Corporate governance has been variously defined.
The Investopedia defines Corporate Governance as “The system of rules, practices and processes by which a company is directed and controlled’’. It further states that corporate governance essentially involves balancing the interests of the many stakeholders in a company - these include its shareholders, management, customers, suppliers, financiers, government and the community. Since corporate governance also provides the framework for attaining a company's objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure. Ian Crosby, IFC’s Sustainable Business Advisory Manager for East Asia and the Pacific, defined Corporate Governance as “the structures and processes for the direction and control of companies. Corporate governance concerns the relationships among the management, Board of Directors, controlling shareholders, minority shareholders and other stakeholders’’.
In my view and from the available definitions on this subject, two concepts are central to Corporate Governance – governance and control. Consequently, my understanding of Corporate Governance is the framework of company procedures, conduct, and attitudes that add value to the business, builds its reputation and ensures its long term success across generations. It includes the processes through which companies' objectives are set and pursued in the context of the social, regulatory and market environment. Governance mechanisms include monitoring the actions, policies and decisions of the companies and their agents.
Ladies and Gentlemen, the task to which I have been assigned is to share with you some of the banking industry’s experiences in relation to corporate governance in Small & Medium Enterprises especially Family Businesses transformation, growth and corporatization. Permit me, first to look briefly at the general global experience.
The global experience
Corporate Governance became prominent in the 1970s in the United States of America and within the last 30 years has become a subject of intense interest by academics, regulators, executives and investors. In Britain, Corporate Governance became popular from the 1990s when the London Stock Exchange and the Financial Reporting Council, which regulates accounting standards in the U.K., established in 1991 the Committee on the Financial Aspects of Corporate Governance chaired by Sir Adrian Cadbury. Soon after the Cadbury Committee was established, a number of prominent British public companies collapsed in circumstances which suggested that a lack of accountability on the part of top executives had contributed to the problems which had arisen.
Corporate governance in Nigeria
In Nigeria, the concept of Corporate Governance gained prominence after the Atedo Peterside Committee set up in 2003 by the Security and Exchange Commission (SEC), developed a Code of Best Practice for Public Companies in Nigeria. The Code was designed to entrench good business practices and standards for Directors, Auditors, Chief Executive Officers and other key leaders of listed companies including banks.
The Central Bank of Nigeria, in 2006, published the Code of Corporate Governance for Banks and Discount Houses in Nigeria. This Code was published in light of various weaknesses noted in banks in the areas of governance and control which included board and management disagreements giving rise to board disputes, ineffective board oversight functions, weak internal controls, and non-compliance with laws and regulations. Furthermore, there were poor risk management practices and abuses in credit approvals and disbursement. It was therefore unsurprising that there was a high incidence of non-performing loans, including insider-related loans that were eventually purchased by the Asset Management Corporation of Nigeria (AMCON).
Before the advent of the CBN Code of Corporate Governance, the governance style and code of banks in the country was largely regulated by the Companies and Allied Matters Act, 1990 and internal processes established by the Boards of the banks and their shareholders.
However, the Code of Corporate Governance sought to address the short-comings and loopholes that were being exploited by these stakeholders and thus provided for the following:
· Size and Composition of the Board membership – This provided for expanded membership, providing for a higher number of Non-Executive Directors above the Executive Directors, and also placed control of the Executive Directors within the purview of the Board.
· Separation of Powers – The code separated the roles of the Chairman from that of the CEO, thereby providing for decentralization of powers and improved decision making.
· Appointment and Tenure – The code provided for merit as the criterion for appointment into board membership and clearly defined the criteria (both academic and experience) for appointment into top management positions. This ensures that the management of any bank is handled by qualified, experienced and competent persons.
· Clearly Defined Rights of other Stakeholders – The rights and privileges of other shareholders who may not have board representation were clearly defined by the code while binding the company and the Board to respect these rights and privileges.
