The selfless board: a legal assurance

January 2016 | EXPERT BRIEFING | BOARDROOM INTELLIGENCE

financierworldwide.com

Corporate governance is a broad term referring to the means by which a company is directed or controlled. It encompasses the different roles of all stakeholders in the company. Following the high profile collapse of many large corporations in the US and Europe in the early part of this century, largely attributable to accountability issues, there has been a sustained interest in the corporate governance of companies, especially public companies.

Complying with principles of corporate governance is thus one of the ways in which the board of directors ensures that a corporate entity is run fairly and transparently. The combined effect of statute and the principles of corporate governance is that the board is accountable to the company as well as all its shareholders and stakeholders.

This article reiterates that the responsibilities assumed by the board affect the overall operational and strategic management of the company. An efficient and selfless board enables the company to meet its objectives, thus effectively moving the company forward. Good corporate governance practices emanating from the board enhance the value of the company and promote international investment.

The CAMA

The Companies and Allied Matters Act 2004 (CAMA) is one of the leading pieces of legislation that enforces corporate governance in companies in Nigeria. Without doubt, the relevant provisions of the Act are a potent weapon available to company members. However, it is imperative that the members of the company are made fully aware of the power they have over the board, and utilise them accordingly.

The CAMA does not define the term ‘director’ but seems to describe or ascribe a meaning to it. Section 244(1) CAMA merely states “directors of a company under this Act are persons duly appointed by the company to direct and manage the business of the company”. This is extremely vague and incomplete considering the important responsibilities expected of the board.

Decision-making is an important board activity and the quality of the board’s decisions will translate into effectiveness and progress for the company. It is unfortunate the CAMA is as silent on the selection and professional qualifications of the board as it is verbose with the selection and qualification of company secretaries. The choice is left to the discretion of the members, leaving more than enough room for nepotism and discrimination. The quality of a board will certainly reflect its effectiveness.

Following judicial remedies for breach of director duties, the intention of the CAMA is that the members exercise control and direct the affairs of the company, prompting steps to assure a selfless board. However, in reality the members hardly ever exercise this power. The members would rather retreat and leave the board to make important decisions on behalf of the company, and approve the same, unfettered, at the next scheduled general meeting.

Following the above, abuse of corporate power is made possible by the weakness or strength of the members in the general meeting and the board of directors through whom the company’s powers are exercised. A check on these powers vested in the board must at all times be carried out by the members, and should be enforced through the provisions of the CAMA. This will in turn move things closer to a selfless board.

The Code of Corporate Governance

The Code of Corporate Governance (the Code), originating from the strict provisions of the CAMA, provides a set of principles intended to guide and enhance sound corporate practices and behaviour in public companies in Nigeria. It is applicable to all public companies whose securities are listed on a recognised securities exchange and all companies seeking to raise funds from the capital market.

The Code graciously fills in some of the salient gaps created by the CAMA, by laying out specific duties, obligations and responsibilities of the board. They are entrusted with the responsibility of effectively managing the company in compliance with good corporate governance and board practices, so as to ensure due protection and enhancement of shareholder value.

The Code suggests that membership of the board should not be less than five, comprising both executive and non-executive directors with at least one independent director. The Code further defines the term ‘independent director’ as one who is not a substantial shareholder of the company, and whose shareholding, whether directly or indirectly, does not exceed 0.1 percent of the company’s paid up capital. In practical terms, however, a 0.1 percent shareholding may constitute a material influence in companies whose shares are widely held.

The Code further provides that not more than two members of the same family should sit on the board of a public company at the same time. The Code, however, fails to define ‘family’, thus making unclear the categories of excluded persons, leaving uncomfortable room for corporate malpractice.

It is highly unfortunate that the Code appears to be an unenforceable guide used to ensure the highest standard of transparency, accountability and good corporate governance solely in public companies. If enforcement mechanisms remain non-existent, the Code will come and go with very little impact on assuring the company’s interests.

Reforms to assure a selfless board

While there are laws and codes for ensuring good corporate governance, the Code’s inefficiency lies in its lack of detail and inadequate means of assuring compliance. The reforms set out below proffer possible solutions to these shortfalls.

