Building a Sustainable Business With Corporate Governance Principles.

The term corporate governance means the collective effect of infusing the principles of transparency, accountability, integrity, and security using rules, laws, and guidelines from regulators, to establish policies, processes, and procedures that help a company manage its affairs and achieve its long-term goals.

It became relevant following the uncovering of several corporate scams that collapsed big corporates in the United States. This sounded the alarm for other countries to implement corporate governance policies that eliminate fraudulent practices, especially in publicly owned companies.

In the year 2000, a committee set up by the Securities and Exchange Commission [SEC] and the Corporate Affairs Commission [CAC] led by Atedo Peterside issued a Code of Corporate Governance for Public Companies. This was followed by other sectoral codes from Regulators such as the Central Bank of Nigeria [CBN], Securities and Exchange Commission [SEC], Nigerian Communications Commission [NCC], National Insurance Commission [NAICOM], National Pension Commission [PENCOM], etc. to guide players within their sectors.?

A more encompassing code was that of the Financial Reporting Council of Nigeria [FRCN] which is known as the Nigerian Code of Corporate Governance [NCCG] 2018 to drive corporate accountability, transparency, sustainability, and economic development. According to the NCCG 2018, some private companies and all public companies regardless of their sectors are expected to apply the principles of the code and explain how they have applied them in their operations.

Who Should Abide by Corporate Governance Principles:

As a general rule, all public companies, private companies that are holding companies, privatized companies, and any private company that is regulated by any authority other than the Corporate Affairs Commission [CAC] and the Federal Inland Revenue Services [FIRS]. This means that business names and small companies that are not regulated by sectoral regulatory bodies like those mentioned above with the sector codes are not mandated by law to abide by the code of corporate governance.

I believe that for any organization to truly grow, the principles of corporate governance are essential as they serve as evidence of a company’s values and ethics thereby building public trust and confidence. In our growing ecosystem where startups now rely strongly on venture capital funds, individual investments, and loans to expand and meet strategic goals, a solid corporate governance best practice gives investors reasons to partner with such organizations and makes their structure solid enough to support. In essence, every company no matter how small should set corporate governance principles that should guide their operations even before incorporation. This will form part of pre-incorporation matters to be discussed and agreed upon by members. As the company grows, changes will be made to the principles to accommodate all players and the internal system that the company operates. The members will easily work and grow together while sharing the same values. The shareholders will be able to align their objectives with those of the Board of Directors without springing up any agency problems.

Key Principles of Corporate Governance:

Board Structure:

For any company to thrive, there has to be the right people at the hem of affairs calling the shots. Even though the Corporate Affairs Commission [CAC] now allows a single director to run a company, however, imbibing the principles of corporate governance requires that no single person should call the shots if a company wants to truly grow.

As their operating capital increases and they expand in their operation’s geography, products, and people, there is a need for the appointment of new directors and senior managers to manage the affairs of the company. Once this is done, a Board of Directors which comprises all Directors of the company and headed by a chairman [appointed from among the directors] can be duly constituted. The company should design a policy that outlines the appointment, removal, remuneration, appraisal, etc. of directors. Appointment of directors should be based on the needs of the company and the skills, integrity, experience, and passion of the potential director to be appointed while ensuring a balance in skills and diversity [Age, Gender, and Experience].

Types of Directors:

The directors should comprise of Executive Directors and Non-Executive Directors who may also be Independent Non-Executive Directors. What makes a Non-Executive Director independent is the fact that they have no prior relationship with the company that could influence their decision-making capacity and they bring a high degree of objectivity. They do not own any part of the shares of the company, do not provide any form of professional or consultancy service to the company, and are not employees or relatives of any employee or shareholder of the company. They can remain neutral in their decision-making without being influenced by anyone or the company itself.

Composition and Quorum:

A minimum of two or more directors should manage the affairs of a company aiming for sustainability. For a commercial, Merchant, and Non-Interest Bank, the CBN has set a minimum of Seven [7] and a maximum of Fifteen [15] directors. In the case of Payment Service Banks, a minimum of Seven [7] and a maximum of Thirteen [13].

The Non-Executive Directors must always be more than Executive Directors while a minimum of Two [2] Independent Non-Executive Directors must be on the Board. This figure should increase as the number of Directors on the Board increases.

Two-thirds of the members should form a quorum for meetings and passing resolutions which may either be special or ordinary.

Separation of Power:

The position of Chairman and Managing Director/Chief Executive Officer should be separated at all times. One person should NOT hold the two positions at the same time as this may hinder growth and impose too much power on a single person. ?This also applies to Non-profit organizations as Founders are expected to not hold the positions of Chairman of the Board of Trustees, Governing Board, and Management at the same time.

Where family members are serving in the company, a maximum of Two [2] members of an extended family shall be on the board. Where a member of the said extended family is the Managing Director/ Chief Executive Officer, the other person cannot be the Chairman of the Board of Directors.

Meetings:

For a private company, board meetings of directors are to be held at least quarterly to make and review strategic decisions of the board. A Fourteen [14] days’ notice must be given stating the reason for the meeting, venue, date, time, meeting agenda, voting methods, proxy requirements and attach necessary documents that will be used during the meeting. Likewise, a general meeting of shareholders can be called by any shareholder to discuss emergency matters such as those obtainable in extraordinary general meetings.

Public companies are expected to hold annual general meetings yearly. Where the company is newly incorporated, the first meeting must be held within Eighteen [18] months of incorporation. A Twenty-One [21] days’ notice must be given stating all the information mentioned above for it to be valid. All matters to be considered should be clearly stated under relevant sub-headings.

In case of emergencies, extraordinary general meetings can be held while statutory meetings are held every Six [6] months. The resolutions that can be passed in these meetings make the difference between them.

Any of the directors or shareholders can call for a meeting that relates to them upon giving of requisite notice through the company secretary

Tenure:

Every director should have a tenure of at least Two [2] years. Most companies grant a maximum of Twelve [12] years which will be divided into Three [3] terms of Four [4] years each. The business continuity plan should expressly state how each tenure is calculated where the director is made a Chairman of the Board or the Managing Director as well as who takes over in case of death, resignation, or termination of appointment before expiration of the tenure.

The tenure of Founders of Non-profit organizations where they hold certain positions such as Chairman of the Board of Trustees, Governing Board, and Management should be clearly stated. The succession plan should be stated in the constitution of the organization.

Remuneration:

A remuneration committee should be put together to decide adequate remuneration for different positions held in the company. The shareholders should decide the remuneration of directors and no director should be a part of the remuneration committee that decides on his/her remuneration.

Executive Directors should naturally be put on salary as they run the day-to-day management of the company in conjunction with the management team. They are NOT to be paid sitting allowances as their salaries cover time spent on the board. Non-Executive Directors and Independent Executive Directors should not be placed on salary. However, they can be paid director’s fees, travel, and hotel expenses, sitting allowances, and given gifts or bonuses to encourage and appreciate their work.

A clawback policy that allows for recouping excess rewards from directors who underperform or those who were paid under misrepresentation or false documentation.

Conflict of Interest:

The potential directors to be appointed must disclose any other position held that could amount to a conflict of interest. This disclosure must be made before the appointment is executed by shareholders.

Conclusion:

Corporate Governance is an effective way of building sustainable businesses if practiced diligently. A company must start from the very beginning to incorporate corporate governance principles as this makes it easier as they grow. A sole proprietor can also incorporate corporate governance principles by documenting all ethical, social, and financial policies that should guide the business and implement them as though other people exercise checks and balances on him/her. The success of any business guarantees community and economic development, hence why corporate governance should be practiced by all and sundry.