Corporate Governance
Corporate Governance is defined in the Cadbury Reports 1992 as the system by which organization is
directed and controlled.
Governance should not be mistaken for Management.
 Management is about taking business decisions Governance is about Monitoring and
Controlling decisions as well as giving Leadership and Direction.
 If Management is about Running a business Governance is to ensure that the business is
ran properly (Prof. Bob Tricker 1984).
Governance is concerned with:
1. In whose interest is the company governed?
2. Who has the power to make decision for the company?
3. How is the power used?
4. For what aim & purpose is the power used
5. Who else might influence the governance of the company?
6. Are the governors held responsible/accountable for the way they govern the company?
7. How are the risks managed?
Corporate governance issues
So what are the key issues in corporate governance, which establish how well or badly a company is
governed? The main areas covered by codes of corporate governance are as follows:
The role and responsibilities of the board of directors.
The board of directors should have a clear understanding of its responsibilities and it should fulfil these
responsibilities and provide suitable leadership to the company. Governance is therefore concerned
with establishing what the responsibilities of the board should be, and making sure that these are
carried out properly.
The composition and balance of the board of directors.
A board of directors collectively, and individual directors, should act with integrity, and bring
independence of thought and judgement to their role. The board should not be dominated by a
powerful chief executive and/or chairman. It is therefore important that the board should have a
suitable balance, and consist of individuals with a range of backgrounds and experience.
Financial reporting, narrative reporting and auditing.
The board should be properly accountable to its shareholders, and should be open and
transparent with investors generally. To make a board properly accountable, high standards of financial
reporting (and narrative reporting) and external auditing must be upheld. The major ‘scandals’ of
corporate governance in the past have been characterised by misleading financial information in the
company’s accounts – in the UK, for example, Maxwell Communications Corporation and Polly Peck
International, more recently in Enron and WorldCom in the US and Parmalat in Italy. Enron filed for
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bankruptcy in 2001 after ‘adjusting’ its accounts. WorldCom, which collapsed in 2002 admitted to fraud
in its accounting and its chief executive officer was subsequently convicted and jailed.
Directors’ remuneration.
Directors work for a reward. To encourage their commitment to achieving the objectives of their
company, they should be given suitable incentives. Linking remuneration to performance is considered
essential for successful corporate governance. However, linking directors’ pay to performance is
complex, and remuneration schemes for directors have not been particularly successful. Directors’ pay is
an aspect of corporate governance where companies are frequently criticised;
Risk management and internal control.
The directors should ensure that their company operates within acceptable levels of risk, and should
ensure through a system of internal control that the resources of the company are properly used and its
assets are protected.
Shareholders’ rights.
Shareholders’ rights vary between countries. These rights might be weak, or might not be exercised
fully. Another aspect of corporate governance is encouraging the involvement of shareholders in
the companies in which they invest, through more dialogue with the directors and through greater use
of shareholder powers – such as voting powers at general meetings of the company.
Corporate social responsibility and ethical behaviour by companies (business ethics) are also issues
related to corporate governance.
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SEPARATION OF OWNERSHIP FROM CONTROL
Companies is seen by company law as a legal entity; that is different from its owners.
The directors are responsible for the direction of the company and not the shareholders.
The shareholders delegates control to the hands of the directors.
However, it is generally accepted and expected that the Directors act in the best interest of
the shareholders.
The separation of ownership from control still gives rise to Corporate Governance Problem –
Conflicts of Interest.
Concept OF Corporate Governance
Honesty/Probity
Honesty is an essential quality for directors and their advisers. An individual who is honest, and who is
known to be honest, is believed by others and is therefore more likely to be trusted.
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However, honesty is not as widespread as it might be. Business leaders, as well as political leaders, may
prefer to ‘put a spin’ on the facts, and manipulate facts for the purpose of presenting a more favourable
impression.
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Accountability
In a company, the board of directors should be accountable to the shareholders. Shareholders should be
able to consider reports from the directors about what they have done, and how the company has
performed under their stewardship, and give their approval or show their disapproval. Some of the ways
in which the board are accountable are as follows:
Presenting the annual report and accounts to the shareholders, for the shareholders to consider and
discuss with the board. In Nigeria for example, this happens at the annual general meeting of the
company. If shareholders do not approve of a director, they are able to remove him from office.
Individual directors may be required to submit themselves for re-election by the shareholders at regular
intervals. In Nigeria for example, it is common practice for directors to be required to retire every three
years and stand for re-election at the company’s annual general meeting.
In the UK, it is recognised that individual directors should be made accountable for the way in which
they have acted as a director. The UK Corporate Governance Code includes a provision that all directors
should be subject to an annual performance review, and should be accountable for their performance to
the chairman of the company.
It might be argued that a board of directors is not sufficiently accountable to the shareholders, and that
there should be much more accountability
 Responsibility
The directors of a company are given most of the powers for running the company. Many of these
powers are delegated to executive managers, but the directors remain responsible for the way in which
those powers are used.
