HELD ON SUNDAY, MAY 3, 2015 AT THE 500 LECTURE THEATRE, COLLEGE LIBRARY BUILDING, OOUTH SAGAMU

1. CORPORATE GOVERNANCE PRACTICES IN NIGERIAA PUBLIC LECTURE DELIVEREDAT THE INSTITUTE OF MANAGEMENT, REMO CHAPTER HELD ON SUNDAY, MAY 3, 2015 AT THE 500 LECTURE THEATRE, COLLEGE LIBRARY BUILDING, OOUTH SAGAMU   BY Prof. Owolabi Sunday A.(PhD) Professor of Accounting/Associate Vice President, Financial Administration Babcock University Ilishan-Remo, Ogun State

2. Introduction The industrial revolution that moderated entrepreneurial behavior in the mid-nineteenth century translated to the establishment of the first corporate body in England in 1845. This transformation is the major reason for the dichotomization of ownership of corporations and their control.

3. The situation above translated to a contractual arrangement between the owners of resources and the managers of the resources. This arrangement is described as agency relationship. The owners of resources are described as the principal while the managers of these resources are described as the agents. There is always a gap in the process of synchronizing the objectives of the agents and principals; this gap is called agency cost.

4. Agency cost is sometimes described as the cost of resources owners’ absence in the management of their resources by the third party referred to as the agent. The financial management scholars postulate that, the major objective of establishing a firm is to maximize the shareholders wealth. This means the interest of other stakeholders would have been swallowed by the shareholders. The truth of the matter is that there are other stakeholders whose interest should be adequately taken care of if the shareholders interest will be maximized.

5. The management of resources and the leadership dynamisms of a corporate body are usually referred to as its governance structure. Therefore, corporate governance deals with the mechanism of control of resources (finance, human, machine, policies, and others) to achieve the objective of the organization. Pat Barret the Auditor General of Australia as cited by Ajogwu, 2007, opined that “corporate governance is largely about organizational management performance. Simply put, corporate governance is about how an organization is managed, its corporate and other structure, its culture, its policies, and the ways in which it deals with its various stakeholders. It is concerned with structures and processes for decision making and with the control and behavior that support effective accountability for performance outcomes/results.

6. Also, Berle and Means (1968) expressed their observations that corporations were becoming so large that ownership and control were separated, that is, the stock holders own the firm while the management controls the firm. The discussion and publication on corporate governance issues grew quietly, but the concept gained abundant momentum within the last two decades. The issue started featuring prominently in the academic world and business community since the well celebrated corporate failures of Adelphia, Enron, WorldCom, Global crossing, Tyco, and others that experienced high profile scandals. The US responded to the crises through the popular Sarbanes-Oxley Act of 2002. The governance structure, mechanisms and ethics attracted series of attention from all stakeholders in the business and academic world. The compatibility of corporate governance practices with the global standards has also become an important part of corporate success.

7. Practitioners, regulators and academicians in recent times argued that the stock price collapse of many big corporations is to some high degree due to poor corporate governance practices, and corporations like; Adelphia, Enron, Parmalat, Tyco and WorldCom are cited as examples. If these assertions are considered valid, then a market premium should exist for relatively well governed firms.

8. Corporate governance as a concept has been viewed and defined by various authorities giving it different meanings and connotations. Shleifer and Vishny (1997) stated that corporate governance deals with the ways in which suppliers of finance of corporations assure themselves of getting a return on their investment. This assertion however is consistent with the position of Garrey and Siran (1994) who argued that corporate governance determines how the firms’ top decision makers actually administer such contracts. Akinsulire (2010) submitted that corporate governance is a system by which companies are directed and managed in the best interest of the owners and investors.

9. In a more comprehensive manner, the Institute of Internal Auditors (US) IIA (as cited in Dana & Larry 2003) defined “governance as a process that deals with the procedures utilized by the representatives of the organisations’ stakeholders to provide oversight risk and control processes administered by management”. The monitoring of organisational risks, and the assurance that controls adequately mitigate those risks both contribute directly to the achievement of organisational goals and the preservation of organisational value. Those performing governance activities are accountable to the organisations’ stakeholders for effective stewardship. Also, Organisation of Economic Cooperation and Development (OECD, 1991) in the same vein sees corporate governance as a system

10. by which business corporations are directed and controlled. The corporate structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as: the board, managers, shareholders, and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company’s objectives are set, and the means of attaining those objectives and monitoring performance.

11. The rest parts of this lecture will review the prominent theories of corporate governance, historical development of corporate governance in Nigeria, benefits of an effective corporate governance, challenges of corporate governance in Nigeria and finally recommendations and conclusions.

