Corporate Governance probably has a zillion definitions. According to Wikipedia 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. An interesting definition is one that defines Corporate Governance as “aimed at reducing conflicts of interest, short-sightedness of writing perfect contracts and monitoring controlling interests in the firm, in the absence of which firm value is decreased’ ( Denis & McConnell.
The principles of Corporate Governance by themselves define the responsibilities of individuals who have significant roles within the Corporate Governance framework and the diligent performance of these roles ultimately impact on the entity to which they belong. These principles are Responsibility, Accountability, Transparency, Reputation, Fairness, Independence and integrity.
At the top of the pyramid of the CG framework are providers of capital or the owners of the business – shareholders (and lenders). A broader perspective of Corporate Governance includes stakeholders (employees, regulators, society in general) in this bracket. These are the ones to whom Directors owe duties of accountability, responsibility, and transparency. Directors are appointed and hold office at the pleasure of shareholders. Shareholders – particularly institutional investors – and lenders are expected to be vigilant in protecting their interests. They should insist that Directors uphold good corporate governance to safeguard shareholder value.
Regulators should monitor compliance with rules and regulations and impose stiffer sanctions on erring individuals and not only the entity. It is submitted that imposing fines and penalties on the company does not serve to deter executive misconduct. The company can only act through the individuals that have specific responsibilities. These individuals should be appropriately sanctioned when their misbehavior impacts negatively on the company.
In the words of Justice Ope-Agbe in the case of The Federal Republic of Nigeria Vs. Lord Ifegwu & 5 Others, “I am moved by the pleas of learned counsel but I have a duty to sound it loud and clear that those who embark on destroying edifices that have been the only hope of the ordinary struggling worker should not go unpunished. By becoming distressed, Alpha Merchant Bank has caused sorrow to many and it is in this light that I want to approach the issue of sentence and impose a sentence that will serve as deterrent to intelligent people who would want to use their intelligence to cause sorrow to others”.
Given the significance of their role, Directors have legal duties flowing from their fiduciary role. These include acting in good faith at all times, exercising power only for proper purpose, exercising care and skill, protecting corporate property, opportunity or information, not to fetter their discretion to vote in a particular way, and not to allow personal interests to conflict with their duties and responsibilities as Directors.
To enable them perform this role, Directors are expected to espouse the CG principle of Independence. Independence is a state of mind that should be cultivated by the Director who seeks to give a good account of his stewardship. Directors should play down collegiality on the Board and be prepared to have a divergent view if this is in the best interest of the company as a whole. A diligent Director should also acquire knowledge required to make him perform his role and seek expert advice when necessary. Directors should also disclose all real or perceived conflicts of interest and abide by the company’s policies in this regard.
Assisting the Directors in the performance of their oversight responsibilities are External Auditors, consultants and legal advisers. Auditors in particular are expected to give independent assurance on the state of the company’s financial position, internal controls and going concern status. Recent corporate failures have raised the question as to whether the interests of auditors – who are expected to be gatekeepers – are aligned with those of the owners of the business or with Management as he who pays the piper dictates the tune. To assure auditor independence, mandatory term limits have been introduced by the Codes of Corporate Governance. Similarly, auditors are not expected to provide non-audit services to the companies they audit to reduce conflicts of interest. It is suggested that audit firms, who fail to represent the interest of shareholders should be disciplined by the market and appropriately sanctioned.
At the base of the pyramid is Management which reports to the Board. In a bid to align managerial interests with those of shareholders, directors approve incentive structures that include stock options, profit sharing etc. These have in many cases been counterproductive as managers have engaged in earning misrepresentation and financial fraud that eventually bring down their organizations. Executive Directors, Managers and other employees are expected to live by ethical values – “doing right things right”.
Good Corporate Governance is not a set of rigid rules and should go beyond ticking the structural indicator boxes. Directors, employees and all stakeholders should understand and honour the letter and spirit of the laws and regulations that apply to their business; foster a fair, respectful and collaborative work environment; instil & maintain trust in dealings with all stakeholders and above all act with integrity.