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Corporate governance: Beyond Rhetorics

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By Akintola Benson -Oke

I HAVE long been a proponent of the school that vision is fundamental to the success of any corporate objective and that it is the corporate vision that should determine the framework for corporate governance. In other words, the corporate governance framework adopted by any corporate entity must be such as would ensure the realisation of the vision of that entity.

Corporate Governance: The Foundational Principles

It is not surprising that, following the series of corporate failures of the 2000s, series of measures considered extraordinary at that time were taken by different countries and by multilateral organisations to address the observed lapses. From these measures, we can distill the principles or values on which an industry-standard effective corporate governance framework should be built.

In this respect, it has been noted that, “Corporate governance values and guidelines have in recent past been issued by a variety of bodies ranging from committees appointed by government departments to representatives from professional bodies and academics. This writer has chosen to highlight the OECD Principles of Corporate Governance 20043 (OECD Principles) and the Basel Committee Corporate Governance Standards4 (Basel Principles). The OECD Principles played a major role in the development of corporate governance codes around the world including Nigeria”.

Furthermore, “It is trite that the primary concern of the Board of directors is to effectively and efficiently supervise the management of their company. However, they shoulder responsibilities for a lot more. For instance, they decide and drive the goals, strategy, culture, values and standards of the company as well as set and approve the company’s budget and capital expenditure.  In the case of a bank, some Board members constitute the Board Credit Committee to manage the credit risk of the bank through well formulated credit policies and approve large credits that are above management’s approval limit. These credit approval limits and indeed other internal controls (expenses, etc) are set by the Board as part of its duties. Furthermore, the Board determines the bank’s risk appetite and decides on the efficient and effective means to manage the various risks the bank is faced with.

For instance, it is from among the Board members that the following key organisational officials are selected: the Chairman, the CEO, the executive directors, the non-executive directors and the company secretary. These members are also members of various committees set up by the Board to deal with diverse issues. These committees include, the Audit Committee, Remuneration Committee, Nomination Committee, Risk Committee and in the case of a bank, the Board Credit Committee.”

Having identified the key players in the corporate governance process and, adopting the OECD Principles as guide, what are the principles and values to distill? A detailed examination of the OECD Principles and the Basel Principles reveal certain corporate governance principles as listed below. It is expected that a corporate organisation will be able to accomplish its goals and objectives if the Board’s culture as well as its decision-making and approval processes are all influenced by these best practice principles. These principles are discussed below:

Independence and Objectivity.

In corporate governance, independence is therefore important in a number of contexts. It is vital that external auditors are independent of their clients, that internal auditors are independent of the colleagues they are auditing, and that non-executive directors have a degree of independence from their executive colleagues on a board. But what do we mean by ‘independence’ as a concept?

Independence is a quality that can be possessed by individuals and is an essential component of professionalism and professional behaviour. It refers to the avoidance of being unduly influenced by a vested interest and to being free from any constraints that would prevent a correct course of action being taken. It is an ability to ‘stand apart’ from inappropriate influences and to be free of managerial capture, to be able to make the correct and uncontaminated decision on a given issue.

If, for example, an auditor is a longstanding friend of a client, the auditor may not be sufficiently independent of the client. Given that it is an auditor’s job to act on behalf of shareholders and not the client, the friendship with the client may compromise the auditor’s ability to effectively represent the interests of the shareholders. The auditor may not be as thorough as he ought to be, or he may be influenced to give the benefit of a doubt to the client when he should not be doing so.

The same could apply to non-executive directors (NEDs). In some countries, NEDs are referred to as independent directors to emphasise this very point. NEDs are appointed by shareholders in order to represent their interests on company boards. The primary fiduciary duty that NEDs owe is, therefore, to the company’s shareholders. This means that they must not allow themselves to be captured or unduly influenced by the vested interests of other members of the company such as executive directors, trade unions or middle management.

There is also the matter of the measurement of the degree of independence and its impact on governance. A common problem in many organisational situations is ensuring independence where it could represent an ethical threat if absent. In real-life situations, friendships and networks build up over many years in which relationships exist at a number of different levels of intensity. Audit engagement partners can get to know clients very well over many years, for example, and serving together on boards can cement friendships between NEDs and executive members of a board.

