Control, Ownership, Conflicts and Corporate Governance

In any corporation, there are many players who play a key role in driving the business of the company. These stakeholders include the investors, shareholders, board of directors, and the members of management. Every corporation has financial responsibilities and these stakeholders all play very different roles by virtue of their relationship with the company. By virtue of this difference in roles, it is inevitable that there would be conflicts arising from the different interests at play. Any corporation that wants to keep its business afloat must, very much like any democratic government, ensure there is a separation of powers. Thus, the role of ownership of the corporation and control of the corporation are often separated. While this separation is crucial and essential for the success of the company, it also births conflicts among the parties. The goal of any owner is to maximise profit, revenue and cash flow, while those in control are in charge of overseeing the daily activities of the company, planning and directing the company to meet its objectives. Although these two functions are not necessarily opposing ideas, both parties may face obstacles in aligning their roles and interests for the good of the company. This is where corporate governance comes in to mitigate conflicts and ensure the interests of all parties are aligned to take the right actions for the company.

Corporate governance is simply a set of rules, practices, codes which "govern" or dictate how a company is run and controlled. Corporate governance balances the interests of the various parties in a corporation and provides a framework for positioning their interests to achieve the company's objectives. Corporate governance influences the management of the company, helps determine how risks are addressed and helps to optimize the internal performance of the company. Good corporate governance helps to build trust in a company. The turn of the century brought to light a lot of scandals, fraud and gross mismanagement which rocked the corporate world. Many companies went into liquidation as a result of irregular and unethical practices being perpetrated by those managing the companies. Particularly, the collapse of major companies like Arthur Anderson and Enron, and the accompanying scandals which rocked the corporate world heightened the need for better corporate governance practices. A common theme in many of these bankruptcy filings were accusations of mismanagement and fraudulent manipulation of the company's books. Thus, it became important for any company to prioritize adherence to good corporate governance.

There are different models of corporate governance, such as the shareholder model, the political model and the two tiered system. The shareholder model of corporate governance is designed to prioritize the interest of shareholders as their funds are essential in keeping the business of the company running. In the two tiered system, the company has two different boards. The company has the management board, which comprises of the company's insiders such as its executives, and the supervisory board, which is made up of outsiders such as the shareholders.

The key drivers of the corporate governance regime in any company are the board of directors. The members of the board appoint members of management and make important decisions on matters such as remuneration and compensation, the board also owes a fiduciary duty to the shareholders to protect their interest in the company. There are different types of directors, depending on the role they play in relation to the company. Whether the directors are executive directors (responsible for the daily operations of the company) or non-executive directors or independent directors, it is important that the board is independent from the company's management. Research has shown that independent boards tend to make fewer value destroying acquisitions, and tend to act more in the interest of shareholders. Beyond independence, it is also important to ensure that the board is competent and diverse. The company must also ensure that it prioritizes risk management to identify any potential disasters and put in place mechanisms to combat them. The company must also treat shareholders equally and equitably, ensure that adequate disclosures are made concerning matters of importance to the company's business, and promote reporting integrity.

While implementing all of these internal structures is commendable, regulation also plays an important role in promoting good corporate governance in order to protect investors. With regulation, there is also the added cost of sanctions for non-compliance with the principles of corporate governance set out. For example, the Dodd-Frank Act which was enacted in the USA in 2010 requires all listed companies to appoint independent compensation committees. The act also requires public companies to establish policies that allows the company to take back up to three years of any executive invective which was erroneously award (claw back provisions).

In Nigeria, the corporate governance regime is largely divided into general legislation and sector specific laws and codes. With the collapse of major corporations as mentioned earlier, the Securities and Exchange Commission and the Corporate Affairs Commission set up a committee in 2000 to investigate the issue of corporate governance in public companies, which led to the eventual issuance of the Code of Corporate Governance for Public Companies. The Companies and Allied Matters Act (CAMA)2020, the Investment and Securities Act (ISA)2007 and the Financial Reporting Council of Nigeria Act 2011, all apply generally and make provisions on the framework for the regulation and operation of Nigerian companies. Other sector specific regulations include: Code of Corporate Governance for Public Companies, the Code of Corporate Governance for Banks and Discount Houses, Code of Corporate Governance for Financial institutions in Nigeria and the Securities and Exchange Commission rules. All of these regulations make provision as to the size and qualification of the company's board of directors and members of senior management, to ensure that the persons directing and controlling the company have the necessary qualifications to properly manage the company considering the scale and complexity of the company's operations and projects. These codes also tend to set tenure limits on persons serving on the company's board to ensure that the members are periodically rotated. Another key provision which is a common theme in codes of corporate governance is the establishment of a whistle blowing framework for persons to report any fraudulent or illegal behavior and activity. This is particularly important as many of the biggest failures of corporations have been as a result of the failures of the company's reporting policies, fraudulent accounting and reporting policies. Lastly, the codes mandate the company to carry out an annual board evaluation led by an independent consultant. The evaluation report focuses on the performance of the board within the year in review, the performance of the board committees, regulatory issues and so on.

In determining whether a company is practicing good corporate governance, certain pertinent areas of the company's operations have to be examined. These areas include, but are not limited to the compensation policy, risk management, policies on conflict of interest, board qualification and the frequency of both internal and external audits of the company. Good corporate governance is a key element to sustainability of any company. It is a system of checks and balance which enhances the value of the company to investors. It helps to promote investor confidence, minimise risk and corruption, and also aids the adoption of ethical business practices which in turn lead to financial viability. In conclusion, every company that wants to practice good corporate governance must ensure that its people, processes, performance and purpose align with the company's vision and adhere to provisions of the principles and regulations on corporate governance.