INTRODUCTION
The separation of corporate governance models has been analysed deeply in the context of international convergence.Footnote 1 However, a time-hallowed issue in the province of corporate governance appears to be the probability of the polarized models converging towards a single system.Footnote 2 The European Union (EU) has been of particular interest, given the level of corporate governance sophistication including its progressive approach to the harmonization process among member states.Footnote 3 From the orthodoxy of corporate governance taxonomy, the competing models are the Anglo-American “outsider” system, the continental “insider” system characterized by Germany and the Asia-Pacific model exemplified by the Japanese approach.Footnote 4 Given national histories, cultural backgrounds and financial traditions, each framework is exemplified by varying managerial strategies, structural approaches and ownership patterns.Footnote 5 In the wake of the last global financial crisis, there has been renewed interest in legal and economic arenas regarding the harmonization of “best practices” within corporate governance codes.Footnote 6 This has resulted from pressure for globalization and financial integration, including the major proliferation of global governance principles and codes.Footnote 7 The harmonization of corporate governance systems has the potential to level the playing field for businesses because of the increasing financial and economic interconnections and market integrations between countries.Footnote 8 Given the difficulty in attaining a large-scale corporate governance harmonization framework at the regional level, the EU approach has been to work towards a flexible strategy of alternative mechanisms that permits members to adopt their various national codes. The corporate governance code-based approach, which is bolstered by the “comply or explain”Footnote 9 framework, is termed “procedural harmonization”.Footnote 10 The EU experience offers illuminating guidance for emerging economies such as Nigeria from which useful lessons can be drawn.
Indeed, Nigeria's corporate governance landscape is underpinned by a multiplicity of overlapping regulatory frameworks. The Financial Reporting Council (FRC) tried to address this issue and unify the sectoral corporate governance codes with the 2016 Nigerian Code of Corporate Governance (NCCG). In January 2017 the federal government suspended the NCCG (which was intended to regulate the private sector, public sector and not for profit organizations) following stiff opposition from various stakeholders.Footnote 11 This suspension coincided with that of the FRC executive secretary / chief executive. The suspension, which was widely criticized and condemned, had more to do with politics and power-play than anything else. Nevertheless, the entrenchment of mandatory compliance in the suspended private sector code and the code's resultant rigidity was the principal reason the code was rejected by investors and the business community.Footnote 12 A similar rigidity underlies the “apply and explain” model in the 2018 draft NCCG, leading to disquiet among some investors.Footnote 13 Arguably, a necessary balance should be sought that satisfies the inclination of investors and the business community towards flexibility, as well as the government's drive for an oversight function. This will be achieved by adopting a broad based hybrid model that internalizes the advantages of both the “comply or explain” and mandatory compliance approaches, while eschewing their disadvantages.
This article is divided into six main sections. Following this introduction, the next section provides an overview of corporate governance. The article then evaluates the Anglo-American model of corporate governance in comparison with the continental model and the Asian-Pacific model from the prism of culture, stock markets and convergence. The next section makes a panoramic analysis of diverse contours of harmonization, including the drive towards convergence evidenced in the “comply or explain” approach. The article then discusses the efforts at harmonizing different codes in Nigeria and the useful lessons Nigeria can learn from experiences in other jurisdictions, before offering some concluding remarks.
