010).

Despite its several advantages, corporate governance also has drawbacks. Companies are obligated to comply with both state and federal legislation. While the primary incentive for incorporating is to protect shareholders from the firm's liabilities — a corporation limits a shareholder's liability to the amount of funds or assets invested — there are associated burdens (Fernando, 2010).

Corporations are typically created to sell shares and generate capital. The downside, however, is that a listed firm wishing to sell stock and protect its owners from liability must adhere to a variety of requirements. For example, the board of directors and corporate officers are obligated to act in the best financial interests of the corporation (Fernando, 2010). Failure to fulfill this fiduciary duty may result in personal liability, which is why many corporations offer liability coverage to their top executives. While this typically does not cover fraud, it can protect the corporation from the consequences of poor financial decisions.

An additional drawback of corporate governance is the high cost of compliance. Due to the obligation to comply with corporate governance rules and regulations, the administrative expenses of corporations are usually substantially greater than those of other entities. Limited liability companies, for instance, are not obligated to adhere to such requirements, meaning their administrative outlays are significantly lower (Rossouw, 2005).

Global and Regional Corporate Governance Practices

In the United States, investors of various corporate institutions have played a key role in promoting good corporate governance. The American approach to corporate governance aims to reduce conflicts of interest between owners and management, primarily by offering managers profit-oriented incentives such as shares and stock options. However, linking managerial performance to the stock market has raised concerns about short-termism in corporate behavior (Mohamad and Mohamad Sori, 2011).

A longer-term concern in America relates to the information asymmetry between management and owners, as well as worries about whether directors are awarding themselves irrational increases in remuneration and privileges while corporate restructuring and downsizing affect employees and communities. Corporate governance in the United States has historically relied on disclosure rather than procedures and structures (Mohamad and Mohamad Sori, 2011).

The required level of disclosure of compensation, benefits, and incentives for the top five named executives is broadly comprehensive. Compensation committees composed entirely of independent directors have only recently become the norm. Despite contemporary New York Stock Exchange and NASDAQ rules enhancing board independence, it remains common practice in America for the roles of chairman and chief executive officer to be combined. This concentration of power in a single individual — in contrast to the European model, where the CEO manages operations and the chairman oversees the board — is considered a critical weakness of the U.S. corporate governance model (Mohamad and Mohamad Sori, 2011).

The full framework of corporate governance in many jurisdictions includes statutory requirements mandating that all listed corporations publish an annual directors' remuneration report alongside their yearly accounts. This report must include a statement of the corporation's remuneration policy and individual disclosure of payments, bonuses, share and stock plans, benefits, and other long-term incentives (Mohamad and Mohamad Sori, 2011).

Stock exchange regulations also require that all listed corporations establish remuneration committees composed of independent directors and separate the roles of the CEO and chairman. Guidelines for institutional investors — whose members hold approximately 30 percent of equity shares listed on the London Stock Exchange — address issues such as bonuses, share incentives, performance conditions, remuneration policy, benchmarking, service contracts, and terminations (Mohamad and Mohamad Sori, 2011).

Conclusion

Governance in any nation requires transparency so that individuals can effectively determine whether their interests are being served. More importantly, good corporate governance must operate transparently so that corporate owners and investors can make informed decisions about their investments. In Nigeria's case, for good corporate governance to have a meaningful effect, the necessary political will and institutional framework — as well as a resolute legal system to enforce compliance — must be firmly established.

Some of the challenges obstructing good corporate governance in Nigeria originate from the nation's culture of entrenched corruption and political patronage, which manifests in exceedingly weak regulatory frameworks and the refusal of government agencies to enforce and monitor compliance. These challenges are compounded by widespread poverty and high unemployment, which discourage a culture of whistle-blowing when unethical and illegal activities are discovered. However, this does not mean all hope is lost. To move forward, governance professionals must fully separate business from political interests. The judiciary also needs to be restructured and strengthened.

With regard to corporate governance, it is recommended that special corporate affairs tribunals and panels be established within the Nigerian judiciary to try those who violate rules and regulations. Governance officials and professionals should also promote a whistle-blowing culture, advance business ethics through moral education, and encourage resource-based development through fiscal federalism. For example, to develop professionals who are principled and ethical, an institute of corporate governance could be established to train professionals and promote good corporate governance across the country.

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