Corporations, accountability and corporate governance practice in Nigeria

It is impossible to underestimate the importance and value of a corporation’s contributions to the commercial, social, economic and environmental development of a nation like Nigeria. Through its laws and regulations, the government restricts corporate operations by granting it license to operate, and also limits the liability of its investors and employees. The chief corporate governance regulator in Nigeria – the Securities and Exchange Commission (the “SEC”) has several rules and regulations about how companies must operate, and the level of disclosure to the public and government. The Organization for Economic Co-operation and Development (“OECD”) defines corporate governance as “the procedures and processes according to which an organization is directed and controlled”.

The aim of this article is to present an in-depth definition of a corporation, how corporations should be held accountable for their commercial activities to ensure obedience of the law and also examine corporate governance practice in Nigeria and the necessary reforms that should be introduced.  The term “Corporation” isn’t commonly used under Nigerian Law, the equivalent common term under Nigerian Law is a “Company”.                 

What is a Corporation?

A Corporation is “a structure established by law to allow different parties to contribute capital, expertise and labour for the maximum benefit of all of them”. In the setting up of a corporation, the investors play a key role. The investors usually provide the financial assistance which will enable the corporation come into existence, commence and carry out its activities. The investors will then be able to participate in the profits derived without actually getting involved in the operations of the corporation. Likewise, the directors, officers and other employees of the corporation are not burdened with the responsibility of providing funds, but it should be noted that their collective efforts should be able to generate some of these funds.

One particular advantage of a corporation is that it has its own identity which is distinct from that of its promoter(s). They are recognized by the law as being separate entities and the promoter(s) have a limited liability in the event that the corporation suffers bankruptcy and winds up. The personal assets and/or possessions of the promoter(s) will not be listed as that of the corporation even if it has creditors who are yet to be paid.

Despite being recognized as a legal entity by the law that can sue or be sued, a corporation is expected to carry out its activities within the confines of the law in all its interactions with its directors, officers, shareholders, customers, creditors, government and community at large.

The American Law Institute says that the objective of a corporation is “the conducting of business activities with a view to enhancing corporate profits and shareholders’ gain”; however a corporation has the responsibility of ensuring that these objectives are carried out in a manner that will not contravene any laid down laws or regulations.

In addition, a corporation must also take into account ethical considerations that are reasonably regarded as appropriate to the responsible conduct of business and devote a reasonable amount of resources to public welfare, humanitarian, educational and philanthropic purposes.

Should Corporations Be Held Accountable? 

It has been established that corporations have a responsibility to their directors, employees and stakeholders, as well as the government and the community while carrying out their commercial operations. However, it is necessary that there must be a system of accountability. In theory, the government lays down guidelines in the form of regulations and statutes whereby corporations are held accountable, however in reality this has not been the case.

The Global Financial crisis which affected the banking sector in Nigeria between 2009 to 2010 is a glaring and disturbing example of what happens when corporations fail to be held accountable for their operations. This period witnessed a severe crisis in the banking industry which led to the takeover of some banks including Bank PHB, Intercontinental Bank and Oceanic Bank. The crisis and eventual takeover could be ascribed to the alarming level of impunity perpetrated by some of their top executives. Several unsecured loans were issued to different parties and multi-million naira contracts were issued to phantom companies devoid of the capabilities to carry out such contracts. These actions directly led to loss of employment, financial/stock market uncertainties and a weakened economy.

The case has not been different when one looks at the oil and gas industry. It will appear that a significant lack of corporate governance and accountability has existed throughout this industry for many years. This country’s reputation, on the international stage, has almost become synonymous with corruption issues. The N155 Billion oil scandal in 2012 springs to mind. Another example of corruption allegations in the Nigerian oil and gas industry could be gleaned from the 2014 report of the House of Representatives Ad hoc Committee on fuel subsidy.

There is need for corporations to adopt more efficient and effective corporate governance practices to ensure better accountability. This will serve as an instrument of checks and balances on their activities. The onus rests upon the Board of Directors of these corporations to ensure that their legitimacy and credibility are achieved and maintained. For this to be accomplished, corporate management needs to be effectively accountable to some competent and motivated representatives of the corporation, preferably the Corporate Governance Department, which will have the duties of advising on all corporate governance matters and ensuring that proper corporate governance practice is carried out at management level and in all decision making processes.