Clearly then, there are varying degrees of independence. I find the use of continual helpful when describing a variable such as this. A continuum is a theoretical construct describing two extremes and a range of possible states between the two extremes. In the case of the continuum,  the left hand extreme describes the ‘total independence’ extreme. At this point, the parties in the relationship have no connection with each other, may not know the identity of each other and, therefore, have no reason at all to act other than with total dispassionate independence. On the other extreme on the right-hand side – the ‘zero independence’ end – the two parties are so intimate with each other they are incapable of making a decision without considering the effect of that decision on the other party.

Another fundamental principle is that of Board Accountability and Responsibility. Accountability and Responsibility presupposes that each of the officers having governance responsibilities fully understands that he or she is responsible and accountable for the performance of his duties to the shareholders and the company. It is a full realisation by each member of the Board that he or she can be held liable if for any reason the company fails as a result of its mismanagement. It is my view, however, that accountability and responsibility of directors is threatened where the shareholders to whom the directors owe accountability, do not actually and actively participate in the nomination of Non-Executive Directors who are expected to be the ‘eyes’ of shareholders on the Board.

The third fundamental principle pertains to Transparency. A principle of good governance is that stakeholders should be informed about the company’s activities, what it plans to do in the future and any risks involved in its business strategies. Transparency means openness, a willingness by the company to provide clear information to shareholders and other stakeholders. For example, transparency refers to the openness and willingness to disclose financial performance figures which are truthful and accurate.

Indeed, disclosure of material matters concerning the organisation’s performance and activities should be timely and accurate to ensure that all investors have access to clear, factual information which accurately reflects the financial, social and environmental position of the organisation. Organisations should clarify and make publicly known the roles and responsibilities of the board and management to provide shareholders with a level of accountability. Transparency ensures that stakeholders can have confidence in the decision-making and management processes of a company.

Transparency also refers to the ease with which investors (current or prospective) are able to comprehensively analyse a company on its financial and non-financial position.  This can be achieved where the Board ensures a timely disclosure on a number of issues including, its:

(a)           Audited financial statements;

(b)           Objectives;

(c)           Major shareholding and voting rights;

(d)           Ethics and code of conduct for staff;

(e)           Conflict of interest policy, where not included in the ethics and code of conduct for staff;

(f)            Related party transactions and;

(g)           Material risk factors.

One must note that the issue here is not just about the Board’s timely publication of reports, it is more about ensuring that these timely reports are genuine and actually represent the true position of the relevant company. A lot of the troubled banks in Nigeria posted clean financial reports few months before the CBN’s investigations revealed the contrary. The then CBN Deputy Governor, Financial Sector Surveillance, Tunde Lemo, corroborated this fact by pointing it out that “the apex bank was aware of the preparations of three different financial accounts by banks for themselves, regulatory authorities and shareholders.”

This worrisome exposure clearly indicts the external auditors and audit committees of the affected banks. The external auditor is expected to review the reports of the internal auditors all in the bid to ensure financial reports. Apparently, this is not always the case, particularly where the external auditors are not objective and independent. In a situation where the external auditors have an on-going familiarity with the Board, the auditors could agree to a contentious method of accounting with the objective of enhancing the bank’s financial position in an exaggerated light.

Even with the independence and objectivity of the external auditors intact, the fact of the matter is, the external auditors work with facts and figures as presented by the Board and its management, an issue which bothers on their integrity and transparency. This is where the Audit committee comes in.

The Audit Committee is a composition of some members of the Board (largely independent Non executive Directors) to monitor the integrity of the company’s financial statements. This Committee is required to review the effectiveness and make recommendations to the Board on:

(a)           The internal controls systems of the bank;

(b)           The internal audit function of the bank and;

(c)           Appointment, re-appointment and removal of the external auditors before presenting the issue before shareholders at AGMs.

To function accordingly, it is important that the Audit Committee members are accounting or finance experts such that they are able to interpret financial and accounting books of the bank no matter how convoluted or voluminous it may seem. There is really no good in a watchdog, which is unable to decipher a problem even when he sees one simply because he is incapable of recognising it. Also, the members of this committee must be independent enough to demand essential information from management and report anomalies to the Board where such is sighted otherwise the much talk on transparency would only be ‘cosmetic’ and left to imagination only.