· Disclosures in the Annual Report – The introduction of the compulsory disclosure requirements and due process has led to the exercise of enhanced care in the management of banks, as top managements of banks endeavor to avoid the consequences of their Annual Report being fraught with reports of sanctions and penalties.
· The provision for code of Ethics & Professionalism and Conflict of Interest and the requirement for disclosure of the existence of actions having ethical implications and the definition of applicable sanctions have placed the burden of compliance on affected stakeholders.
· The Office of the Chief Compliance Officer – The requirement for the compulsory setting up of Compliance Department in all the Banks and the appointment of Chief Compliance Officer to oversee the compliance of the bank and its businesses with the provisions of the code and compliance with the provisions of the Money Laundering (Prohibition) Act 2011 and the Terrorism Prevention Act 2013.
· The Code further prescribed a tenure for banks’ CEOs to a maximum of ten years.
· The Code requires that the Board shall ensure that a succession plan is in place for the CEO, other Executive Directors and top management staff.
· Limitation of Government holding in any Bank to not more than 10% has removed the Banks from the control and manipulations of the Government, Politicians and Government appointed Board members, thereby, leaving the management of the banks strictly in the hands of individuals and private sector.
· The Code provides for the constitution of Board Audit Committee to independently verify and ensure the integrity of banks’ financial reporting and enhance the independence and competence of the bank’s external auditors.
· The Code also limited the tenure of the Bank’s external Auditor to a maximum of 10 years and barred reappointment of such auditor until after 10 years.
· The banks are required to render monthly and annual returns to the Central Bank of Nigeria stating if there had been corporate governance infractions during the period.
· Regulation also requires that all insider related credits are reported to the regulatory authorities.
The emphasis on Corporate Governance and in particular the various enabling laws and regulations which hold Directors and key officers jointly and severally liable for their actions has largely assisted in the reduction of poor corporate practices.
The Central Bank of Nigeria, in order to align the Code with current realities and global best practice recently reviewed it and issued a new Code of Corporate Governance for banks and discount houses effective October 2014. The new Code contains stricter provisions which aim to strengthen governance practices in Financial Institutions.
Currently, the key corporate governance provisions relating to banks are contained in the Companies and Allied Matters Act (CAMA) 1990, the Banks and other Financial Institutions Act (BOFIA) 1991, the Investment and Securities Act (ISA) 1999, the Code of Corporate governance for public companies in Nigeria published by the Securities and Exchange Commission and the recently revised CBN Code of Conduct for Banks and discount houses. It is also important to note that all directors are also bound by the CBN code of conduct for Directors of licensed Banks and Financial Institutions.
This codes and the deliberate steps taken to strengthen them have largely helped in resolving some of the corporate governance issues, that affected many banks and which led to the collapse and take-over of many of the family-owned Banks in Nigeria.
Corporate Governance and Small & Medium Scale Businesses
One of the major challenges facing Small and Medium Scale Enterprises in Nigeria and indeed in Africa, is the lack of institution of effective Corporate Governance system, processes and practices.
In working with SMES as one of our key business vision and strategy at Heritage Bank, the following challenges (not exhaustive though), have been identified severally in various formations
i. low level of entrepreneurial skills,
ii. poor management practices,
iii. constrained access to money and capital markets,
iv. inadequate equity capital - low equity participation from the promoters because of insufficient personal savings due to their level of poverty and low return on investment,
v. Poor Financial Management Skills
vi. poor infrastructural facilities,
vii. high rate of enterprise mortality,
viii. shortages of skilled manpower based on affordability,
ix. Environmental Factors - multiplicity of regulatory agencies and overbearing operating environment,
x. Policy inconsistencies and government bureaucracy
xi. societal and attitudinal problems,
xii. integrity and transparency problems,
xiii. restricted market access and marketing problems
xiv. lack of skills in international trade;
xv. lack of access to information given that it is costly, time consuming and complicated at times.
xvi. access to Modern Technology
xvii. unfair Competition
xviii. non availability of raw materials locally
xix. Multiple taxes & levies
xx. Lack of transparency, undocumented processes, poor business integrity, accountability issues etc. – affecting legacy transfers and sustained existence
xxi. Non-observance of due diligence in dealing with, employment, customers and suppliers.