Corporate Governance in Nigeria

In recent years there have been various reports of corporate failures in Nigeria as a result of its weak corporate governance practice. The 2004 World Bank’s Report on the Observance of Standards and Codes (the “ROSC”) in the Nigerian accounting and auditing practice revealed enormous institutional weakness in regulation, compliance and enforcement. The 2004 ROSC resulted into 14 Country Action Plans. Charged with the task of improving corporate governance in Nigeria, the Securities and Exchange Commission, in September 2008, inaugurated a National Committee to review the 2003 Code of Corporate Governance for Public Companies in Nigeria to address its weakness and to improve the mechanism for its enforceability. This Committee was mandated to identify weakness in, and constraints to, good corporate governance, and to examine and recommend ways of effecting greater compliance and to advice on other issues that are relevant to promoting good corporate governance practices by public companies in Nigeria and for aligning it with international best practices.

Sometime in 2010, the Government requested the World Bank to conduct a second ROSC with the aim of identifying ways to strengthen the institutional framework underpinning accounting and audit practices and improve financial reporting in Nigeria. The ROSC exercise was conducted through a participatory process involving key stakeholders and led by the country authorities.

The 2011 ROSC found that there had been limited implementation of the 2004 Country Action Plan and limited improvement in financial reporting practices in Nigeria. It further stated that Nigerian authorities had successfully implemented only 6 of 14 action plans emanating from the 2004 ROSC thereby leaving significant areas which have been yet to be addressed.

A number of banks were able to exploit loopholes in Nigerian accounting and audit standards, weak capacity of the regulatory bodies and weak enforcement, and employed creative accounting to boost their balance sheets. These weaknesses in financial reporting, audit and accounting also contributed to Nigeria’s aforementioned banking sector crisis. Given the magnitude of the costs of the crisis (between N1.5 – N2 Trillion), the Government is now focused on improving the accounting and audit practice. Since 2009 the Central Bank of Nigeria, SEC and other bodies have taken considerable steps to improve financial reporting and disclosure standards.

The Financial Reporting Council (the “FRC”) was inaugurated with the responsibility of developing a National Code for Corporate Governance in Nigeria. There is a school of thought that argues that the introduction of FRC has only succeeded in increasing the number of corporate governance codes currently operating in Nigeria. Furthermore, this school suggests that this multiplicity could result in conflict amongst the various codes, thereby leading to the potential reduction in compliance to these codes by the very corporations they aim to regulate.

We believe that corporate governance in Nigeria is still in need of the emergence of more reforms to address the various issues that still exist. The practice of non-transparent disclosure of information and corrupt dealings between managers and directors in the Nigerian corporate environment require attention from the appropriate Government agencies. The stock market bubble, poor accounting practices and outright fraud are just some of the reasons why some corporations have had to be wound up. The common trend among such corporations is best described as lacking proper corporate governance. Proper corporate governance practice in Nigeria will certainly boost its economy as there will be more confidence to invest by both local and international investors. It will make corporations more accountable as actions carried out by its directors and stakeholders will be under more stringent scrutiny.

In the United Kingdom, one of the biggest impacts upon corporate governance practice has come from what was initially a private sector initiative and what continues to be essentially a self-regulatory approach – the Combined Code. In July 2003, the United Kingdom reformed the Combined Code. Having produced the appropriate results desired for the United Kingdom, the Combined Code and its philosophy of “comply or explain” has been increasingly emulated outside the UK (Canada and Sweden have adopted the Combined Code in their corporate governance practice).

It is pertinent to note that no system of governance can or should fully protect companies and investors from their own mistakes. Onus is usually placed firmly on the shoulders of the corporation to ensure that decisions taken in the boardroom are within the purview of the law. Good governance should facilitate efficient, effective and entrepreneurial management that can deliver shareholder value over the longer term.

Conclusion & Recommendation:

As corporations expand their operations and markets into virtually all parts of Nigeria, we must begin to develop a more consistent and coherent approach for corporate governance. Commendation should be given to the efforts by the Government to revise codes of conduct and best practice and also, to the systematic approach to enable the Government know what regulations shall be best.

The FRC has an immense role to play to enforce better corporate governance practice in Nigeria. The laid down laws should be process oriented, and not just substantive. Corporations should be encouraged to have primary and overriding goals with long term values. There should be a commitment to satisfaction of employees, suppliers, customers and the community in achieving these goals on the part of the corporation. Also proper criteria or standards should be provided by both the Government and corporation on how corporate performances are measured.

Furthermore, corporations should be made to contribute maximum value to the society through Corporate Social Responsibility activities. A corporation’s major aim and commitment should be to operate in a structured, transparent, accountable, economically, socially and environmentally sustainable manner whilst balancing the interests of its diverse stakeholders. This only enhances the obligations a corporation owes to all its stakeholders. According to Margaret M. Blair in Firm – Specific human Capital and Theories of the Firm, “arrangements for governing the relationships among employees, and between employees and the firm, can no longer be treated as something separate from corporate governance”.

Chinedum Umeche

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