An important role of the board of directors is to monitor the decisions of executive management, and to
satisfy themselves that the decisions taken by management are in the best interests of the company and
its shareholders.
The board of directors should also retain the responsibility for certain key decisions, such as setting
strategic objectives for their company and approving major capital investments.
A board of directors should not ignore their responsibilities by delegating too many powers to executive
management, and letting the management team ‘get on with the job’. The board should accept its
responsibilities.
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Integrity
Integrity is similar to honesty, but it also means behaving in accordance with high standards of
behaviour and a strict moral or ethical code of conduct. Professional accountants, for example, are
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expected to act with integrity, by being honest and acting in accordance with their professional code of
ethics.
If shareholders in a company suspect that the directors are not acting honestly or with integrity, there
can be no trust, and good corporate governance is impossible.
 Fairness
In corporate governance, fairness refers to the principle that all shareholders should receive fair
treatment from the directors. At a basic level, it means that all the equity shareholders in a company
should be entitled to equal treatment, such as one vote per share at general meetings of the company
and the right to the same dividend per share.
 Reputation
A large company is known widely by its reputation or character. A reputation may be good or bad. The
reputation of a company is based on a combination of several qualities, including commercial success
and management competence.
However, a company might earn a good reputation with investors, employees, customers and suppliers
in other ways. As concerns for the environment have grown, companies have recognised the importance
of being ‘environmentfriendly’ or ‘eco-friendly’. Reputation is also based on honesty and fair dealing,
and on being a good employer.
Investors might be more inclined to buy shares and bonds in a company they respect and trust. Some
investment institutions are ‘ethical funds’ that are required to invest only in ‘ethical’ companies.
Employees are more likely to want to work for an employer that treats its employees well and fairly. As
a result, companies with a high reputation can often choose better-quality employees, because they
have more applicants to choose from.
Consumers are more likely to buy goods or services from a company they respect, and that has a
reputation for good quality and fair prices, and for being customer-friendly or environment-friendly.
Companies that are badly governed can be at risk of losing goodwill – from investors, employees and
customers
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Independence
Independence means freedom from the influence of someone else. A principle of good corporate
governance is that a substantial number of the directors of a company should be independent, which
means that they are able to make judgements and give opinions that are in the best interests of the
company, without bias or pre-conceived ideas.
Similarly, professional advisers to a company such as external auditors and solicitors should be
independent of the company, and should give honest and professional opinions and advice.
The independence of a director is threatened by having a connection to a special interest group.
Executive directors can never be independent, because their views will represent the opinions of the
management team. Similarly, a retired former executive might still be influenced by the views of
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management, because he or she shares the ‘management culture’. Directors who represent the
interests of major shareholders are also incapable of being independent.
The independence of external auditors can be threatened by over-reliance on fee income from a client
company. When a firm of auditors, or a regional office of a national firm, earns most of its income from
one corporate client there is a risk that the auditors might choose to accept what they are told by the
company’s management, rather than question them rigorously and risk an argument. It has been
suggested that this occurred in the Houston office of Andersen’s, the audit firm that collapsed in 2002 as
a result of the Enron scandal.
Familiarity can also remove an individual’s independence, because when one person knows another well
he is more likely to accept what that person tells him and support his point of view. Auditors are at risk
of losing their independence if they work on the audit of the same corporate client for too many years.
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Judgement
Directors make judgement in reaching their opinions. All directors are expected to have sound
judgement and to be objective in making their judgements (avoiding bias and conflicts of interest). In its
principles of corporate governance, for example, the OECD states that: ‘the board should be able to
exercise objective judgement on corporate affairs independent, in particular, from management.’
Independent non-executive directors are expected to show judgement that is both sound and
independent. Rolls Royce, for example, in an annual report on its corporate governance, stated that:
‘The Board applies a rigorous process in order to satisfy itself that its non-executive directors remain
independent. Having
undertaken this review in [Year], the Board confirms that all the non-executive directors are considered
to be independent in character and judgement.
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Transparency
Transparency means clarity. In corporate governance, it should refer not only to the ability of the
shareholders to see what the directors are trying to achieve. It also refers to the ease with which an
‘outsider’, such as a potential investor or an employee, can make a meaningful analysis of the company
and its intentions.
Transparency therefore means providing information about what the company has done, what it
intends to do in the future, and what risks it faces.
NON-CORPORATE “Corporate Governance”
Public Sector Organizations (PSO) are state controlled. Their aim is to implement part of government
policy.
Government likes to keep control over such parts as it cannot be trusted to private shareholders and
their profit motive. The separation of Owner/Manager still causes Governance problem of “Fitness
for Purpose”
NOLAN’S SEVEN PRINCIPLES OF PUBLIC LIFE
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1.
2.
3.
4.
5.
6.
7.
Objectivity
Openness
Honesty
Selflessness
Accountability
Integrity
Leadership
Charities & Voluntary Organization
These exist for particular social, environmental, religious humanitarian or similar benevolent
purpose and often enjoy tax privileges and reduced reporting requirements.