Competency and Commitment. Each member of the Board must be competent to hold his position on the Board in terms of skill and experience. In the case of a bank, it expected that the Executive Director for the corporate or consumer banking department should have some qualification in finance or accounting and a proven track record in finance, accounting or business administration. Also it is expected that a NED should have a wealth of experience to bring on Board. In a nutshell, each member of the Board should be qualified and experienced enough to contribute effectively to the decision-making capabilities of the Board.

To ensure that members are qualified and competent, the OECD Principles recommend a formal and transparent director nomination and election process, normally through some members of the Board making up the Nomination Committee. The Nomination Committee has a key role in identifying potential members for the Board with the appropriate knowledge, competencies and expertise to complement the existing skills of the Board and thereby improve its value-adding potential for the company13.

Nevertheless, it is not all about their competency but also about their commitment to achieving the goals and aspirations of the bank. In fact, the issue of lack of commitment has been the major criticism of the Non Executive Directors over time. Perhaps a reason for the Non Executive Directors laissez-faire attitude could be as a result of the fact that they are part-time officers or perhaps the fact that they earn only sitting allowances and not enough to win their devotion to the bank. Regardless of these reasons, the company secretary needs to educate them that they owe as much duties to the company and its shareholders, as the executives and are therefore subject to as much liability as management. It is therefore imperative and in the best interest of the Non Executive Directors to dedicate time and energy to ask questions where necessary and proffer valuable advice accordingly.

Furthermore, in order to improve on competency and commitment, it is salient for each Board member to undergo suitable training and development which is usually arranged by the company secretary. Executive directors training should be more of a refresher on their responsibilities as well as the potential liabilities they face as regards their role. On the other hand, the training for the Non Executive Directors should typically cover learning about the business of the company since they may usually not spend more than a day in a week with the company and in effect may knowingly little about the company’s business. The only way to improve the quality of their opinion in Board discussions is to train them in this regard.

Furthermore, it is recommended that the Board undertakes a formal annual evaluation of its own performance, including its committees, individual directors, the CEO and Chairman’s performance14. This is necessary to ensure:

(a)           their improved performance;

(b)           a powerful and valuable feedback mechanism for improving Board effectiveness;

(c)           maximising Board strengths and;

(d)           highlighting areas for further development.

Maximising shareholders’ value and protecting stakeholders’ interest is another fundamental principle in today’s understanding of corporate governance practice. A major responsibility of the Board is to maximise the wealth of its shareholders in terms of share price appreciation and dividend payments, subject to the Board’s compliance with the requisite laws and regulations. However, as pointed out above, the view of this writer aligns with the stakeholders’ theory i.e. putting into perspective the interest of other stakeholders aside from the shareholders. Therefore, in addition to maximising shareholder value, the Board’s objective should be broad enough to act fairly in the interests of its employees, customers, its society and in the case of a bank, its regulators and creditors (which includes its depositors).

One way to achieve this is for the Board to inculcate the culture of thoroughly debating and deliberating on business transactions, intended mergers or acquisitions to determine if indeed such transactions will maximise value for its shareholders. Now whether the transaction will maximise shareholder value in the long or short run is another issue entirely but at least the foundation for which the decision is made should be in line with the fiduciary duties the directors owe to the shareholders – to act in their best interest. The shareholders’ interest notwithstanding, the Board’s deliberation and decision must be considerate and fair to all other stakeholders.15

Corporate Governance in the Future – What Shape?

We now turn to an examination of the question of whether the fundamental principles restated above are suitable or capable of addressing the corporate governance challenges of the future. A number of commentators have opined on this issue and I will proceed to share some of these with you.

Corporate governance in the future will, according to Devdip Ganguli, reflect an increasing emphasis on customer satisfaction as a way of measuring the adaptability of the organization over time. As he put it, “By focusing too strongly on financial records and audit committee work, we lose sight of the fact that departments like operations and human resources are very important components in forecasting future success.16

Shann Turnbull suggests that the world of corporate governance will benefit from the establishment of “a new type of corporate information and control architecture.” In fact, he goes beyond this to propose that a network of more specialized board groups and “advisory stakeholder councils” comprising employees, lead customers, suppliers, and others offers a useful solution to the governance vacuum that exists in many large corporations today.