CORPORATE GOVERNANCE: AN OVERVIEW
As a contextual construct embedded in institutions, the term “corporate governance” has no universally accepted definition. Nevertheless, it may be described as a set of processes and structures for controlling and directing an organization.Footnote 14 Shleifer and Vishny view corporate governance in terms of the economic interests of the participants.Footnote 15 Former World Bank President James Wolfensohn views corporate governance as all about promoting corporate fairness, transparency and accountability.Footnote 16 Corporate governance seeks to ensure a fair return on investment and establishes incentives and procedures that meet the interests of shareholders while respecting other stakeholders’ interests in the organization.Footnote 17 The Organisation for Economic Cooperation and Development (OECD) Principles of Corporate Governance stipulate that corporate governance provides the structure through which a company's objectives are set, and the means by which attaining those objectives and monitoring performance is determined.Footnote 18
The fundamental arguments that underlie corporate governance can be traced back to the pioneering work of Berle and Means.Footnote 19 These corporate theorists observed that modern corporations have grown very large, necessitating the need to separate ownership from control. In essence, Berle and Means observed the difference between the owners and the people actually in control of corporations. Their observation led to a renewed emphasis on the behavioural dimension of the theory of the firm.Footnote 20
The importance of corporate governance arises as a result of possible conflicts of interest among the various stakeholders in corporate management.Footnote 21 These potential conflicts of interest, often regarded as agency problems, are brought to bear from two notable sources. First, different stakeholders in a corporation have different objectives and preferences. Secondly, information asymmetry exists among the various participants in relation to their goals and preferences; the problem then arises from the separation of ownership and control because of the misalignment of interests between the principal and the agent.Footnote 22 Berle and Means identified these problems by examining the separation of corporate ownership from corporate control in public corporations and noting that the separation has the potential to provide executives with the ability to act in their own self-interest rather than in the interest of the principal (shareholders).Footnote 23 This fundamental argument is a major influence in every modern organization.Footnote 24 The agency issues arose from the diffusion of share ownership, leading to the owners’ inability to observe the agent properly so as to ensure adequate returns on their investment.Footnote 25
In light of the above, a model for reducing the agency problems became necessary.Footnote 26 Shareholder primacy theory, the stakeholder theory and the Asian-Pacific approach emerged in response to these conceptual governance issues.Footnote 27 From the perspective of shareholder primacy theory, which is prevalent in the US and the UK, it would appear that the corporation's sole objective is to maximize the interests of the shareholders, which means that the governance mechanism must prioritize shareholder value. However, the weakness of this system lies in the corollary of its strength. The inherent volatility, short-termism and inadequate governance procedures associated with the model have often led to periodic financial crises.Footnote 28
On the other hand, the stakeholder theory, which is evident in continental Europe and epitomized by Germany, contends that corporations exist to cater for the wider interests of the affected constituencies, including shareholders, creditors, employees and suppliers.Footnote 29 The German two-tier system, comprising a management board and a supervisory board, is typical of co-ordinated market economies and long term industrial strategies supported by capital investment.Footnote 30 However, the lack of flexibility and inadequate investment for new business remains a major source of concern in the system.Footnote 31
The Asia-Pacific model of corporate governance systems is the most networked of all, with the firm at the middle of long and lasting economic relationships with investors, employees, suppliers and customers.Footnote 32 This insider system has encouraged the long term investment horizons and trust relationships in Asian economies.Footnote 33 However, one principal distinction between the western-oriented models, particularly the shareholder-oriented model and the Asia-Pacific model, is the “institutional rigidities” that underlie the latter, which neutralize shareholders’ rights.Footnote 34 These “institutional rigidities” are reflected in Japan (where a powerful business lobby, Keidanren, and the judiciary balance shareholders’ primacy rights to a certain extent), in China (where the prevalence of state-owned enterprises makes effective shareholder-based governance difficult), in Korea (where the influence of the large corporate groups, or chaebol, complicates shareholders’ rights) and in India (where “pyramidal” business groups create similar challenges to shareholder governance).Footnote 35
In Africa, the prevailing corporate governance system is generally a shareholder-centred model, with a stakeholder model becoming increasingly relevant. The prevalence of the shareholder-centred model is explained by English law influences on former colonies including Ghana, Kenya, Nigeria, South Africa, Zambia and Zimbabwe and the dominance of this model in financial development and capital market financing. Hence, a survey of corporate governance development in 13 major economies in Africa, including Nigeria,Footnote 36 indicates the predominance of the Anglo-American market-based system, where market forces strongly influence adherence to sound corporate governance. Nevertheless, the stakeholder model has an increasing influence, entailing gradual convergence between the shareholder-centred model and stakeholder model. This is typified by the King IV Code (King IV) applicable to South Africa. The stakeholder approach of King IV has permeated the corporate governance of other African countries, including the 2018 Draft NCCG. Also, stakeholder consideration forms a core objective of the African Union's Africa Peer Review Mechanism. The convergence of the shareholder-centred model with the stakeholder model in African corporate governance practices is congruent with emerging global practice.Footnote 37
In addition, standard-setting institutions play a major role in shaping corporate governance in Africa. Development finance institutions, such as the International Finance Corporation, influence corporate governance in high debtor countries such as Ghana, Malawi and Uganda through incentives set out in development targets to strengthen the role of the private sector in stimulating economic activity and overall economic development. Similarly, the World Bank's Reports on Standards and Codes provide country-level reports on corporate governance to assist countries to improve.