There is agency problem between the donors and the charity “Will the donations be used fully for
the purpose”
Directors
These are the most prominent group in corporate governance (and often the most annoying).
Seriously though they have a massive part to play in making sure the company is well run and
directed (hence the name!)
Executive Director: are directors that are involved in the day to day running of the company
Non-Executive Directors: are independent and are not involved in the day to day running of the
business.
Duties of Directors
1. Fiduciary duty to act in good faith: as long as directors’ motives are honest
2. To exercise their power in appropriate way and in line with regulations
3. To avoid conflicts of interest
4. To exercise a duty of care: This is a legal requirement. The amount of skill expected
depends on your expertise and experience
Company Secretary
Compulsory In most countries, the appointment of a company secretary is a compulsory condition
of company registration. This is because the company secretary has important responsibilities in
compliance, including the responsibility for the timely filing of accounts and other legal compliance
issues. The legal frameworks are there to try and protect the stakeholders.
*Advises Legal Responsibilities
The company secretary often advises directors of their regulatory and legal responsibilities and
duties.
*Loyal to company
His or her primary loyalty is always to the company. In any conflict with another member of the
company (such as a director), the company secretary must always take the side most likely to
benefit the company.
*Technical knowledge
In many countries’ he (get me being all modern!) must be a member of one of a list of professional
accountancy or company secretary professional bodies.
Major roles include:
Maintaining the statutory registers
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Ensuring the timely and accurate filing of audited accounts and other documents to statutory
authorities
Providing members (e.g., shareholders) and directors with notice of relevant meetings
Organizing resolutions for and minutes from major company meetings (like the AGM)
AGENCY RELATIONSHIP & THEORIES
Agency is defined in relation to a principal. This means when an owner (principal) lets somebody run
her business (manager).
The agent is doing this job on behalf of someone else (The Principal).
Agency Relationship
The shareholders are the principals.
They expect agents (directors) to act in their best economic interests an agency relationship is one
of trust between an agent and a principal which obliges the agent to meet the objectives placed
upon it by the principal.
As one appointed by a principal to manage, oversee or further the principal’s specific interests, the
primary purpose of agency is to discharge its fiduciary duty to the principal.
Principal & Agent
A principal appoints an agent to act on his or her behalf. In the case of corporate governance, the
principal is a shareholder and the agents are the directors.
The directors are accountable to the principals
Agency Conflicts
Any conflict between principals and agents is called an agency problem, or agency conflict. A good
example of an agency conflict between stockholders and managers is related to executive salaries.
To some extent, top executives establish their own compensation, and if that compensation is “too
high,” it adversely affects stockholders.
They arise in several ways:
1. Moral Hazard
2. Effort Level
3. Earnings Retention
4. Risk Aversion
5. Time Horizon
Agency Costs
Indirect Cost: -Opportunity Cost
Direct Cost
 Bonding Cost
 Monitoring Cost
 Residual Cost
AGENCY THEORIES
Stakeholders
Stakeholder as defined by Freeman 1984 as any group or individual who can affect or be affected by
the achievement of an organization objectives.
The important part of the organization is that stakeholder may:
i.
Be affected by what the organization does
ii.
Affect what the organization does
iii.
Both be affected by or affect what the organization does
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Company stakeholder is someone who has a stake in the company or interest in what the company
does.
One of the objectives of Corporate Governance should be to provide enough satisfaction for each
stakeholder group.
Stakeholder groups in the company Includes:
1. The Shareholders: expects a reasonable return on their investment in the company.
Influence: exercise their right to vote for or against
2. Employees: Expect fair salary or wage, job security or carrier prospect
Influence: to work with motivation and efficiently or go on strike or demand high pay.
3. The Directors & Management: need to satisfy both the shareholders by ensuring
maximization of wealth and Employees motivation by way of high benefits. They also have
their self-interest of high remuneration.
4. Customers of the company
5. Suppliers of the company
6. Trade Union
7. Communities in which the company operates
8. The Government
9. Pressure groups and activist groups such as environmentalist
Claims of Stakeholders
Each stakeholder or group of stakeholders have claims against the company. Some know that they
have claims while others do not know and hence, they do not express it openly.
This knowledge or lack of knowledge of claims gives raise to Direct Stakeholders and Indirect
Stakeholders Claims.
Direct Claims: Claims makes directly by stakeholder with their own voice
Indirect Claims: are claims that are not made directly by a stakeholder or stakeholder group but are
made indirectly on their behalf by someone else.
Stakeholder Influence
Mendelow Framework
This framework can be used to understand the influence that each Stakeholder group has over a
company’s strategies and actions. Influence over a strategy or action comes from a combination of
Power and Interest.
Influence = Power X Interest.
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INTEREST
L
H
L
MINIMAL EFFORTS
KEEP INFORMED
H
KEEP SATISFY
KEY PLAYERS
P
O
W
E
R
Categories
of Stakeholders
Narrow & Wide
1.
