AN APPRAISAL OF THE APPLICATION OF CORPORATE GOVERNANCE PRINCIPLES OF COMPOSITION, DUTIES AND DISCLOSURE REQUIREMENTS OF DIRECTORS UNDER NIGERIAN LAW

AN APPRAISAL OF THE APPLICATION OF CORPORATE GOVERNANCE PRINCIPLES OF COMPOSITION, DUTIES AND DISCLOSURE REQUIREMENTS OF DIRECTORS UNDER NIGERIAN LAW
ABSTRACT
Corporate organizations are engine of growth and development. They contribute to economic and social development of individuals, society and the nation in general as they produce goods and render services that improve the social and economic life of the people. In carrying out their businesses, they provide investment opportunities to the public and other social responsibility projects as well as contribute to national gross domestic product. Based on the above factors the survival of corporate organizations is of interest to both government and individuals hence the need for promoting good corporate governance. Corporate collapses have however, occurred around the world including Nigeria with devastating social and economic effects of loss of income, employment and revenue due to corporate governance lapses. The Nigerian Companies and Allied Matters Act like companies statutes in other countries of the world was found to be insufficient in stemming the increasing rate of corporate collapses around the world including Nigeria due to corporate governance abuses. The introduction of codes of corporate governance in Nigeria and around the world was meant to complement companies’ statutes in order to improve corporate governance. The Nigerian Securities and Exchange Commission Code of Corporate Governance was meant to apply essentially to all public companies that are listed on the stock exchanges in Nigeria. The Code has made far reaching provisions in respect of composition, duties and disclosure requirements of directors with the objective of ensuring that directors perform their duties and responsibilities in such a way that corporations are protected from abuses that resulted to their failures. The issue for consideration was whether the Companies and Allied Matters Act and the Securities and Exchange Commission Code of Corporate Governance in Nigeria have provided sufficient legal regime that would protect companies from directors’ abuses in performing their duties and responsibilities. Consequently, the objective of the research was to find out whether the Companies and Allied Matters Act together with the Securities and Exchange Commission Code of Corporate Governance in Nigeria have sufficiently addressed issues of corporate governance relating to composition, duties of directors and disclosure requirements. The research adopted a doctrinal research methodology which relied principally on existing statutes, subsidiary legislation and literature on corporate governance and made analyses which resulted to formation of opinions and findings. The study reveals that the category of persons prohibited from being directors on the basis of past fraudulent conduct is narrow which will continue to provide a leeway for some fraudulent persons to become company directors; It was also found that the SEC Code has failed to provide sanctions for failure to comply with the Code therefore making the Code to lack enforcement power thus making compliance to be voluntary and haphazard which will not achieve the desired best practices in the Nigerian business environment. It was further shown that the narrow scope and ambiguous definition of the concept of ‘connected persons’ to directors cannot achieve the objective of preventing conflict of interest transactions under the current corporate governance regime. The research therefore recommended among other things, the amendment of the Companies and Allied Matters Act to make the definition of fraudulent persons to be elastic enough to cover other areas beyond company affair. Fraudulent conduct should be made elastic enough to cover other areas like civil and public service; the SEC Code should be made mandatory for compliance by public companies and clear sanctions should be prescribed for failure to comply in order to enhance faster application and entrenchment of good corporate governance in Nigeria. It was further recommended that a clear definition of ‘connected persons’ to directors with an extended scope be made to cover other persons such as father, mother, brothers and sisters, father in-law and mother in-law who are more likely to promote the interest of directors in material transaction with the company.
CHAPTER ONE
 
1.0         GENERAL INTRODUCTION
 
1.1          Background to the Study
 
Corporate organisations are the drivers of every nation‟s industrialization, commerce, employment and general economic development. Companies are business ventures that are established to produce goods or provide services for consumption by individuals, organisations and government. They are regarded as the engine of growth and development1. Companies provide investment outlets for the public to invest with the expectation to receive returns on their investments and improve their economic strength. In order to carry on their activities, companies employ people in various levels of the workforce who are remunerated in form of salaries, wages and allowances. Those who receive financial benefits from companies use their money to improve their standard of living by taking care of themselves, their families, accessing health care, sending their children to good schools and payment of taxes to the government. Companies also engage in corporate social responsibilities in their host communities to improve the social wellbeing of the people. Some companies provide scholarship; others build schools and other philanthropic activities. In addition companies provide taxable revenue to the government. Companies pay corporate tax while employees and investors pay taxes on income derived from companies. The revenue derived from these taxes by the government is used for government operation and provision of infrastructures that would become factors of economic and technological development in the country. Based on the above premise the performance of companies is of interest to not only government but also individuals. Several classes of people have stake in the company and would not want their stake to be destroyed due to the collapse of the company.
The experience of the great depression between 1929 and 1939, points to the devastating consequence of corporate failures. The great depression has been acclaimed as the deepest and longest-lasting economic downturn in the history of the Western industrialized world. In the United State of America, it began soon after the stock market crash of October, 1929, which sent Wall Street into a debacle and wiped out millions of investors. Over the next several years, consumer spending and investment dropped, causing steep declines in industrial output and rising levels of unemployment as failing companies laid off workers2. By 1933, when the great depression reached its nadir, some 13 to 15 million Americans were unemployed and nearly half of the country‟s banks had failed3.
 