In his presentation titled “SME Issues, Challenges and Prospects” at the Financial Systems & Strategies (FSS) 2020 Conference, Peter Mousley of the World Bank fingered on two dynamic indicators that should be of particular interest:
S/N / Two Dynamic Indicators / Importance of the Indicators(why do these measures matter??)
1 / § Transformation of micro and informal firms into formal firms / § SMEs are the single largest source of employment in economies.
§ Formalisation increases SME access to services and capacity for employment creation
§ Firms that grow or link to international value chains increase technology absorption and create major spill-over effects in the economy
§ SMEs play a key social inclusion role in strengthening stake-holding and voice in the economy.
§ The SMEs are pivotal to resolving issues of Crime and terrorism.
2 / § Growth of small and medium firms into globally competitive firms
He therefore summarised the challenges of SMEs into four key aspects of the “broader” investment climate in Africa are consistently highlighted as constraints to productivity improvements, transformation and growth viz:
§ Infrastructure
§ Access to Finance
§ The Regulatory and Compliance Burden
§ Training and Education
At Heritage Banking Company Ltd
We apply various prescriptions to deal with the challenges and assist in implementing strategic and financial as well as corporate governance frameworks for SMEs:
Towards Corporatizing SMES and Family Businesses
In order to achieve the desired transformation and growth in African businesses, especially for the huge potentials of the future rewards and market booms, employment generation that will lead to reduction in crime and security challenges that currently face us, to be realised, it is recommended that specific attention be paid to SMES. The owners of SMEs initiatives must also agree to the following:
§ Define clear objectives and set achievable goals at all times
§ Separate ownership from management duties and specify clear roles and responsibilities for business owners, partners and other stakeholders.
§ Create a balanced board and invite non-executive directors with expertise that would add value to the board (replace the board of director with an advisory board for companies that are not legally required to establish a board of director). Non-executive directors play an important role in ensuring integrity of the financial data provided to the board and protecting shareholders' interests. They also exercise control over executive management and reduce the risks arising from poor management practices or gross negligence.
§ Introduce Code of Business Conduct policies that must be adhered to by everybody in the Company
§ Raise corporate culture with a focus on benefits of corporate governance; indoctrinate employees on corporate cultures and values and check compliance at all times
§ Develop (senior) management's administrative and technical skills particularly in areas such as strategic planning and leadership.
§ Create clear organization charts.
§ Establish independent internal control/audit function (or employ an internal auditor based on the size of the organization).
§ Create job descriptions, which establish clear responsibilities and reporting lines.
§ Introduce succession plans and rules against conflicts of interests.
§ Be open to financial/investment advices from competent sources such as banks. Bankers of SMES Companies must also kit up to meet the strategic demands of their customers in business advisory services
§ Document all processes and procedures in the enterprise
§ Compare notes with industry practitioners, collaborate with competitors to influence government policies and bench mark others on performance
§ Enshrine due diligence in their business operations and management
Conclusion
In my humble opinion, the introduction of Code of Corporate Governance, in addition to other relevant regulations, has reduced significantly, the incidence of Board rifts which were the hallmark of past Boards of Banking institutions, as the roles, responsibilities, functions, rights and privileges have been clearly defined, reducing the incidence of conflicts and suspicions. Furthermore, there is more transparency as the banks are now better managed with less or no incidence of bank failures.
In concluding this presentation, I strongly advise that banks comply with all guiding laws, regulations and codes, learning from the experiences of others who had in the past had issues as a fall out of non-compliance with Corporate Governance Codes and poor governance practices. Improved corporate governance in our banks is surely the only way to go in the years ahead.
Thank you for listening.
IFIE SEKIBO
6 | Page