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GOOD CORPORATE GOVERNANCE: PROSPECTS FOR NIGERIAN CAPITAL MARKET DEVELOPMENT by Daniel Chimezie.




Columnist: Daniel, Uzoigwe Chimezie 
BACKGROUND
In recent times, the issue of corporate governance has become quite a topical one. As a student of Economics, I have to come to terms with the fact that corporate governance is a phrase that I will continue to confront till I graduate. The fact that it forms the core issue in the 11th edition of the annual national essay competition of the Nigerian Stock Exchange (NSE) sends only one signal; and that is the fact that the issue of corporate governance is not only relevant in school curriculum but also relevant in industry.
CONCEPTUAL CLARIFICATIONS
The Capital Market and Capital Market Development
The capital market is defined as the market where medium to long-term finance can be raised (Akingbohungbe, 1996). The capital market helps in mobilization of savings and capital formation, provides an investment avenue and speeds up economic growth and development.  In line with this, the Nigerian capital market has continued to play its traditional role of mobilizing medium to long-term finance for firms and government for their growth and development purposes. The market consists of the primary market for new issues of securities and the secondary market for trading on existing securities. The Nigerian Stock Exchange (NSE) is the most visible symbol of the Nigerian capital market. Other operators include but not limited to the issuing houses and brokerage firms. The Securities and Exchange Commission (SEC) is the market regulator and instruments traded in the market include equity and debt instruments.
On the other hand, a developed capital market is a world class capital market. According to the Director-General (DG) of the Securities and Exchange Commission (SEC), Ms Arunma Oteh, such a market is one “that engenders investor confidence, has breadth and depth in terms of product offerings, is characterized by market integrity, has a sound regulatory framework, a strong and transparent disclosure and accountability regime, fosters good corporate governance and is a fair, robust and efficient market place.” According to Professor Gabriela Anghelache, a modern economy, competitive and capable to line up with the present requirements of the globalisation process, is not to be conceived without the existence of an efficient capital market. The SEC DG also acknowledges that a developed capital market (a world class capital market) is crucial to Nigeria as “it seeks to better leverage its wealth in terms of natural and human resources to realize its full potential and address socio-economic challenges.”  
Corporate Governance
There is no one encompassing definition of the term corporate governance. As a matter of fact, a lot of divergent definitions of the subject exist. This is not surprising as Scholars generally agree that what constitutes good corporate governance practices in an economy depends on the prevailing economic and socio-cultural characteristics in such economy. According to the Capital Markets Board of Turkey (CMB), studies emphasize that no single corporate governance model is valid for every country. However, the concepts of equality, transparency, accountability and responsibility appear to be the main concepts in all international corporate governance approaches that are widely accepted.
THE GLOBALIZATION OF CORPORATE GOVERNANCE AND THE OECD PRINCIPLES
The issue of corporate governance has become a global issue. Wilson (2006) emphasize that the governance of Corporations have become a matter of great concern worldwide and bodies like the Organization for Economic Co-Operation and Development (OECD) and the Bank for International Settlements (BIS) have developed core principles of corporate governance which are viewed as representing the moral consensus of the international community. The OECD principles particularly define corporate governance as involving “a set of relationships between a company’s management, its board, its shareholders, and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.”
WHY GOOD CORPORATE GOVERNANCE?
The need for good corporate governance arises because in corporations, the owners (who are also providers of funds) are usually separate from the managers of such corporations. Even when the owners of corporations form key part of the management (especially in the Board of Directors as is the case when institutional investors own controlling shares in the company), there is need to protect the interests of individual shareholders. Corporate governance principles are inexhaustible but involve the” allocation of authority and responsibilities by a company’s board and management, including how they set the firm’s strategy and objectives, determine the firm’s risk tolerance, operate the firm’s business on a day-to-day basis, meet shareholder obligations and take into account the interests of other recognized stakeholders and how they align corporate activities and behaviour with the expectation  that firms, market operators and regulators will operate in a safe and sound manner, with integrity and in compliance with applicable laws and regulations.” (See Basel Committee on Banking Supervision (2010): Principles for enhancing corporate governance).
