Basic Principles of Corporate Governance

Issues of corporate governance continue to attract considerable attention nationally and internationally, especially with current global financial volatility. The ongoing global financial ‘tight spot’ has further reinforced the message that governance of organisations should always aim at protecting the interests of all stakeholders, including shareholders/ investors, employees, suppliers, customers, regulators, communities and the public.

Corporate governance can, therefore, be explained to be concerned with the effective, transparent and accountable running of the affairs of an organisation by its management and board. It is about enforcing decision-making processes that hold individuals accountable, encourages stakeholder participation, and facilitates the constant flow of information. Consequently, strong corporate governance contributes to development. It helps companies operate more efficiently, improves their access to capital through retained shareholders and attracted investors, mitigates risks, and guards against mismanagement. Furthermore, corporate governance makes companies more accountable and transparent to investors, and gives them the tools to respond to stakeholder concerns, and boost economic growth through effective use of limited resources. Summarily, corporate governance enhances and ensures performance as well as conformance of establishments

The corporate governance landscape in Nigeria has generated locally and globally. In 2003, the Nigerian Securities and Exchange Commission (SEC) adopted a Code of Best Practices on Corporate Governance for publicly quoted companies in Nigeria, which was reviewed in September 2008 to improve the mechanism for its enforceability. In addition, at the end of the consolidation exercise in the banking industry in 2006, the Central Bank of Nigeria also released the Code of Corporate Governance for Banks – reviewed in 2014 – to complement and enhance the effectiveness of the 2003 SEC code. Most recent is the National Code of Corporate Governance which was released in October 2016 – a harmonised corporate governance code applicable in different sectors – comprising the Code of Corporate Governance for the Private Sector; the Code of Governance for Not-for-Profit Entities; and the Code of Governance for the Public Sector.

A common focus area in each of these codes is the dealings of the board of directors of these organisations. The board of directors performs a pivotal role in any system of corporate governance. They are the guardians of stakeholders’ interests, and are therefore, accountable to the stakeholders, especially because of their responsibility in directing and controlling management. Essentially, the board is an efficient control device that can help align management’s decision making with stakeholders’ interests.

To successfully carry out these duties, members of the board require a high degree of specialised knowledge to effectively deal with strategic issues. If board members are to perform their control tasks in effect, they must possess knowledge and skills most relevant to their functional area, as well as firm-specific knowledge and skills. Functional area knowledge and skills include accounting, finance, marketing, and law, and where such knowledge is not already owned, it can be accessed via external networks. Firm-specific knowledge and skills refer to detailed information about the firm and an intimate understanding of its operations and internal management issues. The board is often required to be able to effectively integrate this kind of tacit knowledge of the firm with their expertise in the business areas. Further, the oversight role and responsibilities of the board require them to make many decisions that shape the organisation and its direction. The way in which the board moves toward its decision-making processes is consequently a basic part of its impact on the organisation’s performance.

A proactive culture of commitment and engagement that drives both the board and the organisation it governs will certainly lean toward high performance. As such, board leaders should pay keen attention to how much time is spent passively listening to reports, compared to that spent on discussing strategic issues and the duties of care and loyalty. Active and vigorous board discussion, debating and questioning are not only signs of good board participation, they are signs of an engaged board. Engaged cultures are characterised by honesty and a willingness to challenge, and they reflect the social and work dynamics of a high-performance team. An open culture of cooperation and transparency is healthy and will ensure good governance practices.

At the heart of the corporate governance deliberation again, is the synergy between the board of directors of an organisation and its management. Analysts have shown that one of the most important board-management relationships entails independent monitoring and control. Boards of directors, in performing their oversight role, are expected to supervise the actions of management, provide advice, and veto poor management decisions. In its control capacity, the board is also responsible for removing ineffective management. The propensity to engage in such actions, however, can often be manoeuvred by the management through selective release of information needed to make decisions. The management may influence the board and this could have an adverse effect on the board’s oversight function. For good corporate governance, it is important that the management does not dictate the agenda for the board and consequently control the outcomes of board decisions. Top management members should, therefore, not be members of key board committees, and should not participate in the selection of new board members to eliminate board members being beholden to management.

Likewise, behavioural and organisational learning experts agree that people and organisations cannot learn without feedback. And so, no matter how good a board is, it is bound to get better if it is reviewed intelligently. Board evaluation and appraisals should be regarded as tools that enhance board effectiveness by providing a process of identifying sources of governance failures. They will allow board members to take a closer look at areas of concern before they reach crisis points. Evaluations are not the absolute remedy for all board ills, but when used correctly and regularly, they play a major role in averting governance failures. Continuous training, monitoring and regularly reporting to stakeholders are other issues that should be addressed to enhance corporate governance.

In conclusion, corporate governance is not just about playing watchdog over management, it is more about enhancing corporate strategic choices, acknowledging and responding to the interests and concerns of stakeholders, developing and bolstering managerial competencies and skills, and ultimately protecting and maximising investor’s resources.

Adapted from Chris Ogbechie and Dr. Dimitrios N. Koufopoulos’ Corporate Governance and Board Practices in the Nigerian Banking Industry


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