The following section examines the influence of culture, stock markets, the convergence debate and board structure on Anglo-American jurisdictions, continental European countries, the Asia-Pacific economies and African economies.Footnote 38
CULTURE, STOCK MARKET AND CONVERGENCE
Culture
Culture is reflected in various aspects of life, collective beliefs and value systems that influence corporate organization.Footnote 39 Values are the foundation of culture, as they shape attitudes and are instrumental in the design of state rules and governance structures.Footnote 40 It has been argued that the values and organizational structure of a corporation reflect the national culture in which that organization operates.Footnote 41 Culture influences organizational policies and corporate attitudes through the values held by the decision-makers.Footnote 42 This value system affects the relationship between individuals and institutions that ultimately shapes the corporate governance structure in a country.Footnote 43 Therefore, a corporate governance code is a reflection of the institutional norms and environment in which it is embedded.Footnote 44 For instance, the cultural impact of the continental stakeholder and Asia-Pacific models contrasts sharply with that of the shareholder model. States with a shareholder model, such as the UK and the US, are culturally individualistic, as the firm is managed for the shareholders.Footnote 45 By contrast, countries with a stakeholder approach, including the Asia-Pacific model, emphasize the communitarian values and long-term sustainability of firms. In other words, firms are managed with an emphasis on sustaining the interests of all the stakeholders as against the primacy of shareholder value.Footnote 46 In Germany and Japan, employees play a major role in the management of the company through their representation on the board.Footnote 47 The system promotes a collective egalitarian culture where corporations are managed for the long-term goal of all, not just for the short-term individualistic maximization of profits for the shareholders.Footnote 48
In Africa, culture equally plays an increasing role in shaping the principles of corporate governance. Although the “comply or explain” model remains the predominant paradigm for corporate governance codes, some African countries are adapting this model to suit their cultural peculiarities. This is exemplified by King IV that adopted the “apply and explain” model, which assumes compliance at the outset and requires explanation merely to indicate “practices that have been implemented and the progress made toward giving effect to each principle”.Footnote 49 Moreover, the notion of ubuntu (which generally connotes the African version of social capital), used in King IV in South Africa, is illustrative of cultural influence on corporate governance.Footnote 50 This same idea of ubuntu is expressed as unhu in Zimbabwe, in Malawi as uMunthu, in Burundi and Rwanda as ubuntu, and in Uganda and Northern Tanzania as obuntu.Footnote 51 The notion of ubuntu is about entrenching African culture and philosophies within corporate governance codes and practices. The “apply and explain” model of King IV has been adopted in the 2018 Draft NCCG.
