“Good corporate governance is about ‘intellectual honesty’ and not just sticking to rules and regulations, capital flowed towards companies that practiced this type of good governance.“
– Mervyn King (Chairman: King Report)
A lot has been said about the desirability of institutionalizing a mandatory regime of Corporate Governance as the optimal panacea for corporate failure. This is the reasoning behind the draft National Code of Corporate Governance recently released by the Financial Reporting Council. There is a lot to be said however, for encouraging voluntary compliance by building a culture of “right doing”.
If enhanced corporate governance practices are beneficial and desired by investors, firms competing for scarce capital will implement them voluntarily. On the other hand, investor advocates would argue that a voluntary regime is insufficient, since there is no guarantee that all firms will implement the reforms necessary to provide investors with adequate checks on management and board control. Mandatory rules are thus required according to this school of thought to protect investors and, in turn, to build confidence in the capital markets.
The challenge of institutionalizing Corporate Governance principles without the introduction of a mandatory enforcement regime lies in continuous education and putting in place the structures that encourage companies to appreciate how adopting a ‘comply or explain’ regime would serve their corporate interests, in the final analysis. The following will also go a long way in institutionalizing Corporate Governance:
- Improved clarity of purpose – Corporate Governance Codes need to be clearer in terms of the objectives they are intended to achieve with reduced emphasis on sanctions for non-compliance, a measure oftentimes construed as revenue-generation by many companies, with the intended purpose lost on them.
- Legal underpinning – A recent study has revealed that very few countries including the United Kingdom have been able to successfully implement the “comply or explain” regime without recourse to legal underpinning. The existence of a legal foundation for entrenching good Corporate Governance has proven to be particularly important in the emerging markets, where companies have a stronger tendency to “game the system” and take advantage of regulatory lapses.
- The “Ownership” Principle – Perhaps the most difficult to achieve, yet the most practical method for encouraging a voluntary comply or explain regime would be to entrench amongst corporate entities the notion that the ownership and maintenance of Corporate Governance best practice remains their primarily responsibility and that a failure of adherence thereto is tantamount to an inherent failure of themselves. According to Mervin King S.C. (Chairman, King Report of South Africa) “you cannot legislate good behaviour’. In practicing good corporate governance lies its own reward which easily manifests in the growth, progress and sustainability of a company on the long term.
It is in this context that the Corporate Governance Rating System (CGRS) of the Nigeria Stock Exchange is to be commended. The CGRS seeks to promote notable companies that are leaders in their respective sectors and adhere to the highest CG standards, as well as meet stringent listing requirements, by providing them greater global visibility, making it easier for these companies to attract global capital flows, reduce borrowing costs, lay the foundation for new products and increase market liquidity. It is however trite to caution that the emerging “Premium Board” should truly comprise companies that have adopted Corporate Governance best practice as a way of life and not merely as a “good to have”. The NSE should also consider finding a place on the Premium Board for those companies with market capitalization of less than $1billion who have truly demonstrated sincere commitment to the principles and practice of good corporate governance.
In her article “Voluntary Vs Mandatory Corporate Governance: Towards an Optimal Regulatory Framework” Anita Indira Anand, Associate Professor, Queen’s University, Kingston concludes that an optimal regime is one that takes into account the benefits and costs to all stakeholders, particularly issuers and investors. While the benefits of a corporate governance regime (such as accountability) are relatively clear, the corresponding costs (such as compliance) are not. The cost analysis can be completed by weighing the level of expected compliance against the aggregate costs of the regime. A partially mandatory structure is likely to yield a high level of compliance at lower cost than a wholly mandatory regime. While a wholly mandatory structure may yield slightly better compliance, its costs are likely to be much higher. Thus, a partially mandatory structure that minimizes costs but encourages a high level of compliance is optimal.