Several countries such as the UK have reviewed their corporate governance practices in the past, and have accomplished this by employing the aid of experts in the form of committees to recommend reforms to promote corporate governance standards and best practices.

Accordingly, the Cadbury Committee recommends that the board should: (i) meet regularly, retain full and effective control over the company and monitor the executive management; (ii) have a clearly accepted division of responsibilities at the head of the company, to ensure a balance of power and authority so that no individual has unfettered decision-making powers; (iii) include non-executive directors whose views carry significant weight in the board’s decisions; (iv) follow up on agreed-upon procedure in performing their duties and consulting independent professional advice; (v) have access to the advice and services of the company secretary, who is responsible for ensuring that board procedures are followed and that applicable rules and regulations are complied with; (vi) present a balanced and understandable assessment of the company’s position; (vii) maintain an objective and professional relationship with the auditors; (viii) establish an audit committee and other committees of the board, of at least three non-executive directors, with clearly written terms regarding its authority and duties; and (ix) report that the company is a ‘going concern’.

Based on the above, it would appear that the Cadbury Committee intends that the board be shaped into a monitoring and control body in addition to a strategy-setting body. The above suggestion should not only be a recommendation and an added reform of the Code to assure a compliant, selfless board, but also an implementation mandated and enforceable upon the board with sufficient support from the relevant regulatory authorities.

Recommended amendments to the Code

Selection and recruitment of the board. Given that the CAMA and the Code leave the selection of the board to the discretion of the members of the company, it follows also that they should be responsible for identifying qualified candidates to serve on the board, as well as managing the board evaluation process. The process should begin by evaluating the needs of the company, following which the members, with the aid of experts (if necessary) assemble a list of top candidates, interview them, rank them in preferential order, and then make a selection based on an evaluation of who is best qualified. When assembled, the composition of the board should satisfy the diverse strategic, operating and functional needs of the company.

Independent directors. The Code recommends that every public company must have at least one independent director on its board who should be a non-executive director, free from any relationship with the company or its management. The suggested number of independent directors recommended by the Code is quite minimal if the intention is for them to provide necessary checks on managerial excesses. It is recommended that large companies should be required to adopt a substantial increase on the minimal requirement as stipulated by the Code, for example, one independent director for every four directors on the board. This will positively assure the board fulfils its proposed role.

Meetings and resolutions of the company. According to the relevant provisions of the CAMA and the Code, meetings of the company, as well as the board including its committees, should be scheduled regularly (a minimum of one meeting quarterly, depending on the body of the meeting). In these respective meetings, decisions should be made with the full board and company members present, with no exceptions. Even in the absence of other members with due cause, decisions of the board should be suspended until the composition of the board is complete. Decisions reached by the board and company members should be concluded via a resolution executed at the same meeting. Written resolutions, though legally permitted, should be discouraged and eventually discontinued, as resolutions entertained in these meetings will encourage open deliberations between the board and company members on matters that concern the interests of the company.

Conclusion

Every company should be managed by an effective board, responsible for long term success. The CAMA and the Code not only acknowledge this fact, but also principally address the conduct and responsibilities of the board.

Due to the widely acknowledged inclination of the board to derive benefits for themselves from their position, it is desirable not only to raise corporate governance standards, but to also adopt the international paradigm of ‘comply or explain’, which should place the burden on the board to monitor whether the company’s explanation for non-compliance with relevant provisions of the law is acceptable.

It is therefore imperative that, not only should the relevant laws (especially the Code) be mandatory and enforceable, the members, upon whom the power to sanction lies, should be encouraged to utilise sanctions effectively and properly, so as to ensure a dedicated, responsible and selfless board – as is the intent of the CAMA and the Code.

James Okoh is the deputy head of dispute resolution practice and Adanna Nosiri is at Fidelis Oditah & Co. Mr Okoh can be contacted on +234 (01) 271 0290 or by email: jokoh@oditah.com.

James Okoh and Adanna Nosiri

Fidelis Oditah & Co.