Primary & Secondary
Active and Passive
Voluntary and Involuntary
Legitimate & Illegitimate
Known and Unknown
Internal and External
Transaction Cost Theory
Cost incurred when organization get someone to do something for them.
Factors impacting Transaction Cost:
1. Bounded Rationality: individuals possess limited rationality, meaning they obtain and process
limited information, and hence, have fewer options to choose from. Economic transactions are
not based on pure rationality but on bounded rationality. Bounded rationality is a form of
rationality where a person’s decision-making and rationality is limited by the amount of
information available to them and the finite amount of time, they have to make a decision.
2.
3.
4.
5.
6.
7.
2. Opportunism: People will not always be honest and truthful about their intentions and will
sometimes be opportunistic. Opportunism is an effort to realize individual gains through a lack
of honesty in transactions.
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Degree of Impact of Transaction Cost depends on the:
Frequency: how often is the item needed. The less often, the lower
the transaction cost.
Uncertainty: Do we trust the other party enough? The more certain
we are, the lower the transaction / agency cost
Asset Specificity. How unique is the item? The more unique the item, the more worthwhile the
transaction cost.
Stewardship Theory
In the stewardship theory of corporate governance, it is recognized that the directors of a
company have a stewardship role. They look after the assets of the company and manage
them on behalf of the shareholders.
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Resources Dependency Theory
This theory looks at how the resources of an organization affect its governance and
behavior. The basic argument of resource dependence theory can be summarized as
follows:
Organization depends on resources (such as materials, labor and capital), many of which are
under the control of other organizations
Resources are a basis of power.
Legally independent organizations may therefore depend on other organizations for the
resources they need.
Power and dependence on resources are directly linked
Managerial Hegemony Theory & Class Hegemony Theory
Class Hegemony Theory is a theory that considers the business elite (the upper class) as a group of
individuals who control the governance of companies to perpetuate their power base.
Managerial Hegemony Theory is similar to class hegemony theory in that the system of governance
under the board of directors is seen as the tool of management. It argues that the real power in
corporate governance lies with management and that they can take advantage of shareholder weakness
to pursue their self-interest
System Theory
A System Theory approach to governance considers a company as an overall system, consisting of interlinked sub-systems. Governance depends on how these sub-systems and Sub-sub-system interlink with
each other.
APPROACHES TO CORPORATE GOVERNANCE
Rule Base Approach to Corporate Governance
A rule-based approach to corporate governance is based on the view that companies must be required
by law (or by some other form of compulsory regulations) to comply with established principles of good
corporate governance.
Advantages
1. Companies do not have the choice of ignoring the rules
2. All companies are required to meet the same minimum standards of corporate
governance.
3. Investor’s confidence in the stock market might be improved if all the stock market
companies are required to comply with recognized corporate governance rules.
Disadvantages
1. The same rules might not be suitable for every company because the circumstances of
each company are difficult. A system of corporate governance is too rigid if the same
rules are applied to all companies.
2. There are some aspects of corporate governance that cannot be regulated easily such
as negotiating the remuneration of directors, deciding the most suitable range of skills
and experience for the board of directors and assessing the performance of the board
and its director.
Rule Based Approach in the US.
Sarbanes-Oxley Act 2002.
Key Provisions
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1. CEO/CFO Certification (Section 302 of the Act): The act requires all companies in the USA with
stock market listing (both US companies and foreign companies) to include in their annual and
quarterly accounts a certificate to the SEC. The certificate should be signed by the CEO & CFO
and should contain accuracy of the financial statements. The CEO and CFO are therefore
required to take direct personal responsibility for the accuracy of the company accounts.
2. Assessment of Internal Controls (Section 404 of the Act): The act required the SEC to establish
rules that requires companies to include an internal control report in each annual reports. This
internal control report must:
i.
State the responsibility of management for establishing and maintaining an
adequate internal control structure and procedures for financial reporting.
ii.
Contain an assessment of the effectiveness of the internal control structure
and procedures of the company for financial reporting.
Principled Based Approach
A principle-based approach to corporate governance is an alternative to a rule-based approach. It is
based on the view that a single set of rules is inappropriate for every company. Circumstances and
situations differ between companies. The circumstances of the same company can change overtime.
It is therefore argued that a corporate governance code should be applied to all major companies, but
this code should consist of principles, not rules.
Advantages & Disadvantages
The advantages & disadvantages of a principle-based approach to corporate governance are opposite of
those for a rule-based approach. There is no conclusive evidence to suggest that one approach is better
than the other.
However, the relative advantages of rule-based approach might become clear only when more
Corporate Governance scandals occur at some times in the future.
International Codes & Principles of Corporate Governance
When we discuss the history of Corporate Governance, we really mean the history of attempts to
improve perceived weaknesses in corporate governance, especially among large public companies.
The drive for improvements in corporate governance began in the UK. Following a number of highprofile corporate collapses, a committee was established and produced a report (the Cadbury Report,
1992) which recommended, amongst other things, that listed companies should have an adult
committee and a minimum number of non-executives on their board.
