The Role of External Forces on the Corporate Governance in Nigeria

THE ROLE OF EXTERNAL FORCES ON THE CORPORATE GOVERNANCE IN NIGERIA

BY

AUDU JACOB

DEPARTMENT OF POLITICAL SCIENCE

AHMADU BELLO UNIVERSITY ZARIA

A PAPER PRESENTED AT THE 2ND INTERNATIONAL CONFERENCE OF THE SCHOOL OF MANAGEMENT AND SOCIAL SCIENCES, BABCOCKUNIVERSITY.

10TH – 11TH SEPTEMBER, 2007

ABSTRACT

Governance has become a focal point of development discourse in contemporary African countries. This is because it has been observed that Africa’s dismal economic performance has been attributed among other things to weak and ineffective governance. Inappropriate political environment, in particular the poor governance practice of state has been identified as major impediment to economic growth. The relationship among the political economic and corporate governance is analogous to a series of concentric circles in which the corporate governance forms the core or centre of it. Corporate governance therefore stands at the intersection of law, public policy and business practice. This paper examines the role of external forces on corporate governance in Nigeria. There are complex linkages between internal and external factors that affect the operating environment of the corporation. The focus of our analysis is to examine the nature of constraints or opportunities or prospects that some contemporary external forces present for corporate governance. This paper establishes that there is a direct relationship between external factors and corporate governance. For proper and effective analysis, this paper has been divided into the following sections: section 1 deal with the introduction and conceptual clarification; section II deals with imperative of corporate governance in Africa and Nigeria in particular; section III deals with the external factors and corporate governance in Nigeria; section IV deals with the conclusion and recommendation. The paper concludes that external factors constitute constraints or opportunities and prospects for corporations depending on how sensitive the management of those corporations is to responding to the changes in the environment.

INTRODUCTION

Corporate governance is potentially important for development of a nation’s economy, yet it has been ignored for a long time. It remained virtually impossible as a development policyuntil the East Asian financial crisis of 1988, followed closely by those of Russia and Brazil. Charles O, et al (2005). The phrase corporate governance came into prominent use in the 1980s, and is often used narrowly to refer to the mechanism and rules that govern relationships among direct corporate participants in publicly traded firms, especially shareholders, directors, managers and sometimes employees. The proper goal of corporate governance therefore is more likely to be seen as a balancing of interest among all the corporate stakeholders.

Corporate governance stands at the intersection of law, public policy and business practice. For instance, political governance which provides the institutional infrastructure in terms of the rule of the game) defines the context in which economic governance provides the context in which corporate governance is practiced. What then is corporate governance?

CONCEPTUAL CLARIFICATION

Corporate governance can be viewed from different perspectives ranging from relationship, supervision, control and leadership. According to Monks and Minor, (1996) it is defined as a relationship among various participants in determining the direction and performance of a corporation. It is also defined as involving a set of relationships between a company’s management, its board, its shareholders and other stakeholders. It provides the structure through which the objectives of the company are set and the means of attaining those objectives and working performance are determined. (OECD 1999). Corporate governance has also been defined as the process of supervision and control (of governing) intended to ensure that the company’s management act in accordance with the interest of the shareholders. Parkinson (1994). The Common Wealth Association on Corporate Governance (CACG) views it as essentially about leadership for efficiency, leadership for probity, leadership with responsibility, leadership which is transparent and which is accountable (CACG 1999).

From the above perspective corporate governance pertains to the way in which the incorporated firms are controlled and managed.

A separate dimension of the public nature of the corporations relates to it being viewed as serving or being responsible to the interest not only of shareholders, but also of the larger society. This is centered around the question of accountability.

The term corporate governance also refers to the legal rules, institutional arrangements, and practices that determine who controls business corporations and who gets the benefits that flow from them. (Weston J.F.T. 1992). Here corporate governance includes how major policy decisions are made in business corporation, how various stakeholders can influence the process, who is held accountable for performance and what performance standard are applied.

Furthermore, Thesaurus defines it as management of a company. Here it refers to company’s management techniques and processes in general or the way a particular company is managed.

Corporate governance according to Adam (2006, p.26) at its simplest form is the system by which organizations are controlled and directed. In essence, he added that it is a function of direction and leadership, risk management, control, transparency and accountability. Corporate governance therefore comprise a country’s private and public institutions both formal and informal which together governs the relationship between thepeople who manage corporations (corporate insiders) and all others who invest resources in corporations in the country.

The institutions of corporate governance therefore lie at the heart of one of the greatest challenges that virtually all developing and emerging market economies now face. This is because these economies are gravitating towards how to move successfully from institutions of economic and political governance that tends to be heavily relationship based to institutions that are more effectively rules based. Charles O, et’al (2005).