WHY GOOD CORPORATE GOVERNANCE IS BENEFICIAL TO FIRMS AND THE GENERAL ECONOMY
When firms stick to sound corporate governance practices, they are able to balance multiple stakeholders’ interests, meet both legal obligations and general societal expectations. Since good governance practices enhances transparency and accountability in companies, investors are better placed to make informed investment decisions and as Shleifer and Vishny (1997) observes, a firm is likely to get external finance due to assurances provided by the corporate governance system.
Good corporate governance practices matter because it allows firms to have increased access to financing, reduces the cost of capital, ensures higher valuation of the firm and allows for better operational performance (Claessens, 2012). According to Caprio and Levine (2002), corporate governance influences the efficiency of a firm production at the corporate level, so that the effectiveness of a nation’s corporate governance system shapes economic performance at the country level. The OECD principles recognizes this when it reads in part that “the presence of an effective corporate governance system, within an individual company or group and across an economy as a whole, helps to provide a degree of confidence that is necessary for the proper functioning of a market economy.”
It is worthy to note that in a Mckinsey survey issued in June 2000, investors from all over the globe indicated that they will pay large premiums for companies with effective corporate governance. This goes to show that good corporate governance promotes external investment and thus, the growth of firms.
HOW CORPORATE GOVERNANCE WOULD IMPACT NIGERIA’S CAPITAL MARKET DEVELOPMENT
There are many ways good corporate governance practices can aid the development of the Nigerian capital market. The first is through what I would call an abstracted equation model.
An Abstracted Equation Model
Corporations are usually quoted in the stock exchange (which we said is the most visible symbol of the capital market) of any economy. It is also generally agreed that the stock exchange is the barometer of the economy- gauging the business environment and reflecting the general state of the economy. If healthy corporations (on account of their good governance practices) are quoted on the Nigerian stock market, at least two things will happen- the market will reflect the healthiness of these corporations and in itself become healthy. In the same manner, the Nigerian stock market would value quoted corporations efficiently and by itself reflect this value. This resultant pricing efficiency forms part of the efficiency measure of a developed capital market.
Corporate Governance, access to finance and financial performance
Corporate governance structures and practices are very important in determining the cost of capital in a global capital market. A firm’s access to finance and its financial performance are both determinants of capital market development. Firm-level corporate governance quality can enhance the performance of quoted firms, which would eventually lead to the development of the Nigerian capital market.
Corporate Governance and Cost of Capital
According to the economic approaches (see Drobetz et al, 2004) to corporate governance, better firm-level corporate governance would not only reduce agency costs, but would enhance investors’ optimism in the future cash-flow and growth prospects of Nigerian firms. This would in turn reduce the rate of return expected by the investors, leading to low cost of equity capital to the firm. Likewise, a reduction in the agency costs is likely to cause improved operating and investment performance of the now better governed firms. The reduced cost of equity and the improved operating performance would eventually enhance both the firms’ ability to access equity finance, and the firm value. This eventually would enhance the process of capital market development in Nigeria.
Corporate Governance and Market Liquidity
From what has been said about corporate governance, it becomes very obvious that good governance practices would attract external investment in Nigerian firms which would enhance liquidity and trade-ability in the Nigerian capital market. Market liquidity and trade-ability (especially in the secondary market) would form an essential feature of a developed Nigerian capital market.   

