CHALLENGES OF COMPLIANCE TO THE CODE OF CORPORATE GOVERNANCE IN NIGERIA

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CHALLENGES OF COMPLIANCE TO THE CODE OF CORPORATE GOVERNANCE IN NIGERIA

 

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Financial scandals around the world and the collapse of major corporate Institutions in USA and Europe have brought to the fore, once again, the need for the practice of good corporate governance. An important theme of corporate governance is the nature and extent of accountability of particular individuals in the organization and mechanisms that try to reduce or eliminate the principal–agent problem.[1] There has been renewed interest in the corporate governance practices of modern corporations since 2001, particularly due to the high profile collapses of a number of large corporations, most of which involved accounting fraud.[2] While investors need to be protected through regulation, it is also important for the issuers of securities they invest in, to adhere to good corporate practices which enable the company to attract financial and human capital, perform efficiently and thereby perpetuate itself by generating long term economics value for its shareholders while respecting the interest of stakeholder and society at large.[3]

Whilst there would appear to be an upsurge in the literature on corporate governance developments across the globe[4] , there is still a lacuna in the literature on corporate governance developments, especially in the developing world. Although some authors[5] provide evidence of corporate governance developments in some developing countries, there is little evidence of corporate governance developments in Africa, however, there exist some evidence of the evolution of corporate governance in Nigeria, albeit within the banking sector.[6] According to Charkham[7] foreign systems of corporate governance reflect their history, assumptions and value systems. These should not be transplanted, but rather, countries should identify the various ways in which the universal principles of sound corporate governance can be applied.[8] This will help each country pinpoint and correct the weaknesses in its own system, which depends on the effective operation of management, the board and shareholders. Hence, whilst trying to establish a code of best practices for the UK, the Hampel Committee[9] looked at corporate governance in other countries and concluded that they “found no support for the import into the UK of a whole system developed elsewhere”.[10]

Nigeria has been plagued by various forms of corruption since the attainment of independence in 1960. Corruption has eaten deep into the fabric of most governmental sectors and as such resulted in low economic turn over both in public and private corporations. Hence corporate governance remains high on the agenda in Nigeria both as a developing country and as a member of the Commonwealth. Given Nigeria’s colonial heritage, the system of corporate governance is essentially “Anglo-Saxon”, and there are several institutions and individuals charged with the responsibility for ensuring effective accountability of public companies in Nigeria.[11] Influenced by developments within the global business community, following the spate of corporate scandals, codes of corporate governance have been issued in Nigeria, and revised appropriately, as the country is keen to be seen to be addressing its economic malaise.[12] whilst there is a case for adherence to global corporate governance standards, any Code of Best Practices adopted in Nigeria must reflect its peculiar socio-political and economic environment, whilst at the same time providing the right assurance to prospective and existing shareholders.[13]

Corporate governance is not an entirely new concept in Nigeria. Corporate governance has become a major concern to both the public and the private sector of the Nigerian economy. In the immediate past two decades the financial services industry has experienced fluctuating fortunes leading to high profile cases of corporate failure and consequent near loss of public confidence. The implication of this on our tottering economy is obviously negative. The industry’s problems are consequences (directly or indirectly) of bad corporate governance.[14] There are a number of corporate governance provision in the Companies and Allied Matters Act, 1990, the Bank and other Financial Institutions Act, 1991 (as amended) the Investment and Securities Act, 1999 (as amended) the Securities and Exchange Commission Act, 1988 (as amended). These laws which place the responsibility for regulating corporate governance on the corporate Affairs Commission (CAC), Securities and Exchange Commission (SEC) and the Central Bank of Nigeria (CBN) reflect some of the Orgainization for Economic Cooperation and Development (OECD) principles of corporate governance following the growing concerns on issues of corporate governance and realizing the need to align with the International Best practices.[15] In order to ensure proper corporate governance practice in Nigeria, the Security and Exchange Commission (SEC) constituted a committee on June 2000 to supervise public companies practise in Nigeria[16] , to:

Review the practices of corporate governance in Nigeria and thereafter, recommend a Code of Best Practices to be followed by public companies registered in Nigeria in the exercise of power over the direction of the enterprise, the supervision of executive actions, the transparency and accountability in governance of these companies within the regulatory framework and market.

The Committee was also required to[17] :

  1. Identify weaknesses in the current corporate governance practices in Nigeria with respect to public companies.
  2. Examine practices in other jurisdictions with a view to the adoption of international best practices in corporate governance in Nigeria.
  3. Make recommendations on necessary changes to current practices.
  4. Examine other issues relating to corporate governance in Nigeria.