In a similar vein the financial crisis that affected almost every nation‟s economy in the world otherwise popularly called the financial meltdown between 2007 and 2008 was triggered by the bursting of the United States of America housing bubble which peaked in about 2005 – 20064. Easy availability of credit in the United States fueled by large inflows of foreign funds led to a housing construction boom and facilitated debt financed consumer spending. Lax lending standards made it easy for loans of various types to be obtained and consumers assumed an unprecedented debt load5. However, as housing prices declined major global financial institutions that had borrowed and invested heavily in mortgages reported significant losses. Defaults and losses on other loan types also increased significantly as the crisis expanded from the housing market to other parts of the economy. Total losses were estimated in trillions of United States Dollars globally6
The United States financial crisis inquiry commission reported its findings in January, 2011 and concluded that “the crisis was avoidable and was caused by widespread failures in financial regulation… dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk… and systemic breaches in accountability and ethics at all levels.”7It is against this backdrop that all stakeholders including government desire that corporations not only survive but operate in the best interest of all stakeholders and the economy in general. This is the hallmark of corporate governance.
 
Over the years, different issues relating to corporate governance practices have been on the agenda of the inter-governmental working group of experts on International Standards of Accounting and Reporting at its various sessions. During the International Standard of Accounting and Reporting (ISAR) intersession period of 2003/04, the issue of corporate governance and transparency continued to receive unmatched levels of attention.8 Concerns about corporate governance have grown over time. In recent years, there has been the recognition of a need for changes in the way that public companies are governed due to a number of spectacular and well-publicized corporate failures. In the United States of America, many organizations in the savings and thrift industry had to be rescued from financial collapse in the 1980s and recently in the 2000s, witnessed the mega collapse of Enron and World Com, two mega corporations in the United States of America. In the United Kingdom, a number of companies collapsed unexpectedly in the 1980s and 1990s. These included Polly Peck International, the Bank of Credit and Commerce International, British and Commonwealth, the Mirror Group News
International and Barrings Bank.9 In each case, there appeared to be serious accounting or financial reporting irregularities and inadequate internal controls and risk management. In some cases, creative accounting and inadequate financial regulations were identified as the cause of the corporate failures.10
 
In a similar vein in Nigeria, it has been noted that corporate governance lapses were significantly responsible for the collapse of over 70 percent of defunct companies in Nigeria over the last two decades.11Some of the companies that crumbled due to corporate governance questions include Intercontinental Bank, Oceanic Bank, Bank PHB, Afribank, Spring Bank, Lion of Africa Insurance, SocieteGenerale Bank Nigeria, Mtel, Kaduna Textile Mills, Nigeria Airways, Concord group.12 “A survey by the Securities and Exchange Commission (SEC) (in Nigeria) reported that … specifically for the financial sector, poor corporate governance was identified as one of the major factors in virtually all known instances of financial institution‟s distress in the country.”13 In many cases of corporate collapses directors have been linked as perpetrators of unethical business practices and corporate governance abuses. The Central Bank of Nigeria (CBN) had listed the reasons for the collapse of Savannah Bank and SocieteGenerale Bank of Nigeria as the ineffectiveness of the board, false and unreliable returns to the regulatory authorities.14 The revocation of the Peak Merchant Bank license by the CBN was predicated on the ground of over bearing influence of the chairman, significant insider abuses, reckless granting of credits and a host of other reasons.15 While the CBN removal
and replacement of chief executive officers of Oceanic Bank, Intercontinental Bank, Union Bank, Afribank and Finbank was reported to be as a result of deep rooted mismanagement and the existence of large cases of insider lending to directors and their relations, unsecured and bad debts.16The incessant collapse of companies has no doubt brought the failure of good corporate governance into public glare. Investors are becoming increasingly sensitive to the corporate governance framework of companies. There is a general perception that strong corporate governance and transparency are necessary for going concerns as it is a major indicator of a well-managed and resilient business.17
 
There are several stakeholders to corporate governance who have interests, either directly or indirectly that need to be protected by effective performance of companies. These stakeholders similarly have roles and duties to perform to promote good corporate governance. They consist of Directors, Shareholders and Employees, who have direct interests and duties in the company. Other stakeholders include creditors, suppliers, customers and the community/general public who have indirect interests in the company through their transaction with it. All these stakeholders have their respective roles to play to ensure that the company is properly managed for the company‟s interest and that of all its stakeholders. The concern of this research is with respect to the directors‟ issues of corporate governance.
 