Concerns about excessive or inappropriate remuneration packages for executive directors and senior
managers led on to the Greenbury Reports (1995). This was followed by the Hampel Report (1998),
which among other things raised the matter of board responsibility for risk management and control
systems.
The recommendations of these three reports were amalgamated into the first UK Combined Code of
corporate governance (1998). This was a principles-based set of principles and provisions, and all listed
companies in the UK were required to comply with the code or explain their non-compliance.
The next major advance in corporate governance globally was the adoption of the Sarbanes-Oxley Act
(2002), a rule-based governance code introduced following a number of major corporate scandals and
failures in the USA.
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Since that time, corporate governance codes have been introduced in many other countries including
Nigeria where there is a 2018 revision of the Nigerian Code of Corporate Governance for private
companies. The Nigerian code, which covers similar areas to other national corporate governance codes,
deals with issues such as
 The role of the board
 The structure and composition of the board
 Board meetings and the requirement for board committees (nomination and governance;
remuneration; audit; risk management)
 Performance evaluation of the board
 Remuneration Governance
 Risk management internal audit, whistle-blowing, the external auditors
 Relationship between the board and its shareholders, and shareholder rights
 Business conduct and ethics
 Sustainability
 Transparency (Disclosure)
International statements of corporate governance principles include:
 The OECD Principles of Corporate Governance
 The ICGN statement on Global Corporate Governance Principles
 The principles of Corporate Governance in the Commonwealth (the CAGC Guidelines)
Content of the OECD Principles
1. Ensuring the basis for an effective corporate governance framework
2. The rights and equitable treatment of shareholders and key ownership functions
3. Institutional Investors, stock market and other intermediaries
4. The role of stakeholders in Corporate Governance
5. Disclosure and Transparency
6. The responsibilities of the board
Content of ICGN Principles
1. The object of a company
2. Shareholders right
3. The board of directors
4. Corporate Citizenship and the ethical conduct of business.
Limitations of International Codes or Statement of Principles
1. Because they apply to all countries, they can only state general principles. They cannot
give detailed guidelines, and so are not specific. Since they are not specific, they are
possibly of limited practical value.
2. Their main objective is to raise standards of corporate governance in the ‘worst’
countries. They have less relevance for countries where corporate governance
standards are above the minimum standard.
3. Unlike national laws and codes of corporate governance, there is no regulatory
authority for international statements of principles. The principles therefore lack any
‘force’. In specific countries, by contrast, there may be a supervisory body or regulatory
body with specific responsibility for encouraging or enforcing corporate governance
practices.
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BOARD of DIRECTORS
Unitary Board
This means that there is a single Board of Directors which is responsible for performing all the
functions of the board.
Advantages
1. Act Quickly: there is no requirements to appoint directors who represent stakeholder
interest groups. Small boards are more likely to act quickly in an emergency or when a fast
decision is required
2. Cooperation: it is easier for the non-executive directors and the executive directors to work
co-operatively.
3. Common Purpose: Unitary boards work towards a common purpose which the board
considers to be the best interest of the shareholders.
Two-Tier Board
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A two-tier board structure consists of:
A management boards
A supervisory board
The management board is responsible for the oversight of the company. It consists entirely of
executive directors and its chairman is the company’s Chief Executive Officer.
The supervisory board is responsible for the general oversight of the company and the management
board. It consists entirely of Non-Executive Directors who have no executive management
responsibility to the company. Its chairman is the Chairman of the company.
Advantages
It separates two different roles for the board.
1. The management board is responsible for operational issues, whereas the Supervisory
board is able to monitor the performance of management generally including the
executive directors on the management board. -Separation of Duty (Role)
2. Recognition of Differs Interest: The stakeholder’s interest can be represented on the
supervisory board with having a direct impact on the management of the company.
3. Legal Duties: it differentiates their legal duties. E.g the Independent Directors are parttime appointments and are not involved in the management of the company.
1.
2.
3.
4.
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Composition of the BoD
Chairman (who may be Executive but is more usually a Non-Executive Director)
(Sometimes) A Deputy Chairman
Other Executive Directors
Other Non-Executive Directors
The code of Corporate Governance is Nigeria specifies that the size of the board should not be
less than five and should not exceed 15 persons.
The Role of Chairman, CEO & NED
CEO: is responsible for the executive management of the company’s operations. He or she is the
leader of the management team and all senior executive managers report to the CEO. If there is
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an executive management committee for the company, the CEO should be the chairman of this
committee.
Other executive directors may sit on the board of directors, the CEO reports to the board on the
activities of the entire management team, and is answerable to the board for the company’s
operational performance
Chairman: is responsible for the efficient functioning of the board and its effectiveness.
He (or she) calls board meetings, sets the agenda and leads the board meetings. He decides how
much time should be given to each item on the agenda. He should make sure that the board
spends its time dealing with strategic matters, and not matters that should be delegated to the
executive management.
The chairman also represents the company in its dealings with shareholders and
(usually) the media. He is the ‘public face’ of the company
NED: Four roles identified in the Higgs Guidance are as follows:
i.