Following this development, the need to address corporate governance in Nigeria was recognised when the 28th Annual Accountants Conference organised by the Institute of Chartered Accountants. of Nigeria (ICAN) in September 1998 had “Corporate Governance” as the main thrust, to re-emphasise the commitment of the profession to “trust, transparency, accountability and honesty in the management of the nation’s resources” and to “disprove and enlighten the public that corporate failures are not synonymous with audit failures”.[18] Also, In 2008, SEC inaugurated a National Committee Chaired by M. B. Mahmond for the review of the previously issued 2003 code of corporate governance for public companies in Nigeria to address its weakness and to improve the mechanism for its enforceability. The Board of SEC believes that the new code of corporate governance will ensure the highest standards of transparency, accountability and good corporate governance.[19]

The increasing necessity for good corporate governance, in banks and other financial institutions, is underscored by the wave of financial scandals which led to the collapse of big financial institutions in Nigeria and around the world.[20] Although so many factors may have accounted for the instability and the distress syndrome which had engulfed various corporations in Nigeria,the issue of bad corporate governance took the center stage. Most of these corporations were owned by individuals whose interest must be protected at the expense of the numerous depositors, creditors and other stakeholders. Frequent board room squabbles, insider abuses, frauds and forgeries, weak/ineffective internal control systems have all reared their ugly heads under corporate governance.[21]

In recognition of this strategic importance of good Corporate governance practice, knowing full well that the governance of any institution in Nigeria is statutorily placed in hands of board of directors, appointment and activities of  directors in Nigeria are governed by laws and regulations, which presumably, the implementing bodies rigorously enforce; this paper seeks to critically analyze the practice of Corporate Governance in Nigeria. The paper also discusses the legal framework on Corporate Governance in Nigeria as well as the challenges limiting the enforcement of these laws.

1.2 STATEMENT OF THE RESEARCH PROBLEM

There seems to be some elements of doubt if the governance of corporate organizations is really effective considering the rate of bankruptcy and demise of large corporations in Nigeria. Public and private companies in Nigeria are currently experiencing insider abuses of reckless granting of credit facilities running into several billions of naira without adequate security. This is contrary to accepted practice which has been attributed to large scale fraud by directors in connivance with auditors. Also identified  is the problem of window dressing (eye-service) by the directors who are aided by the auditors, as well as the issue of negligence and misfeasance on the part of the auditors when auditing the financial statement of organizations which can be attributed to the lack of independence of the auditors. With this as the background, this study seeks to examine the nature of corporate governance in practice in the Nigerian banking system to see if those people charged with the responsibility of managing the affairs of the enterprise are religiously following the acceptable practices of corporate governance as stipulated by the regulatory authorities in Nigeria and that of other developed countries of the world.

With regards to the aforementioned problems, the research questions for this paper include:

  • What is the nature of Corporate Governance practice in Nigeria?
  • What are the legal frameworks on Corporate Governance practice in Nigeria?
  • To what extent is the legal framework effective in curbing financial malpractices by financial institutions in Nigeria?
  • What are the challenges inhibiting proper enforcement of Corporate Governance laws in Nigeria?

1.3 AIM AND OBJECTIVE OF THE STUDY

Generally, this research intends to bring to limelight the practice of Corporate Governance in Nigerian banking industry. The primary objective of this research includes:

  • To examine the nature of Corporate Governance in Nigeria.
  • To identify the legal framework on Corporate Governance practice in Nigeria.
  • To determine the extent which the legal framework on Corporate Governance practice is effective in curbing financial malpractices by financial institutions in Nigeria.
  • To identify the challenges limiting the enforcement of Corporate Governance laws in Nigeria.

1.4   SCOPE AND LIMITATION OF THE STUDY

This research work is limited to the practice of Corporate Governance in Nigeria. Accordingly, the work shall limit itself to discussions on corporate governance in Nigeria, legal framework on Corporate governance in Nigeria as well as the challenges experienced in enforcing these laws. Recommendations will also be made to assist the government and other regulatory bodies in enacting laws that will ensure good corporate governance practice in Nigeria banking industry.

1.5  SIGNIFICANCE OF STUDY

There is a paucity of literature on Corporate Governance practice in Nigeria. This paper sets out to discuss the problems affecting a corporate governance in Nigeria and to provide some insight into the possible solution to the identified problems especially regarding the  corporate governance code by the Nigerian security and exchange commission (SEC) and (CBN). The focus of this paper is to answer these questions: are there problems affecting a corporate governance in Nigeria? If yes, what are the problems? What are the possible solutions to these identified problems? This study concerns itself with Corporate Governance practice in Nigeria’s banking  industry,  the legal  framework on corporate governance practice in Nigerian banking industry as well as their effectiveness in curbing banking failure in Nigeria. This work shall remain a guide for policy makers with regards to issues of Corporate Governance  in Nigeria. It will also serve to educate the citizens on the forms, effects and available laws on corruption in Nigeria. Furthermore, it will serve as additional literature for further research in this field of study.

