Corporate governance is a buzz word used by many, but it is doubtful if those that use this word understand exactly what it means.
Corporate governance has been perceived by some as:
- The framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in the firm’s relationship with all its stakeholders (financiers, customers, management, employees, government, and the community).
- Corporate governance is a term that refers broadly to the rules, processes, or laws by which businesses are operated, regulated, and controlled. The term can refer to internal factors defined by the officers, stockholders or constitution of a corporation, as well as to external forces such as consumer groups, clients, and government regulations.
In recent years, corporate governance has received increased attention because of high-profile scandals involving abuse of corporate power and, in some cases, alleged criminal activities by corporate management officers.
An integral part of an effective corporate governance regime includes provisions for civil or criminal prosecution of individuals who conduct unethical or illegal acts in the name of the enterprise.
In general, corporate governance is a term that describes the ways in which rights and responsibilities are shared between the various corporate participants, especially the management, the shareholders and the government. A well-defined and enforced corporate governance provides a structure that works for the benefit of everyone concerned by ensuring that the enterprise adheres to accepted ethical standards and best practices as well as to formal laws.
Corporate Governance Committee
There have been a lot of corporate governance committees in Nigeria; one of which was the famous corporate governance committee in 1992 headed by Atedo Peterside.
The group’s recommendation on corporate governance pointed out that the Central Bank of Nigeria should direct all banks in the country to include a corporate governance report in their financial statements, and this report is to be made by an independent officer to enhance the trueness and fairness of the report. However, the current travails of the banks in Nigeria are strongly rooted in their non-adherence to the currently accepted tenets of corporate governance.
Indices of Corporate Governance
The following has been most widely accepted indices of corporate governance:
As one of the singular most important indicators of corporate governance, regularly in our experience, most principal officers seem to think that the pay-as-you-earn tax (PAYE) on their monthly emoluments or withholding tax on their directors’ fee is the final tax. This is not correct. According to S3 (1a) of the Personal Income Tax Act (PITA), the taxable income of an individual derived from a source inside or outside Nigeria shall be the “gain or profit from any trade, business, profession or vocation for whatever period of time such trade, business, profession or vocation may have been carried on or exercised.” In other words, the tax deem on an individual is not limited to its PAYE or withholding tax only, as an the income an individual earn from trade, business, profession or vocation derived from a source inside or outside Nigeria is deem to be taxable in Nigeria.
Most corporate governance, especially those reporting for banks, focus exclusively on separation of duties, board processes activities and decisions, etc; whereas one of the most potent indicators of the company’s adherence to high corporate governance should be taxation. Taxation is a means of measuring how serious a company takes its responsibility to the society. It also shows how serious the chief executives take their personal responsibilities to the society, just as one of the principles of taxation is the redistribution of wealth.
False Income Declaration
Most companies’ income declaration for tax does not reflect the reality, as false income declaration and expenditure overstatement in the view of reducing the taxable income fills the financial statement. Little do they know that declaring false reports exposes the company, on the long run, to pay more taxes and penalties which would actually erode capital base even faster.
False declaration and manipulation of report reveal how the company has been handling its tax matters. Most companies handle their tax matters retroactive rather than been proactive. A company with a proactive approach to tax matters will save itself a series of tax issues and unnecessary penalties as the company would have planed its transaction to take advantage of the provisions of the law and also factor all tax risk and make adequate and necessary provisions.
Taking a proactive step in addressing a company’s tax matters is an indication of good corporate governance by the principal officers as they will safeguard the shareholders’ fund by planning ahead for any tax issues. It also makes them transparent in all dealings which will enhance the trueness and fairness of the company’s report, as well as ways and manners by which the principal officers file the company’s returns and “negotiate” tax penalties for infringement which frequently arise in the course of the business.
An important aspect of corporate governance is corporate transparency. The level at which the company can remain transparent will reflect on the acceptance of the company’s report by all stakeholders.
It is important that adequate attention be given to the company and its employees’ tax health. Indeed, the tax health of a company is a pointer to the company’s level of corporate governance adherence, hence, its level of corporate stability. All these are empirically linked to how the company is valued and its main objective which is the maximisation of shareholders’ fund.
Eben Akinyemi, an Associate of the Institute of Chartered Accountants of Nigeria, is a Country Partner at the transactions and tax advisory firm, Stransact Partners.