12. Corporate governance issues Self Interest Wealth maximization Principals • Agent Self interest THEORIES OF CORPORATE GOVERNANCE AGENCY THEORY Delegates’ authority to manage asset The Agency Model Performance Source: Owolabi, (2012) In summary, the focus of agency theory as it affects modern corporations is to harmonise the conflicting interest of the principal and the agent. One of the limitations of agency theory is its restriction of the principal to the owners and pursues just the owner’s interest. However, there are other stakeholders who have interest in the contract and this shortcoming led to the birth of stakeholders’ theory as discussed below.

13. Stakeholder Theory • It was Freeman in 1984 that popularized the principle of stakeholder theory and it was gradually dragged into management theory since the 80s. Freeman, (1984), argued that corporate bodies have a wide coverage of accountability than the parochial representation of agency theory. Whieler et al., (2002), support this argument by saying that stakeholder’s theory is a product of sociology and organizational disciplines that identify a good array of other stakeholders in an organization.

14. Investors FIRM (Performance) Creditor Political System Government Customers Labour union Society Employees The Stakeholder Model Source: Owolabi, (2012)

15. Stewardship Theory Unlike agency theory, Agris (1973) argues that agency looks at employee or people as an economic being which surpasses an individual’s own aspiration, however, stewardship theory recognizes the importance of structures that empower the steward and offers maximum autonomy built on trust. Donaldso (1997) asserts that “a steward protects and maximizes shareholders’ wealth through firm performance, because by so doing, the steward’s utility functions are maximized.

16. More so, stewardship theory de-emphasises the duality role of Board chair and CEO, suggesting that the unified function empowers the steward to safeguard the interest of the shareholder. In view of the above, Daly et al (2003) stressed the fact that for the employees and executive to protect their reputation, they will take those decisions that will improve performance. This is consistent with the position of Owolabi (2011), who argued that stewards are expected to behave rationally because if they refuse to take decisions that will improve performance, then the shareholder operating in a free market system can switch to a performing firm and the stewards may lose their job. So in stewardship theory, it is assumed that stewards will act in the best interest of the shareholders. However, it has been empirically proved that the combination of these theories yield better results (Donaldso and Davis 1991).

17. (Performance) Shareholder Profit Shareholders Stewards Motivation The Stewardship Model Empower and Trust Protect and maximize Shareholders wealth Source: Owolabi, (2012)

18. OTHER THEORIES • Resource Dependency Theory • Transaction Cost Theory • Political Theory • Business Ethics Corporate Governance Theory • Virtue Ethics Theory • Feminist Ethics Theory • Discourse Ethics Theory

19. CORPORATE GOVERNANCE MECHANISM • The Shareholders • The Board - Composition of the board members (Executive, Non-Executive, Independence) - Board size - Chairmanship/CEO • Audit committee

20. FEATURES OF AN EFFECTIVE CORPORATE GOVERNANCE STRUCTURE • All directors should be elected annually. • At least two third of the company’s directors should be independent. • Companies should have the following committee • Audit committee • Nominating • Compensation committee • Absolute disclosure of directors’ information • Fairness • Transparency • Responsibility • Honesty • Accountability

21. HISTORICAL DEVELOPMENT OF CORPORATE GOVERNANCE IN NIGERIA The impact of poor corporate governance in Nigeria had evoked damaging venoms on the Nigerian economy since 1930. The word corporate governance was never used; however, the damaging hammer of the silent economic killer had been felt on many occasions. The major pivot of economic development of any country is the financial institutions particularly the banking industry. The effect of poor corporate governance was badly felt in the 30s when all the indigenous banks collapsed except the National bank.

22. Also, in 1940’s all indigenous banks collapsed through the liquidator’s hammer except four ,other similar damaging effects of weak corporate governance are; • Industrial and commercial bank was set up in 1929 and failed within a year. • The Nigerian Penny Bank was set up in 1940 and failed under 5 years • Between 1952 and 1954, Sixteen (16) out of Twenty One (21) indigenous banks failed. • The Lever Brothers case of fraud and accounts manipulation in 1999/2000. • In 2006, strong allegations of financial scandals with Cadbury Plc Nigeria. • The Collapse of Oceanic Bank. • The collapse of Intercontinental bank.

23. The situation in Nigeria was so bad that the economic development was retarded in a geometric manner from year to year and most of these problems were traced to weak corporate governance. The above various challenges lead the Securities and Exchange Commission to quickly establish a committee on corporate governance in June 2000. The committee submitted its reports in 2002 which finally metamorphosed to the first Code of Corporate Governance and Best Practices.

24. There are other corporate governance codes such as: • Central Bank of Nigeria code of corporate governance for licensed Pensions Operators 2008 • Code of corporate governance for insurance industry in Nigeria 2009. • Code of corporate governance in Nigeria 2011. The current situation is the establishment of a steering commission of the National Code of Corporate Governance 2015. This commission was inaugurated on 17th January 2013 and it has produced the Exposure draft for discussion and contributions. It is equally important for your institute to contribute to this discussion which is on going to benefit and probably change the economic destiny of this country.