 

1.6 RESEARCH METHODOLOGY

The methodology employed in this work is doctrinal. The data was obtained from sources including statutes, journals, newspapers, articles and textbooks. Commentaries and periodicals were also used. The work contains writings of international and local authors on Corporate Governance, the legal framework on Corporate Governance in Nigeria as well as the factors limiting proper enforcement of the various legal instruments.

 

1.7 CHAPTER ANALYSIS

Chapter one introduces the concept of corporate governance by giving an insight into the need for effective Corporate governance practice in Nigeria. Chapter two has to do with a review of related literature by previous authors on the subject under discourse as well as encompassing the theoretical framework for this paper. Chapter three examines the legal/ regulatory framework on Corporate governance in Nigeria. Chapter four discusses the challenges as well as limitations inhibiting effective enforcement of Corporate governance laws in Nigeria. Chapter five deals with the summary of research findings, observation, recommendations, suggested areas for further studies, conclusion, as well as references.

 

[1] Stephen Ejuvbekpokpo and Benjamin Esuike, Corporate governance issues and its implementation: The Nigerian experience (2013) 3(2) Journal of Research in International Business Management, 53-57.

[2] Ibid.

[3] Ibid.

[4] Jill Solomon, CorporateGovernanceandAccountability (Chichester: John Wiley and Sons Ltd, 2004).

[5] Olivier Fremond and Mierta Capaul ‘Corporate Governance Country Assessment: Chile”. World Bank Report on the Observance of Standards and Codes’ (2003) available at <http://worldbank.org/ifa/rocs_chlcg.pdf> accessed 06/02/2020.

[6] Yakasai Alhaji ‘Corporate Governance in a third world country with particular reference to Nigeria, Corporate Governance: An International Review’ (2001) 9th July, 238–253.

[7] Johnathan Charkham, Keeping Good Company: A Study of Corporate Governance in Five Countries (Oxford: Clarendon Press, 1994).

[8] Okike, Elewechi, ‘Corporate Governance in Nigeria: the Statuses Quo’ Article in Corporate Governance in Nigeria An International Review available at <https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.researchgate.net/publication/4989156_Corporate_Governance_in_Nigeria_the_status_quo&ved> accessed 6/02/2020

[9] Hampel Report Final Report, The Committee on Corporate Governance and Gee Professional Publishing, London, 1998.

[10] Okike, Elewechi, Corporate Governance in Nigeria: the status quo’ Article in Corporate Governance in Nigeria An International Review available at <https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.researchgate.net/publication/4989156_Corporate_Governance_in_Nigeria_the_status_quo&ved> accessed 6/02/2020

[11] Okike, Elewechi, ‘Corporate Governance in Commonwealth Countries. International Centre for Research in Accountability Governance’ (2019) 145-184.

[12] Ibid.

[13] Okike, Elewechi, “Corporate Governance in Nigeria: the status Quo’ Article in Corporate Governance in Nigeria An International Review available at <https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.researchgate.net/publication/4989156_Corporate_Governance_in_Nigeria_the_status_quo&ved> accessed 6/02/2020.

[14] Chukwudire Uwachukwu, ‘Corporate governance in the Nigerian financial services industry, The Nigerian Banker July –  December Edition’ (2004) 15-20.

[15] Stephen Ejuvbekpokpo and Benjamin Esuike, Corporate governance issues and its implementation: The Nigerian experience (2013) 3(2) Journal of Research in International Business Management, 53-57.

 

[16] Ibid, Members of the Committee were drawn from the public and private sectors, including representatives from the Nigerian Stock Exchange, the Securities and Exchange Commission and the Corporate Affairs Commission.

[17] Ibid.

[18] Nwokolo, I., ‘The Nigerian Accountant” October/December, 1998.

[19] Ibid.

[20] Hyun Song, ‘Reflections on Modern Bank Runs: A Case Study of Northern Rock’ (2008)  Paper Princeton University.

[21] Babalola Adeyemi, Corporate governance in banks: The Nigerian experience’[2010] 7(4) Corporate Ownership and  Control International Journal, Ukraine, Special Conference Issue,  34 – 41.

 

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