STRATEGY: Challenge constructively & help to develop proposal on strategy
ii.
PERFORMANCE: monitor performance of executive management in meeting their
agreed targets and goals.
iii.
RISK: Satisfy themselves that the company systems of risk management and Internal
Control are robust.
iv.
PEOPLE: deciding remuneration of executive directors and other senior managers
and should have a major role in the appointment of new directors and in the
succession planning for the next Chairman & CEO.
Criticism of NEDs
1. Lack of Knowledge: about the company and Industry or markets it operates in.
2. Insufficient time with the company
3. Accepting the views of Executive Directors
In spite of these criticism of Non-Executive Directors, it is now widely accepted that major
companies should have a strong presence of independent NED on the board. When NEDs do
not appear to be effective in their role, institutional shareholders might well take action.
Board Balance
A board should consist of directors with a suitable range of skill, experience and expertise.
However, there should be a “Balance of Power” on the board so that no individual can or
small group of individuals can dominate the board’s decision taking.
It went on to state that “To ensure that power and Information are not Concentrated in one
or two individuals there should be a strong presence on the board of both executive and
non-executive directors.
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Board Diversity
Board Diversity means having a range of many people that are different from each other.
Categories might include: Age, Race, Gender, Education Background, Professional
Qualification, Experience, Personal attitude, Marital Status and Religion.
Benefit of Board Diversity
1. More effective decision making -varieties of perspective
2. Better Utilization of talent pool for the NEDs
3. Enhancement of Corporate Reputation.
Drawbacks
1. Increase conflict and Friction which may promote cliques or sub-groups and ultimately
lead to a resistance to share information and debate effectively.
2. Tokenism: feeling of some members that they are just there to make up the numbers
and fulfil a quota. This can lead to an undervaluing of skills and suppressed contribution
to the organization.
Promoting Diversity
1. Imposing quotas: generally
2. Enhancing Transparency & Disclosure
Directors & The Law
The Power of Director
1. Service Contracts
As employees they have a service contract with company. The service contract of
an executive director should specify his role as an “executive manager” of the
company but might not include any reference to his role as a company director.
2. Fixed Term Contracts
Non-Executive Directors are usually appointed for a fixed term. Normal practice
is to appoint a NED for a three-year term. At the end of this term, the
appointment might be renewed (subject to shareholders approval) for a further
three years. This cycle of 3-year appointments continues until the NED eventually
retires or is asked to retire.
Appointment, Election & Removal of Director
An aspect of the corporate governance is the power of the shareholder to appoint and remove Directors
from office.
 When a vacancy occurs in the board of directors during the course of the year, the vacancy is
filled by an individual who is nominated and then appointed by the board of directors.
 However, at the next Shareholders meeting (Annual General Meeting) the director stands for
election and he is elected if He or She obtain a simple majority vote (50%) of the votes of the
shareholders.
 Existing directors are required to stand for re-election at regular intervals. In Nigeria as in the
UK, most companies include in their constitution (article of association) a requirement that onethird of directors should retire each year by rotation and stand for re-election. This means that
each director stands for re-election every three years. (This is why appointments of NEDs are for
periods of three years).
 It is usual for directors who retire by rotation and stand for re-election to be re-elected by a very
majority. However, when shareholders are concerned about the corporate governance of a
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company, or about its financial performance, there might be a substantial vote against the reelection of particular directors.
When a director performs badly, it should be expected that he or she will be asked by the board
by or the company chairman to resign. This is the most common method by which directors who
have “failed” are removed from office.
Occasionally, a director might have the support of the board, when the shareholders want to get
rid of him. UK company law allows shareholders (with at least a specified minimum holding of
shares in the company) to call a meeting of the company to vote on a proposal to remove the
director. A director can be removed by a simple majority vote of the shareholders.
When a director is removed from office, he retains his contractual rights, as specified in his contract
of employment. This could involve a very large payment.
Duties & Legal Obligations of Directors
Directors have certain legal duties to their company. If they fail in these duties, they could become
personally liable for the consequences of their breach of duty.
They duties are:
1. Act within their powers
2. Promote the success of the company for the benefit of its shareholders
3. Exercise independent judgement
4. Exercise reasonable skill, care and Diligence
5. Avoid conflicts of interest
6. Not to accept benefits from third party
7. Declare any interest in a proposed transaction with the company
Prior to the company act 2006, the legal duties of UK company directors to their company
have been:
1. A duty of Skill and Care
2. A Fiduciary duty: this is a duty to act in a good faith in the interests of the company.
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Share Dealings by Directors
When an individual such as the director is found to have carried “insider dealings” or
“insider trading”:
He might be found to have committed a criminal offence and face a fine and imprisonment,
and/or
He might be found liable to an individual at whose expense he made his profit.
Stock Market Restrictions on Share Dealings by Directors
The main requirement of the regulations are as follows:
1. Directors must not deal in shares of their company during a “Close Period”
A close period is the period before the announcement to the stock market of the
company interim and financial results
2. A director must not deal in shares of the company at any time that has price sensitive
information.