The board of directors is the main stay of corporate governance in the company. Its primary responsibility is to ensure good corporate governance in the company.18 This means that the principal objective of the board is to ensure that the company is properly managed by overseeing the effective performance of management.19 Accordingly, the
success or failure of a company depends largely on the board of directors. It is against this backdrop that the Nigerian SEC like many other countries has developed the Code of Corporate Governance in 2011 which it considered as an improved version from the earlier code of 2003. The SEC Code was made with the aim to align with international best practices. It has indeed made far reaching provisions in addition to the statutory provisions for the purpose of enhancing the quality of the board of directors in Nigeria. The requirements for an effective board of directors range from its composition to duties and disclosure responsibilities. The directors are expected to perform their duties and disclosure responsibilities individually and collectively and therefore become accountable for their actions or inactions.
 
1.2         Statement of the Research Problem
 
The incessant corporate failures and malfeasance in Nigeria were due to poor corporate governance culture. The Companies and Allied Matters Act indeed proved to be an insufficient legislation to stem corporate governance abuses. The introduction and production of the Securities and Exchange Commission Code of Corporate Governance was meant to complement the Companies and Allied Matters Act to provide for efficient and effective legal regime for corporate governance system in Nigeria. The issue for consideration now is whether the Nigerian SEC Code of Corporate Governance has sufficiently covered issues of corporate governance especially in the area of composition and duties of board of directors as well as disclosure requirements for effective and efficient corporate governance in Nigeria.
 
In view of the foregoing, this research has formulated the following research questions:
 

  1. Whether the provisions of the Companies and Allied Matters Act and SEC Code of Corporate Governance on board of directors of public companies in Nigeria have set standards that can entrench corporate best practices.
    1. Whether boards of directors under the corporate governance system in Nigeria can constitute effective and competent board that will achieve good corporate governance in Nigerian companies.

     

    1. Whether there are limitations in the legal regime for corporate governance in Nigeria that need to be reviewed and improved upon in order to provide for more effective board of directors of public companies in Nigeria.

     

    1. Whether there has been an improvement in the application of corporate governance principles enunciated in the SEC Code of Corporate Governance in Nigeria.

     
    1.3         Aim and Objectives of the Research
     
    The aim of this research is to show or prove that the Companies and Allied Matters Act and the Securities and Exchange Commission Code of Corporate Governance have not sufficiently addressed issues of corporate governance relating to company‟s board composition, duties of directors and disclosure requirements.
     

    1. In furtherance of the aim of the research, the main objective of the dissertation was set to identify the limitations in the Companies and Allied Matters Act and Securities and Exchange Commission Code of Corporate Governance that would need to be addressed to improve corporate governance in respect of board composition, duties of directors and disclosure requirements.

     

    1. In addition, the research was set to show that companies in Nigeria applied discretionally the requirements of the Securities and Exchange Commission Code of Corporate Governance in the aspects of board composition, duties and disclosure of material information
      1. The dissertation would consequently provide recommendation to address the limitations discovered in the Companies and Allied Matters Act and the Securities and Exchange Commission Code of Corporate Governance as they relate to board composition, duties of directors and disclosure requirements for effective corporate governance.

       
      1.4         Scope of the Research
       
      This dissertation is limited to the consideration of issues relating to the composition of company board of directors, duties of directors as well as the role of directors in making or ensuring the required disclosure of material information needed for an effective and efficient corporate governance regime in Nigeria. In this regard, the Companies and Allied Matters Act and the Securities and Exchange Commission Code of Corporate Governance were used as the base line among others for measuring the application of corporate governance in Nigeria as it relates to board composition, duties of directors as well as disclosure requirements.
       
      1.5         Research Methodology
       
      The approach adopted in carrying out this research is principally doctrinal methodology. For the purpose of legal analysis, primaryand secondary sources of materials constitute very important reference materials. The primary sources of materials that have been considered include statutes and codes of corporate governance from local and foreign jurisdictions as well as judicial pronouncement on the subject. They are considered as primary sources because they form the basis upon which actions and opinions are formed. They are the origin of every legal subject.
       
      The secondary sources of materials that were used are published and unpublished works of scholars in the field of the research. These include books, journal articles, seminars papers, monographs, dissertations on cooperate governance, and available
       
      newspaper, magazine articles and internet materials. In making use of the materials mentioned above, the research adopted a theoretical analysis of the materials and sources of information by comparing and contrasting them with a view to forming opinions and arriving at conclusions.
       
      As part of the secondary source of data, the research further employed empirical information and data from a random compilation of the annual reports and accounts of some companies that are listed on the Nigerian Stock Exchange. These data were obtained and analyzed in conjunction with primary and secondary data to form the basis for the conclusions that were arrived at in the dissertation.
       
       
      1.6          Literature Review
       
      In putting together this study, several literatures were used as foundation. Materials such as text books and journal articles were reviewed. The aim is to borrow ideas that would add value to this research. The approaches adopted for the literature review are in three main ways;
       

      1. Conceptual literature;

       

      1. Theoretical framework and

       

      1. Empirical literature.

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