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.