25. CHALLENGES OF CORPORATE GOVERNANCE IN NIGERIA The crises of business failures and financial scandals that erupted the corporate world ignited the discussion on the need for effective corporate governance around the world. The United Kingdom, Germany, United States of America, Brazil, Canada, Japan and France witnessed both business and financial failures in the last three decades. The last two decades witnessed massive bank failures all over the world (Bell and Pain, 2010). Among the most popular corporate institutions that collapsed in the last three decades are Enron, Lehman Brothers, Tyco, Worldcom and Adelphias, and one of the reasons for their failure was traced to weak corporate governance and unethical practices.

26. In Nigeria, corporate governance challenges have been found to be responsible for several bank failures even from the 30s, some of the banks that had experienced failures in the past include Gulf Bank of Nigeria Plc, Metropolitan Bank limited, Assurance Bank Nigeria limited, Lead Bank Plc, Hallmark Bank Plc, Societe General Bank of Nigeria, All States Trust Bank, Trade Bank limited, and African Express Bank Plc, whose licenses were revoked by the Central Bank of Nigeria. Also in the recent time, banks like intercontinental bank Plc, Oceanic Bank Limited and Bank PHB also failed partly due to weak corporate governance (Fatimo, 2012).

27. The Oil sector and Marginal-lending crisis of 2008 created erosion of shareholders’ fund of a number of banks. This development made SanusiLamido-led CBN to inject N620 billion to rescue 9 banks from imminent collapse. These banks are Afribank Plc, Bank PHB Plc, Equitorial Trust Bank Limited, Finbank Plc, Intercontinental Bank Plc, Oceanic Bank International Plc, Spring Bank Plc, Union Bank Plc and Wema Bank Plc. Eventually, the Federal Government of Nigeria, in August 2011 through AMCON took over Afribank Plc, Bank PHB Plc and Spring Bank Plc and renamed them Mainstreet Bank Limited, Keystone Bank Limited and Enterprise Bank Limited respectively.

28. After the 2005 bank-industry consolidation, banks that have disappeared through merger and acquisition are: • Stanbic and IBTC becoming Stanbic-IBTC Plc (voluntary and before 2008 margin-lending crisis) • Finbank Plc now acquired by FCMB Plc (induced by margin-lending crisis) • Intercontinental Bank Plc now acquired by Access Bank Plc (induced by margin-lending crisis) • Equatorial Trust Bank Limited now acquired by Sterling Bank Plc (induced by margin-lending crisis) • Oceanic Bank International Plc now acquired by Ecobank Transactional Incorporated, induced by margin-lending crisis); and • Union Bank Plc now acquired by Africa Capital Alliance, also induced by margin-lending crisis but remains Union Bank Plc for now pending conclusion of other necessary conditions and harmonization of some areas of disputes (Afolabi, 2011; Sanusi, 2012).

29. Banking sector reforms in Nigeria are driven by the need to strengthen the financial sector and re-position the Nigeria economy for sustainable growth and to become integrated into the global and international best practices. It is also aimed at addressing issues such as corporate governance risk, management and operational inefficiency. The centre of the reforms is around firming up capitalization to increase performance of banks. Ajayi (2005) addressing the issue of performance in Nigeria banking industry, emphasized the point that performance requires best corporate governance practices. Ducan, (2012) enunciates various reforms that had taken place in Nigeria in search for adequate corporate governance mechanism that will enhance performance in the banking industry.

30. BENEFITS OF AN EFFECTIVE CORPORATE GOVERNANCE • Public confidence is assured • Enhances the profitability of the establishment. • Macro-economic stability • Accountability is established • Attraction of foreign investors • Improves share prices • Improves competitive advantage • Development of local capital markets • Reduces poverty level

31. RECOMMENDATIONS AND CONCLUSION Recommendations • Introduction of integrity checks as part of the requirements in recruiting the directors. • Introduction of a national code of corporate governance • Independent compliance auditor reporting to the Corporate Affairs Commission and Financial Reporting Council of Nigeria. • Total disclosure of compliance report in the Annual Reports of the companies. • Corporate governance and ethics should be introduced to the undergraduate and postgraduate bulletin. It should be a requirement of the National University Commission. • Asset declaration at the point of appointment of directors will enhance quality performance as regards integrity of operations.

32. Conclusion The essence of an effective corporate governance is to produce a visionary and intelligent team that will work collectively to achieve the long term objective of the organization. The basic characteristics of an effective corporate governance include total disclosure, accountability, shareholder rights, integrity, honesty and fairness. The macro economic performance indicators have shown over the years that a relationship exists between good governance and economic growth and development. The consequences of poor governance system leads to unemployment, closure and liquidation of companies and loss of wealth by shareholders, these are obvious indicators of backwardness. In conclusion, we plead that all and sundry should work closely to ensure effective governance system to attain a desired national development and growth.

33. THANK YOU