Observers such as Jay Lorsch, in his book Pawns and Potentates, have argued that boards of directors often have insufficient information with which to perform their duties. Some don’t invest the time necessary to provide effective oversight of management activities. And many are reluctant to tread too closely to the line between oversight and management. This may help explain why boards are accused of acting far too slowly in discharging their ultimate duty, insuring proper leadership for an organization.18

Robert Kaplan and David Norton, in their books, The Balanced Scorecard and The Strategy-Focused Organization, have argued for performance measures and reward practices that reflect predictors of future success as well as a continued almost-total reliance on largely historic financial measures.

In support of this position, Robert Kaplan and David Norton pointed out that, among board committees, “the audit committee has historically received the most attention. Not only are boards expected—and in case of publicly financed organizations required—to have one, independent, so-called “outsider,” director membership on the audit committee has been strongly prescribed. Increasingly, audit committees are called to task for their responsibilities and required to co-sign important communications to shareholders. While all of this is going on, of course, governance continues to go astray. An organization’s books may be in order, but its performance may be going down the tubes. What’s to be done?”

They thereafter posed the following questions: “Should the growing number of governance committees require management to establish certain measures—in this case, measures disclosing trends in customer and employee satisfaction and loyalty—that help predict future performance? Should they be responsible for the regular auditing of such measures? Should the measures be made available to investors on a regular basis? In fact, should the SEC or another organization require the disclosure of such information, just as it now requires the disclosure of somewhat meaningless (at least for future investors) historic financial information?”


  1. Another thought leader, Christine Edwards,19 noted as follows with respect to the future: “Consider three areas of corporate governance ripe for change.  First is board size—which likely will decrease.  In addition, director candidates are likely to look very different—including activist investor director candidates making up future candidate slates.  Second, board and management communication with shareholders may dramatically increase and morph in nature.  Finally, annual meetings of shareholders may be eliminated and could be replaced by something akin to the “Instagram Investor” generation:  solicited, tracked and analyzed, instant and ongoing shareholder to company communications.”


  1. Continuing, he noted that “in the face of ever increasing demands on director time for board service, intense public scrutiny regarding board decisions and the continued threat of individual liability, it is not difficult to imagine a corporate governance environment where boards will be substantially reduced in size.  Indeed, some might imagine a “professional board” made up of three directors, one non-executive chair and two independent directors, serving full time as overseers of management and fiduciaries for shareholders.  Outdated, cumbersome and outcome predictive annual shareholder meetings could be replaced by an ongoing series of online (company website) communications. ”


  1. “One could imagine public company communication systems soliciting shareholder and other interested party feedback.  Several different types of communications could be created—and even sanctioned and regulated by federal regulators.  Beyond merely creating a portal for episodic shareholder feedback, the first type of communication might be for “Strategic Discussion Topics” comprising “material” initiatives being considered by management.  These Strategic Discussion Topics could be open to any interested parties to provide comments, criticisms and alternative suggestions to management.  In this hypothetical, regulators might require management to aggregate, analyze, and apply statistical and substantive analytics to various interested party responses received by the company.  That analysis would be reviewed by management and reported, with management’s recommendations, to the board.  Instant communication, instant feedback and instant shareholder response.  A Brave New World indeed.”


  1. “Another conceivable online communication would allow Board-approved decisions (“Strategic Decisions”) to be vetted online in a shareholder-only, password-protected space, allowing only shareholders to “vote” on the Strategic Decisions.  While Strategic Decisions voting would not be binding, the outcome of votes could provide the company with an immediate sense of shareholders’ assessments of decisions being made.  Companies might also be given the option to share any or all of the statistics, analyses and voting results with the public—including analysts covering their stock.  Finally, companies could use “password protected” communication to replace annual meetings by utilizing the same type of online voting for the annual meeting proxy solicitation.”


  1. “The shape of public company governance, and the responsiveness of boards and management to shareholder sentiment, will likely take a dramatic turn over the next 10 years.  Who knew that even Instagram would be part of the major influencers?”


