DRIVING INDUSTRY GROWTH THROUGH CORPORATE GOVERNANCE

Transcription

1 NIGERIAN COMMUNICATIONS COMMISSION DRIVING INDUSTRY GROWTH THROUGH CORPORATE GOVERNANCE DR FABIAN AJOGWU, SAN BEING PART (NOT ALL) OF AN ADDRESS AT THE PRESENTATION OF THE NIGERIAN COMMUNICATIONS COMMISSION CODE OF CORPORATE GOVERNANCE, AT THE EKO HOTEL, LAGSO ON JULY 10, 2014

2 Corporate Governance Corporate governance (CG) is the exercise of power over the direction of the enterprise, the supervision of executive actions, the acceptance of a duty to be accountable and the regulation of the corporation within the jurisdiction of the state it operates Tricker. It is intended to regulate the conduct of directors, accountability to shareholders, recognition of the interest of other stakeholders and the need to encourage investment to flow where it could be most productive. Simply put governance of the corporation F. Ajogwu 2

3 Success Sets the Stage Success begets challenges which if not properly managed changes the trajectory of the curve downwards Great companies do fail (even if too big to fail) Recent developments in Nigeria and the global economic crises put the issue of sustainable development of enterprises at the centre of any economic growth plan and development strategy. 3

4 Evolving Industry Setting The Nigerian telecommunications sector has multiple stakeholders, from 3 main perspectives They have evolved into strategic national key points (backbone infrastructure) They are heavily capitalized, have significant earnings and control a large workforce; and They have tens of millions of subscribers who rely on them for their communication and other services, with the result that the companies have significant unearned income deriving from the pre-paid (but yet to be delivered) services at any given time. This means that TELCOS have multiple stakeholders in the form of subscribers, other customers, employees, shareholders, trade creditors and the larger society. 4

5 The Need for Corporate governance Overbearing influence of Chairmen or MD/CEO, especially in family controlled business or Groups Conflict of interest. Weak internal controls Increasing level of societal awareness about the Sector Ineffective management information system Passive shareholders Power of controlling shareholders over minority shareholders 5

6 Di > Ci Di = Ci The Trust-based Duty of care Di < Ci Di: Director s Interest Ci: Company s Interest The Director must subject his interest to that of the company. Since he/ she is assumed to provide leadership, it is also the argument that the Leader s interest must be subjected to the interest of the people he/ she leads. 6

7 The Corporate Governance Questions Can technical regulation alone by the industry regulator, without more suffice to ensure sustainable development or growth of an enterprise with multiple stakeholders? Does the control of a subsidiary by a parent company, together with the functional reporting lines that exist between the management of the parent company and those of its subsidiaries, not blur the legal principles of separation of ownership from management? What is the corporate governance impact, where a significant shareholder in a group wears several hats (e.g. shareholder, creditor, supplier, manager and franchisor) in relation to the company or companies? Can rules and codes of corporate governance by themselves alone ensure good behaviour in management of company affairs? 7

8 The Cost of Monitoring the Agent : Governance & Compensation The control and monitoring therefore results in greater costs (Agency Costs), which the theory goes, should be incurred to the point at which the reduction of the loss from non-compliance equals the increase in enforcement costs. - Jensen & Meckling It is argued that the agency costs (audit, risk management, systems, SOPs, etc) is a necessary cost ensuring that the agents do their job of delivering value to the principals - Eisenhardt Corporate governance looks at curtailing the agent s tendency by having a board led by an independent board who will control the actions of the management by providing a framework and policy for business, and also monitor that management complies with such policies as well as regulations. Performance-based Compensation models deal with the self-interest aspect of the agent s behaviour. This ties their compensation to their performance (loyalty to the promise of creating value for stakeholders). 8

9 Area of Responsibility What the Law Says What Actually Happens Maintenance of Financial Statements The Directors shall maintain the Accounts, and be responsible for its accuracy The Contractually obliged Accountant prepares and keeps the books of accounts in-house Company Secretary Budget and Financial Control Shareholders at the AGM shall appoint the Auditor The Company Secretary shall be appointed/ removed by the Board Vested on the Board Shareholders at the AGM shall appoint the Auditor The combination of Company Secretary and legal Adviser makes him/ her report to the MD/CEO Actually initiated and directed by Management Management intitates receipt of proposals and send to the Board. Shareholders endorse 9

10 The Agency Costs - Share Price linkage Agency costs in Nigeria typically include monitoring expenditures by the principal such as auditing, budgeting, board and committee meetings, control and compensation systems, bonding expenditures by the agent and residual loss due to divergence of interests between the principal and the agent. The share price that shareholders (principal) pay should reflect such agency costs. To increase the firm value, one must therefore reduce agency costs in real terms. This highlights the nexus between corporate performance and corporate governance. 10