THE IMPERATIVES OF CORPORATE GOVERNANCE IN NIGERIA

Corporate governance matters not only because the health of a country’s corporate sector matters for the country’s entire economy but because it matters greatly as an integral part of the country’s national development. It therefore plays a vital role in today’s developing economies especially as nations are fastly moving heavily from relationship based to be effectively rules based. The institution of corporate governance serves both to determine what society considered to be the acceptable standards of corporate behaviour, and to ensure that corporations comply with those standards.

According to Charles O, et’al (2005) the purpose of corporate governance in any country are three fold. These are:

1. To facilitate and stimulate the performance of corporation by creating and maintaining incentives that motivates corporate insiders to maximize firm’s operational efficiency;
2. To limit insider’s abuse of power over resources; and
3. To provide the means to monitor managers’ behaviour to ensure corporate accountability.

There are three fundamental reasons why corporate governance should not only be given special attention but necessarily an imperative. These imperatives are:

1. There is a growing consensus about private sector led development and the need to strengthen the regulatory capacity of the state in such an economic context.
2. Time has come when the privatization process in Africa should have great influence on the lives of the people.
3. The financial crisis that hit East Asian countries in 1997 have been attributed partly to a wide range of poor corporate governance practices.

These therefore should serve as a wake up call for Africa on the importance of corporate governance issues, particularly as most countries on the continent have begun the transition from state led to private sector led development strategies.

It is also imperative because virtually all developing, transition and emerging market economies are going through a different process of transformation in which corporate governance plays a vital role.

THE INFLUENCE OF EXTERNAL FORCES ON CORPORATE GOVERNANCE IN NIGERIA.

The main argument of this paper is that a number of factors, trends and developments influence the operation of corporate governance. There are complex linkages between internal and external factors that affect the operating environment of the corporations but here we shall be focusing on external forces. There is therefore a direct influence of external forces on corporate governance in Nigeria. The focus of our analysis in this section is to examine the nature of constraints and opportunities or prospects that some contemporary external forces present on corporation.

EXTERNAL FACTORS

External factors are the ones that you cannot control yourself. You only react towards them, or you know that something is happening out there and you need to do something about it. The management must of necessity be sensitive because sudden changes in the external environment happen more frequently these days.

The external factors we are discussing here are not the many minor changes of everyday business but the relatively few trends and events that strike at the core of a company’s business. A company does not operate in isolation; it acts upon and reacts to avery complex environment which is continually changing and constantly moving.

Under these external factors, we shall be considering the following factors. Globalization, and its pillars like, liberalization and privatization and state capacity to challenge, civil society organization, regional cooperation and integration.

GLOBALIZATION:

Globalization refers to the process and a web of increasing integration of countries into the world economy which allows for a free flow of ideas, people, capital and contacts among enterprises, institutions and people across national borders. The effects of globalization, especially economic globalization on the corporate governance are complex and varied; ranging from trade, investment services and technology.

To understand how globalization affects corporate governance, it is necessarily important to make a distinction between corporate structure and corporate practices. Corporate structures refer to the unique organizational arrangements for corporate governance while corporate practices refer to the rules and procedures that govern the operation of the corporation. Hence while globalization may not alter the corporate structure, it influences corporate governance practices in several ways especially through the strategies it makes available on corporate finance, production and management. For instance, the liberalization of capital markets has made foreign capital moreaccessible andattractive in some cases to the corporation. Foreign capital to some extent exerts a disciplinary force on managers and executives of the corporation. This is predicated upon the fact that as a corporation obtains capital from other countries, it increasingly has adopted practices that the foreign investor brings. For instance there is evidence that the US investors insist on the adoption of US style shareholders activism, including demands for a day in the operation of the company, for improved disclosure of financial results, and for reforms to improve the independence of the Board of Directors. Ejeviome E.O (in Adedeji (ed) 2005 p. 109). Moreso, globalization has improved the source of inputs and the scope of product markets for the corporation. This opens various possibilities for managers of the corporation in developing institutional arrangements for production, purchase and distribution for its goods and services.

LIBERALIZATION

Liberalization as a major plank of globalization summarily refers to the reduction or elimination of state controls in the economy resulting in greater reliance on price signalin free markets. It is centered around relaxing state control in the finance, trade and production sector. The lifting of layers of economic regulation invariably leads to the removal of several distortions with which managerial agents of the corporation daily have to contend. (Ibidem p. 111). Deregulation, involving the opening of some hitherto closed sectors has brought about increased competition in these sectors. In sum, liberalization provides a competitive policy environment for corporate governance.

PRIVATIZATION

The term refers to the sale of State Owned Enterprises (SOEs) to the private sector through private placement, public offer or competitive bidding by strategic investors. Privatization replacesone form of corporate ownership state ownership of State Owned Enterprises, withprivate shareholders ownership of the privatized enterprises. One of the major effects of privatization is to foster competition in the product, factor and capital markets. In such an environment, a major task of corporate governance is to adapt to and benefit from the opportunities of the competition.