3. Before dealings in the company shares at any other time, a director must obtain the
prior permission of the chairman.
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Disqualification of Director
1. When a director is Bankrupt
2. When a director is suffering from mental disorder
3. When found guilty of a crime in connection with the formation or management
of a company (such as the misappropriation of company funds)
The BoD and NOCLAR
NOCLAR is defined as any act of omission or commission, intentional or
unintentional, committed by a client, an employer, or an employee of an employer
that is contrary to the law or regulations concerning matters that directly affect the
clients or the employer’s financial statement or business in a material or
fundamental way.
NOCLAR includes breaches of law or regulations concerning:
1. Fraud, Corruption or Bribery
2. Money Laundering, Terrorist financing or proceeds from crime.
3. Securities Market Trading
4. Banking Services
5. Data Protection
6. Tax
7. Environmental Protection
8. Public Health and Safety
The NOCLAR regulations were introduced because the duty of confidentiality was preventing
professional accountants from disclosing illegal acts by clients or employers.
Board Committees
A board committee is a committee set up by the board consisting of selected directors which is given
responsibility for monitoring a particular aspect of the company’s affairs for which the board has
reserved the power of decision-making.
A committee is not given decision making powers. It’s a role to monitor an aspect of the company’s
affairs and;
i.
Report back to the board, and
ii.
Make recommendation to the board
1.
2.
3.
4.
The main Board Committees
Remuneration Committee: whose responsibility is to consider and negotiate the remuneration
of executive directors and senior managers.
Audit Committee: whose responsibility is to monitor financial reporting and auditing within the
company.
A nomination committee: whose responsibility is to identify and recommend individuals for
appointment to the board of directors.
A risk management committee, where the responsibility for the review of risk management has
not been delegated to the audit committee.
There are 2 main reasons for having board committees;
1. The board can use a committee to delegate time-consuming and detailed work to some of the
board members. Committees can help the board to use its resources and time of its members
more efficiently.
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2. The board can delegate to a committee aspect of its work where there is an actual or a possible
conflict of interest between executive directors (management) and the interest of the company
and its shareholders. However, to avoid a conflict, board committee should consist wholly or
largely of independent directors. This means Independent Non-Executive Directors.
Audit
A key requirement for good corporate governance is that a company must have a robust system of
Internal Controls, including financial and accounting controls. Both internal and external audit have a
role in corporate governance, by providing assurance about the reliability of financial reporting and the
effectiveness of internal controls
1. External Audit
The purpose of an independent audit is to give a professional and independent opinion:
i.
On whether the financial statements give a true and fair view of the financial
position and its performance during the year.
ii.
About some other disclosures in the annual report.
2. Internal Audit
Internal audit activities typically include one or more of the following:
i.
Monitoring of Internal Control
ii.
Examination of financial and operation information
iii.
Review of Economy, Efficiency and Effectiveness of operations, including nonfinancial controls of an entity. Audit of “EEE” can be carried out on any aspect of
operations are usually called Value for Money (VFM) audits.
iv.
Review of compliance: these investigations are often called Compliance Audit.
Audit Committee
The Nigerian Code of Corporate Governance calls for the establishment of several board committees,
including an audit committee.
The Nigerian code goes into extensive details about the responsibilities of an audit committee, which
cover oversight of both external and internal audit.
These includes the following responsibilities:
1. To ascertain whether the accounting policies of the company are in accordance with the law
2. To review the scope and planning of external audit requirements
3. To review the findings of the management letter from the external auditors to the board of
directors, pointing to any weaknesses in the system of accounting controls
4. Recommend to the board the appointment, removal and remuneration of the external auditors
5. To keep under review the effectiveness of the company’s system of accounting and other
internal controls.
6. To authorize the internal auditors to carry out investigations into any aspect of the company’s
systems and procedures.
7. To review regularly the effectiveness of the system of controls and receive quarterly reports
from the internal auditors on this subject.
Directors Remuneration
Components of Remuneration package
1. A basic salary
2. Short term incentive: -Bonus
3. Long Term Incentive: -Share Plans
4. Pensions
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1. Basic Salary: the purpose of a basic salary is to give the director a guaranteed minimum amount
of pay. If directors do not receive basic salary, he will depend entirely on incentive payments. It
could be argued that this would not be fair on the director and would put him or her under
stress.
2. Short Term Incentive: bonus payments will be linked to one or more key performance
indicators. The targets may include:
I.
Performance Indicators for the business as a whole (such as target for EPS)
and or
II.
Personal targets for individual executives.
3. Long Term Incentives:
i.
Share options -if the share price falls below the exercise price for a director share
options, the share options are said to be OUT OF THE MONEY or UNDER-WATER.
ii.
Fully paid shares in the company: the award of a fully paid shares is an alternative to
share options. This avoids much of the problems of a fall in the share price.
In order to award free fully-paid shares to executives, the company will buy its own shares.