11 The Owner-Manager, and Shareholder Disposition Does owner management necessarily eliminate the agency costs of ownership? Private ownership and owner management not only reduce the effectiveness of external control mechanisms, they also expose firms to a "self-control" problem created by incentives that cause owners to take actions which "harm themselves as well as those around them" - Schulze Shulze argues that shareholders indeed have incentive to invest resources in curbing both managerial and owner opportunism; and extend the argument to the domain of the family firm. The conflict of interests between management or the majority shareholder, and outside or minority shareholders refer to the tendency that the former may extract perquisites (or perks) out of a firm s resources and therefore be less interested to pursue new profitable ventures. 11

12 The Significant Shareholder, & Curbing of Management Excesses Experience has shown that often the shareholders that are most capable of curbing board and management excesses (institutional shareholders and majority shareholders) have showed an apparent unwillingness to oppose the management and the boards of the companies. Situation is more prevalent in companies operating within group structures (companies having parent subsidiary relationships). The question lies in the specificity or otherwise of the shareholder s interest (s) whether it is limited to residual interest (as in dividends arising from equity); and/ or whether it is contractually designed (as in loan or franchise or technical / management services) The more hats the shareholder wears, the more the likelihood of a conflict that could impair its ability to challenge management. 12

13 Functional Line of Reporting & Corporate Governance? In some groups the management of the subsidiaries report directly to the CEO of their parent, and in so doing, side track their respective boards, rendering them ineffective in governance. The effect is that accountability to the board is reduced and the checks and balances which an effective board would have brought to bear on the company are eroded. In the affected companies, the functional line of reporting within the group, and the activities of the parent and subsidiary appeared somewhat to impair the application of best practices of corporate governance within the subsidiary; thus putting the enterprise at risk. 13

14 The Control Factor The control factor means the ability to appoint the governors of the company the Board. The control factor can if unchecked allow the parent as owners in some instances access to controlling the actions of the management of the subsidiary by means of functional reporting within the group, to the extent that the officers of the subsidiary cease to report to the board of the subsidiary. Where the officers of the subsidiary hold themselves accountable to the CEO of the parent company (rather than the subsidiary s board) the checks and balances in the whole structure becomes eroded. 14

15 The Day-to-Day managers The statutory responsibility to manage the business of the company is vested on the Board. The Delegates of Authority of the Board comprise what is called The Management This Managing Director leads the day-to-day managers who then exercise any or all of the Board s powers. Hence the need for specific Delegation and Scope of Authority. What does a careful Board do? Define and Delimit the scope? What does an ambitious Management do? Seek unhindered powers 15

16 Legal Position of Directors Directors are by law the trustees of the company s money, properties, and their powers and as such must account for all the money over which they exercise control; and shall refund all money improperly paid away. They are required to exercise their powers honestly in the interest of the company and all shareholders and not in their own or sectional interests. S.283(1)

17 Sanctions for Maladministration Removal Section 262 CAMA Injunction or Declaration, Damages or Compensation Restoration of the company s property (Disgorgement) Account of Profits/ Rescission of contract Action in Negligence/ Summary Dismissal (?) Fraudulent Trading and/ or Criminal prosecution (FGN vs. Lord Ifegwu & Others) Incarceration pending Bail???/ Imprisonment Fines Restrictions from holding office (whether or not for a specified term)

18 Aspects of Governance Examined Critical aspects of governance addressed include Disclosure & Transparency in Financial Reporting Rights of shareholders including minority Duties, responsibilities and liability of directors, Separation of powers between the general meeting and the board Ethics 18

19 Being a Director means Taking on high level responsibility with statutorily prescribed duties, most of which are fiduciary in nature. Directors occupy positions of trust, and must show good faith at all times. This implies Ethics! Fiduciary duties carry with them the requirement of honesty, good faith, diligence and care. It is not enough to say I was not there nor to say I am not executive nor we deliberated on only what management gave us It is a collective and individual responsibility that could mutate to liability, with grave consequences at times, which come incompatible with the self-actualization that Maslow describes in his hierarchy of human needs. 19

20 In conclusion Corporate Governance is at the center of enterprise development in Nigeria. To be effective, it requires a clear separation of ownership from management especially in companies operating within group structures. Failing assumptions on significant shareholders incentive to act to curb managerial and owner opportunism need to be dealt with by way of reforms that address the conflicts of interests which wearing many hats could bring about. There is the need for ensuring enterprise sustainability and growth proactively by means of a guide to effective leadership and BEHAVIOURAL GOVERNANCE! 20

21 Thank you! 21