Corporate Governance and Allocative Efficiency
Good corporate governance allows debt and equity capital flow to the most efficient users (Centre for Financial and Management Studies, 2012). If this applies to the Nigerian capital market, it would mean that the market is Allocative efficient, which would form a key aspect of the efficiency measure of a developed Nigerian capital market.
Corporate Governance and Financial Engineering
Good governance practices not only help to attract medium to long term investments but also ensure long term returns as companies are better positioned to perform well over the long term. This falls in line with the nature of finance (medium to long-term finance) the capital market deals with and so, there is no mis-match in the nature of financing provided and what is required. Without this mis-match, negative financial engineering (an inhibitor of capital markets particularly in Nigeria) is avoided and this would lead to the development of the Nigerian capital market.
Corporate Governance and Capital Market Development:  A Two-Way Traffic
It is worthy to note that the issue of how corporate governance impacts Nigeria’s capital market development is a two-way traffic. As much as good governance practices would promote the development of the capital market, weak corporate governance practices would also inhibit its development as it would erode confidence in the capital market with potential wider implications for the Nigerian financial markets and the general economy as seen in the recent ugly experience in the market.
A SITUATION ANALYSIS: RECENT INCIDENTS OF WEAK CORPORATE GOVERNANCE PRACTICES IN THE NIGERIAN CAPITAL MARKET.
In recent times, the Nigerian capital market has witnessed incidents of weak corporate governance practices at the firm level, operators’ level and even at the regulatory level. In 2009, the Central Bank of Nigeria (CBN) sacked the Chief Executive Officers of five Nigerian banks on account of what the bank Governor called “poor corporate governance practices and non-adherence to the banks’ credit risk management practices.” This is brought to the foreground because banks are big players in the Nigerian capital market.
In 2010, the SEC sacked the entire management of the NSE on account of issues bordering largely on weak corporate governance practices with the SEC particularly alleging that there were” stupefying insider dealings perpetrated by banks in collaboration with the NSE which eventually plunged share prices into an unprecedented crash .”
RECENT EFFORTS TO PROMOTE GOOD CORPORATE GOVERNANCE IN THE NIGERIAN CAPITAL MARKET
In recent times, a lot of efforts have been made to promote good corporate governance practices and reposition the Nigerian capital market for development. In April 2011, the SEC issued a new code of corporate governance to align governance in public institutions with global best practices. The SEC has also made efforts to strengthen itself in performing its regulatory oversight. In an interview with THISDAY recently, the Manager, Primary Markets (India, Middle East and Africa), London Stock Exchange, Mr. Richard Webster-Smith, admitted the improvement in the regulatory environment particularly in the disclosures and corporate governance framework now in place.
In the same vein, the new management of the NSE is also making efforts to reposition the market with her reform agenda. These efforts are already yielding fruits and must be sustained.
CHALLENGES FACING GOOD CORPORATE GOVERNANCE PRACTICES IN THE NIGERIAN CAPITAL MARKET
Despite efforts at promoting good governance practices in the market, a lot of firm-level and market wide challenges still abound. Some of these challenges at the firm-level acknowledged by the CBN Code of Corporate Governance (CBN, 2006) include the technical incompetence of board and management, malpractices and sharp practices and inadequate operational and financial controls.
At the market level, the fact that good corporate governance principles is not yet fully entrenched in the larger Nigerian economy  is an issue. As Alba et al (1998) argue, “the governance role of a developing economy capital market is being constrained by an absolute family dominance, weak incentives to improve disclosure and governance, poor protection of minority shareholders and weak accounting standards and practices.”  These challenges must be confronted for the Nigerian capital market to make headway.
WAY FORWARD FOR CORPORATE GOVERNANCE IN THE NIGERIAN CAPITAL MARKET
In the light of the relevance of good corporate governance practices in the development of any capital market, there is need for conscientious efforts to be made to entrench these practices. This could be done at both the firm-level and at the market-level. At the firm –level, there is an abundance of literature in form of reports, existing codes of the SEC and the CBN and other legal regulatory framework on how to achieve quality firm-level corporate governance. These should be adequately implemented and enforced. The focus here is at the market-level.
At the market-level, the following could be considered:
·         Efforts should be geared towards promoting good governance practices at the national level. By so doing, the positive effect would trickle down to the Nigerian capital market.
·          The concern should not only be on the governance of corporations alone. How operators and even regulators in the Nigerian capital market are governed should be brought into perspective.
·         For Nigeria to reap the benefits of good corporate governance, there is need to strengthen the enforcement of regulatory institutions in the capital market.
·         The Nigerian capital market can move towards best global practices by learning from the experience of developed capital markets.
·         All stakeholders  in the Nigerian capital market must see it as obligatory and beneficial to abide by sound corporate governance practices in their operations without necessarily being ‘chastised’ to do so. A developed capital market would be value-enhancing and benefit all stakeholders in the long run.
·         Corporate governance in isolation cannot develop the Nigerian capital market. There is need to sustain on-going efforts and to entrench other best practices known to be relevant in capital market development.  

CONCLUSION
About a decade ago, the term ‘corporate governance’ was barely heard. However, today, corporate governance has become a staple of everyday business and the Nigerian capital market should be better for it.


Note: All references have been omitted.

Daniel, Uzoigwe Chimezie is a student of the department of Economics and Statistics, University of Benin.