Corporate governance is at the heart of how businesses are run. According to the Organization for Economic Cooperative Development (OECD), “corporate governance involves a set of relationships between a company’s management, its boards, its shareholders and other stakeholders”.

Corporate governance, broadly speaking, includes board efficiency, transparency, reporting requirements, investor communications and sustainability.

Corporate governance includes rules and practice guiding such matters as selection of the board and management, roles and responsibilities of a board, the oversight functions of a board over management, shareholder rights, accounting and reporting, and sustainability issues including relationship to host communities, consumers and general public, etc.

Corporate governance standards in an organization are typically based on macro factors at play in the country where a company operates including the country’s legal and financial system, corporate ownership structures, and cultural, economic and political realities. In Nigeria, where corruption is rife and endemic, corporate governance practices are usually lax.  Failures in the banking sector exposed in the Sanusi post consolidation era have been attributed to poor corporate governance including poor credit risk management practices, conflicts of interest in lending, false reporting, etc.

However, current economic realities like the globalization of capital flows has rendered ethical relativism, the doctrine that morality exists in relation to culture or society, an unsound basis for setting corporate governance standards. Nigerian Companies must decide if they want corporate governance standards that lie in the eye of the beholder or corporate governance standards that lie in the eye of any beholder?

The need to change the basis of corporate governance standards to match good international practice is clear. First, because of the high cost of capital in Nigeria, companies that seek to compete on a larger scale are seeking capital from foreign capital markets or from international investors’ participation in local markets.  Given the mainstreaming of corporate governance issues, financial markets all over the world have instituted either mandatory or recommended corporate governance codes to guide the conduct of publicly quoted companies.

Till date, there are 7 Nigerian companies listed on the London Stock Exchange.  Although some are on the growth market, AIM with fewer guidelines, companies who wish to be listed on the main market, like Seplat, Nigerian Oil Company has successfully done, must comply with the London Stock Exchange admission and disclosure standards. They are also required to comply or explain why they are not compliant with the UK Corporate Governance Code.  Failure to comply with these requirements will lead to various sanctions. Therefore, to compete globally both in the size of the market they play and in the quantity and quality of capital they access, Nigerian companies need to set more stringent standards of corporate governance than the Nigerian environment necessitates. Good corporate governance practices demonstrates to investors that their investments will be safe and managed in their best interest

Even Nigerian regulators have taken steps to imbibe good corporate governance practices. In 2003, The Securities and Exchange Commission of Nigeria established a Code of Corporate Governance for Public Companies in Nigeria. This code was refined in 2011.  In the same vein, The Central Bank of Nigeria, after the consolidation exercise in 2006 released the Code of Corporate Governance for Banks in Nigeria. Also, the National Insurance Commission, NAICOM introduced a code of Business Ethics and principles on Corporate Governance for the Insurance Industry.

It is not only big companies that can benefit from adopting good and internationally acceptable corporate governance practices, small and medium sized enterprises (SMEs) without good corporate governance standards will miss out on the chance to participate in the value chain of multinational companies or even big local companies with good corporate governance practices. For example, it will constitute a reputational risk for big international brands like Shoprite, which just opened its 11th store in Ibadan, to associate with suppliers that do not have clear reporting and good management practices. The reputational risk of dealing with suppliers with poor corporate governance practices is heightened by the impact of the Internet and social media on brand perception. All it takes is a tweet or online review in Lagos or Lusaka for the vibrations to be felt in London.

Furthermore, organizations need to practice good corporate governance to guard against other risks that threaten the going concern of the organization. Such risks include the liability or asset damage that may occur if managers enter into transactions that are self-serving and that destroy the value of shareholder’s equity. Others include fines and sanctions that may be levied if a company’s financial statement and disclosures are incomplete, misleading or misstated. In extreme cases, it could lead to a loss of trust from customers that may lead to product boycotts and in the case of a bank, a run. This is necessary because even codified global corporate standards usually constitute an internationally acceptable ethical minimum and may not be sufficient for the nature of a business.

Despite the focus on corporate governance issues all over the world, several constraints still limit its application in Nigeria including the lack of true board independence, inadequate board oversight over management, poor business ethics, etc.

In sum, the business case for corporate governance is strong. Good corporate governance is germane to the going concern of an organization because the quality of corporate governance determines the strategic direction of the firm in terms of the mission and values, corporate culture, risk management and processes. Businesses in Nigeria have to move beyond mouthing the buzzword of corporate governance to adopting sound corporate governance practices.  It makes business sense to do so.

Soji Apampa is the co-founder of The Convention on Business Integrity, which sponsors the Corporate Governance Rating System in partnership with the Nigerian Stock Exchange. He is also a member of the Premium Times editorial board. Kindly give him feedback via Soji.apampa@cbinigeria.com