  1. One can see from above that there are a number of differing insights into the different governance challenges that corporations will face in the future. Thankfully, some other commentators have attempted to reconcile these views.


  1. It has thus been noted that: “Although historic financial performance can be a factor in predicting future success, it is far from being the most important one. A financial scorecard gives the prospective investor an idea of the financial health and reliability of the company. But it is not a reliable yardstick to measure future performance for the simple reason that we see that now, more prominently than ever before, market trends don’t stay in tune with past performance alone. Today’s economy demands performance complemented with dynamic change. A way to measure adaptability is sustained customer satisfaction.


  1. What, therefore, becomes important in a volatile economy is how happy the customers are. After all, it is they who decide the fate of a company. Perhaps it makes more sense today to talk about customer/employee satisfaction than sheer financial performance. Companies like Lucent and Kodak (both part of the list of America’s Worst Boards as compiled by Business 2.0) would benefit if their directors kept their ears open outside the boardroom.


  1. As for the issue of corporate governance in the broader sense, what is honestly lacking today is common-sense perspective. While audit books are a necessary aspect of an organization, the importance allotted to them alone defeats the purpose of progress in the organization, both outwardly and in terms of customer/employee satisfaction. By focusing too strongly on financial records, we lose sight of the fact that departments like Operations, and Human Resources are very important components in the amalgamation of an organization.


  1. Leadership that is bold, willing to listen and adapt, young at heart, and endowed with common-sense priorities will be at the helm of tomorrow’s leading companies. It’s about time we realized that.”20


  1. Another attempt at the reconciliation of these views was made by Goppi Valdi when he noted that, “Customer and employee satisfaction and loyalty are indeed good predictors for future success of a company. This should be viewed in conjunction with historical financials and future development strategies of the company. Also, since this is valuable information, it should be binding on the company to release such data. But we need to answer a few questions. Who will perform the audit? What are the guidelines? Who pays for it? Should there be an independent firm that is appointed by the SEC?”


  1. Finally, I quote Turnbull’s attempt to summarise the thinking by introducing the concepts of “network boards” and “distributed intelligence.” He noted that, Future corporate governance will mitigate the problems identified by establishing a new type of corporate information and control architecture. A network of boards and advisory stakeholder councils will govern sustainable competitive corporations.


  1. Network governance provides the only way to mitigate the information overload introduced by a unitary board through decomposing decision-making labour. Network information and control systems can also provide requisite variety of information feedback and control from strategic stakeholders to provide competitive advantages. This will require employees, lead customers, suppliers, and members of the host community to be organized into self-appointed advisory councils in order to bond and integrate their interests with the corporation’s. Network boards remove and use the conflicts of interest between stakeholders who Michael Porter recommended be integrated into corporate governance in his 1992 Research Report on Capital Choices.


  1. Network boards introduce “distributed intelligence” and specialize in decision-making labour in a way similar to M-Form firms. Watchdog boards take over the compliance roles of auditing and governance boards take over the role of nominating and remunerating directors. This greatly simplifies the duties of the executive board to increase shareholder value. In addition, non-executive directors become politically independent of management and can obtain information independent of management from the stakeholder boards to evaluate management and the strengths, weaknesses, opportunities, and threats of the business.



  1. From the above, it is clear that the following are the areas where thought leaders believe that corporate governance will need to adapt to meet future challenges:

(a)           Customer satisfaction;

(b)           Information exchange and dissemination architecture;

(c)           Board oversight of management;

(d)           Performance measures and reward practices;

(e)           Board sizes, composition, and diversity;

(f) Nature and intensity of communication with shareholder and;

(g)           The nature and format of annual general meetings.

  1. As noted at the beginning of this discourse, the central question is whether the governance principles of today would be mere rhetorics in the face of the real challenges of the future. My submission is that, if the earlier-discussed governance principles of today are retained but adapted to suit the challenges of the future also identified above, they will continue to properly serve the interests of stakeholders in corporate entities.

Dr. Akintola, Benson Oke, Honourable Commissioner, Lagos State Ministry of Establishments, Training and Pensions.


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