In developing an appropriate corporate governance framework, should Nigeria copy international paradigms that may or may not fit our context? Should we borrow wholesale the rules-based or principles-based approaches to corporate governance or would we be better off developing our own unique response based on lessons from these international approaches?
The role of sound corporate governance practice in creating market transparency and efficiency is undeniable, however, there is currently on-going debate around the world regarding what the optimal corporate governance framework is. Is the right framework the rules-based framework as practised in the United States or the principles-based framework as practised in the United Kingdom or a hybrid of the two? And if a hybrid is the answer, where along the spectrum should it lie?
The United States responded to Enron and WorldCom’s corporate governance failures by establishing the Sarbanes-Oxley Act in 2002. This is a regulator–based system enforced through US SEC regulations, stock exchange listing rules and various state laws, given the federal nature of the US constitution. The US Securities and Exchange Commission, SEC requires that companies adhere to strict disclosure requirements including annual and quarterly reports, tender offers and documents related to mergers and acquisitions, etc. Failure to comply with the corporate governance requirements could lead to suspension from trading on stock exchanges or de-listing from the markets.
Alternatively, the United Kingdom’s principles-based system of corporate governance adopts a “comply or explain non-compliance” stance. The UK Combined Code of Corporate Governance contains recommendations for companies covering directors, board structure, remuneration, accountability and audit, and relations with shareholders. It also contains recommendations for institutional shareholders covering their responsibilities to enter into dialogue with companies, to evaluate governance disclosures and make considered use of their votes. The benefit of comply or explain is that it may encourage good practice over and above legislative requirements however it is only as strong as ability of stakeholders to hold company boards accountable for their decisions to comply and whether they accept justifications for non compliance.
Do Nigerian companies have enough motivation (such as arising from a strong need to protect reputation, an ethos of integrity, or core values) to be compliant? Is there agreement amongst them over minimum acceptable standards of behaviour (against which to judge actual or anticipated behaviour)? Is there an effective system of incentives and sanctions in place? Although we have some codes of corporate governance such as the Securities and Exchange Commission (SEC) code, the consequences for bad governance practices have not been consistently applied. Also, going by convention, can we find companies who truly deal with integrity? And where they exist, do they constitute a significant majority? From the foregoing, it is clear that a “comply or explain” framework, which relies heavily on self-regulation, may not be the most appropriate one for Nigeria.
The objective of government regulation is to set standards, gather information on how this is being adhered to in practice and then intervene where needed for behaviour modification. This presupposes that the regulator has the capacity to monitor and measure compliance and in case of a deviance from standards, the capacity to intervene effectively. Even with the best intentions, regulators do not always have the resources to consistently monitor compliance across all industries all the time. Shall we leave government to be the pivot of ensuring compliance like it is with the US?
Some have argued that it is time for greater levels of stakeholder activism but with the chequered history of relations between shareholder associations, labour associations, non-governmental organizations and the listed companies in Nigeria would we leave it to them alone? Stakeholder activism presumes a social consensus on the need to act and lots of social capital to get mobilization between groups, and the presence of levers that stakeholders can use. Such levers could include market-based responses that affect stock prices, business takeovers, reputational blacklists, etc. The conditions of social consensus and social capital are difficult to achieve or sustain in Nigeria at the moment. Also, stakeholder activism without strong regulation may only bring about change within a specific firm and not the much needed system-wide improvements.
Given the peculiarities of Nigeria, business, government and stakeholders, each on its own would be hard pressed to improve the quality of corporate governance in Nigeria due to the systemic nature of the challenges, mutual capture, weak institutions and perverse incentives. Consequently, to solve the problems inherent in adopting a sole locus of control, we need to find an appropriate corporate governance response to what is a systemic failure. Nigeria needs a response that corrects for the inadequacies of self-regulation by companies, inadequacies of government regulation, and inadequacies of stakeholder activism whilst strengthening the overall system at the same time.
Could the right framework be one that allows business, government and stakeholders each play their role in governance but permit an overlay of collective action by all three? Collective action will enable a system of incentives and sanctions, shared standards, strong monitoring and control, social capital and motivations that ensure the development and adoption of sound corporate governance in Nigeria. The beauty of collective action is that it is a self reinforcing mechanism, the quality of government or regulatory oversight will motivate companies to self regulate. Likewise, stakeholder activism will serve as a check against ineffective regulation. Sometimes the regulator needs to be “regulated”.
Is this really different from what is done elsewhere? Would we be inventing something new? Not really, we would merely be combining good practice from a number of tested approaches in a way that fits the Nigerian context.
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.
Soji.firstname.lastname@example.org, twitter: @sojapa