It can do this either by making purchases of shares in the stock market or by giving existing
shareholders an opportunity to sell some of their shares to the company in a tender or
auction process.
4.Pensions:
Executive directors will also receive certain pension benefits.
REPORTING & DISCLOSURE
Disclosures means making information available, so that there is Transparency.
Companies have the main responsibility for disclosure in the stock markets. They provide
regular reports to shareholders and other investors, and it is from these reports that
investors obtain most of their information.
Transparency and Disclosure are the key issues in corporate governance.

There are 3 main categories of information that should be disclosed:
Financial Information about the past performance of the company, its financial position and its
future prospects
Information about ownership of shares in the company, and voting rights associated with the
shares.
Corporate governance information
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Principles of Disclosure & Communication
There are several basic principles for disclosure and communication of information. Information
should be:
Reliable
Understandable
Timely: communicate to investors as soon as information is made public (stock market)
Equally available to investors
Made available by convenient channels of communication
Made available to investors quickly: opportunities for ‘insider dealing’ will be reduced

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Dialogue with Shareholders
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Constructive dialogue between the BoD and the Major Shareholders of the company should
help to improve the quality of Corporate Governance.
For a company, most of the dialogue with its shareholders is conducted by the Chairman,
The CEO and the Finance Director. These are the individuals, for example who normally
make presentation about the company to institutional investors. The chairman should
discuss, amongst other things, governance and strategy.
Senior Independent Director (SID)
A role of the senior independent non-executive director is to listen to the concerns of
shareholders, when shareholders have concerns that have not been resolved through their
normal channel of communication with the Chairman, CEO or Finance Director. The SID
might then be asked to discuss the concerns of the shareholders with the rest of the board –
in effect, to challenge the views of the Chairman and CEO.
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Shareholder Activism
When a shareholder is dissatisfied with the performance of a company, he can sell his
shares.
An alternative approach to selling shares in under-performing companies is to:
Monitor Companies closely
Enter into a dialogue with a company when its under-performing and express the concerns that
the shareholders have about the company
Use voting right to put pressure on a company’s management.
Purpose of Shareholder Activism
The Institutional Shareholders Committee (ISC) principles state that:


The policies of activism do not constitute an obligation to micro-manage the affairs of
companies, but rather relate to procedures designed to ensure that shareholders derive value
from their investments by dealing effectively with concerns about under-performance.
The principle also states that although institutional investors are encouraged to become ‘active’
investors, they should still use their right to sell their shares, if this is what they would prefer to
do in the case of some companies.
General Meetings
There are two types of general meeting:
1. The Annual General Meeting (AGM) which is held each year to vote on ‘routine’
proposals.
2. An Extraordinary General Meeting (EGM) is any general meeting that is not an AGM. An
EGM might be called to consider specific issues, such as a proposal to approve a major
takeover of another company.
The Voting Rights of Shareholders
In a well governed company, all ordinary shareholders should have equal voting rights. In principles, this
means one share, one vote.
The matters that shareholders have the right to vote on are fairly limited. They include votes on:
 The election or re-election of directors
 The re-appointment of the company’s auditors for another year
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Approving a dividend proposed by the directors
Approval of the director’s remuneration report
Approval of new share incentive schemes
Approval of proposed major transactions, such as a takeover.
Problems with the Use of Voting Rights
Although shareholders can use their voting rights, or threaten to use their voting rights, to put
pressure on a board of directors, there are limitations and problems with the use of voting.
1. Individual Shareholders, even major shareholders, might own only a small proportion of
the company’s shares. In the UK for example, the stock market considers any
shareholder to be ‘significant’ if it owns more than 3% of the shares in a company. To
win a vote at a general meeting requires a majority of the votes (and sometimes even
more). Many shareholders need to organize themselves to use their votes in concert to
have any chance of obtaining a majority of the votes.
2. Some institutional investor might fail to use their votes in a responsible way. There are
several reasons for this:
 An institutional investor might own shares, but hand the management of the shares to a
different organization (a fund manager). It might be difficult for institutional shareholder to give
instructions to a fund manager on how to vote at a general meeting of each company in which it
holds shares.
 Institutional Shareholders might engage in stock lending. Stock lending involves lending shares
to another entity for an agreed period of time, in return for a fee. The practice of stock lending
makes it more difficult for institutional investors to vote, because they do not always know how
many shares they currently hold.
 Many shareholders, including some institutional shareholders, might arrange for the company
chairman to vote on their behalf at the general meeting, as a ‘proxy’. A shareholder can instruct
a proxy on how to vote on each specific proposal at the meeting. Giving proxy votes to the
chairman can therefor make the chairman -and so the board as a whole -a very powerful voting
force in a general meeting. It is then very difficult to vote successfully against any proposal from
the board of directors.
 In some countries, there are restrictions on the ability of foreign shareholders to vote at general
meetings of the company. Global investors are often unable to use their shares to vote on
proposals at general meetings, for example because of restrictions on proxy voting.
3. Institutional investors might be advised on voting by their association.
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