TECHNOLOGY

Globalization is sparked off by technology particularly information and communication technology. Changes in technology are the most influential today. Technological change in recent times have created so many new materials , processes and manufacturing techniques that the possible combination of product and the means of getting them stagger human imagination. Consumers can now choose from a host of options in materials, quality, price, services,features dependability, style, colour and shape. Never before had they had such freedom of choice. But the need to create and satisfy product demands has put some corporate organization particularly the manufacturing organizations in the contradictory position of being both contributors to change and its victims. However it can be stated that corporations that are victims of technological change are only victims of their own lack of foresight.

COMPETITIVE CHANGE

Corporate organizations operate in a world of constantly shifting competition. The emergence of foreign low cost producers, the merger of two competitors, the commencement of competitors new range of products, the appearance of an entirely new company in your industries are changes that can have a profound impact on a corporation. If you don’t keep your ear close to the ground, try to calculate and quantify the consequences of such changes, and take appropriate action, customers seek improved products and services, competition forces the companies to provide them.

Competitive change often takes the form of price competition where other firms lower prices to introduce their product to new markets. Some times management is caught flat footed by the sudden appearance of competitor. The quick entry usually is due to new technology. Competition can cause a rise or decline depending on how sensitive the management is to monitoring the outside environment.

Competition could also be a positive force. As Robert D.G (p. 30) points out; I think that the important thing is to try to be a leader instead of a follower by not letting the company sit around and wait until the competitor develop a whole new line of product that do the same as yours, only better and in a different way. Companies that get in trouble are not foresighted enough to feel the need for change. Every change is an opportunity. As Robert S. says, I think if you have been caught by competition, you haven’t been doing your homework (ibid).

In the light of the above, it can be observed generally whether in the financial markets or in the other spheres, globalization has increasingly resulted in the intensification of corporate regulation.

GOVERNMENT CONSTRAINTS AND STATE CAPACITY CHALLENGE

Another fundamental external factor that influences corporate governance is government constraints and state capacity challenge.Government constraints are very relevant to corporate organizations whether at the local levels where politicians may affect one’s production resources, or at the national or international levels, where they can affect one’s materials, home markets and finance. Politicians are playing a growing role in business all over the world. New quotas, duties, taxes, and levies and legislations of all sorts pour out of government agencies. Government infringes on corporate organization by taxation, involvement in employee record, welfare, legislate pollution control and product safety and consumer welfare legislation. Government may pose as a constraint especially if you are not prepared or flexible enough to make necessary adjustment to change

State capacity challenge here refers to the need for effective regulation, strong enforcement and appropriate incentive regimes. It implies that effective state capacity is vital to supporting corporate governance by enforcing state rules and regulation.

REGIONAL COOPERATION AND INTEGRATION

The relationship between regional cooperation and integration and corporate governance is mutually reinforcing. Regional cooperation can provide a platform for shaping corporate governance policies and practices. The private sector as an agent of corporate governance can be a catalyst for regional integration.

THE CIVIL SOCIETY ORGANIZATION (CSO)

The last but not the least external factors to be discussed in this discourse are Civil Society Organizations. Civil society organizations are presently as active in corporate governance as in political processes. corporate governance practices are shaped not only by public regulations on international agreement but also by a range of NGOs activities such as consumer campaigns, mass demonstration, publicity campaign, petition, etc. in so doing, civil society organizations raises public awareness about corporate governance practices, monitor the performance of corporations and disseminate information about corporate conduct. A well informed and articulate CSO can provide an impetus for change in corporate practices. Thus the agitation and advocacy of CSOs can produce major constraint on corporate conduct. Consequently, the management of these corporations must be sensitive to the views of the CSOs especially on issues relating to the operations of their corporation and corporate social responsibility.

In the light of the above, we can conclude here that external factors serve not only as opportunities but also constraints for corporate governance.

CONCLUSION AND RECOMMENDATION

This paper titled the role of external forces on corporate governance in Nigeria has argued that there is a direct relationship between the external forces and operating environment of every corporate organization.

The paper highlighted the imperative of Corporate Governance in Nigeria after clarifying the concept of Corporate Governance. The paper also examined some external forces ranging form globalization and its pillars of liberalization, privatization, technology, competition and other external forces such as government constraint and state capacity challenge, Civil Society Organizations, Regional Cooperation and Integration. The paper thereby concludes that there are complex linkages and direct relationship between external forces and corporate organization even though these forces constitute constraints, opportunities and prospects depending on how sensitive the management of the corporation is to monitoring and responding to the challenges arising from the external environment.