Financing
The Anglo-American model relies largely on equity capital as the source of finance for operations.Footnote 52 Under this model, the capital markets play a major role in encouraging sound governance practices.Footnote 53 In essence, individual and institutional investors own the majority of equity shares and financial development is often rapid.Footnote 54 There is a consistent dependence on legal rules and effective legal enforcement of shareholders’ rights.Footnote 55 On the other hand, the continental European model is structured in such a way that banks play a key role in the funding of companies and so may well be able to exercise some control through the board structure.Footnote 56 This model depends mainly on short-term bank loans for running businesses, as opposed to long term equity capital raised through share subscription in the capital market.Footnote 57 Major equity holdings in these corporations are owned by the lending banks. Hence, banks are relied upon to enforce sound corporate governance practices on corporations. In Asia-Pacific, the core value of communitarianism, exemplified in Japan, has shaped corporate governance practice.Footnote 58 This insider approach has yielded the longest investment of all, and could be the main reason for the resounding success of Japanese businesses in dominating major overseas markets in both the US and Europe with affordable consumer goods.Footnote 59
Broadly speaking, there is general support for the idea that effective corporate governance reduces the cost of equity financing.Footnote 60 Similarly, firms with stronger shareholders’ rights have high share values and enjoy a lower cost of equity capital. While these results provide the link between governance and the cost of equity, they do not provide direct evidence as to whether the quality of governance influences a firm's decision to finance its investment opportunities using equity instead of debt or loan financing. There is an argument that firms with strong governance benefit from higher credit ratings on debt issuances. Further, effective corporate governance is said to reduce the default risk by mitigating the agency cost through better monitoring of managerial performance. Given that corporate governance has a positive connotation with both equity and debt financing, the financing policy to be chosen, whether in the UK, Germany, Japan or emerging markets such as Nigeria, is dependent on empirical analysis.Footnote 61 However, firms with high quality governance will prefer equity financing for a few reasons. First, equity compared to debt is more sensitive to information asymmetry given the agency costs. Similarly, the cost of issuing equity is associated with adverse selection issues due to information asymmetry, while the costs of debt financing are largely associated with the expected cost of financial distress. Firms choose equity financing when adverse selection problems are reduced as a result of high quality audits that can lead to true earnings being reported. Moreover, the governance structure is expected to be stronger for equity issuers than for debt issuers. Equity holders depend on a board of directors and other governance mechanisms to monitor managers continually, whereas debt holders generally interfere with management decisions that have an impact on liquidation. This suggests that issuing equity relies more on the effectiveness of corporate governance. Agency theory regards debt financing as a bonding device and bond holders can use covenants to reduce directly any agency risk that they face, which entails that there should be a relatively small effect of corporate governance on the cost of debt financing.Footnote 62
Convergence or divergence: Towards a single model
Aside from culture and financing techniques, intense debate remains regarding which of the three corporate governance models (the Anglo-American, the continental European or the Asia-Pacific) is more robust than the others, and which system will prevail over others, effectively pushing the others towards a single system. In other words, is the system moving towards convergence or divergence? Fanto argued earlier that the globalization of the economy is pushing corporate governance systems internationally towards US-style market capitalism.Footnote 63 However, this seems to ignore the efficiency that underpins the continental European model, particularly the German dual-structured and co-determination model and the network-oriented system in Japan.Footnote 64 Despite the plethora of theoretical and empirical studies on this controversy,Footnote 65 the issue remains inconclusive given that there currently seems to be no agreement as to which corporate model is the best and whether corporate legal convergence should be encouraged.Footnote 66 In other words, scholars are not in agreement as to whether global corporate governance is converging towards the US and UK models or otherwise.Footnote 67 However it is noteworthy that convergence can move either way. For instance, the enlightened shareholder value enshrined in section 172 of the UK Companies Act 2006 brings UK corporate governance closer to the stakeholder model, particularly its increased emphasis on sustainability and the protection of the interests of non-shareholders.Footnote 68
Superiority debate
Given the lack of agreement on convergence, the debate has extended to the question of the superiority of one system over the others. Strenuous arguments have been advanced to illustrate that the shareholder-oriented system is superior to other systems. The shareholder-oriented system is based on well developed capital markets, institutional investors, effective investor protection, a market for corporate control and shareholder value.Footnote 69 This model encourages greater willingness among investors to provide financing, as it attempts to ensure that shareholders get the most from their investment. Arguably, this leads to a more developed and better functioning financial market, which ultimately results in higher company valuation and long-term economic growth.Footnote 70 Furthermore, the superiority of this system is premised on the fact that frequent exposure to takeovers acts as a check to managerial independence and self-interest.Footnote 71 Arguably, this enables the subsequent acquirer to reallocate the target resources in a profitable way.Footnote 72 However, this argument remains doubtful, given that there is emerging evidence that managers in the Anglo-American model could behave in a short-sighted way if too much attention is paid to the short-term evolution of stock prices.Footnote 73 Nevertheless, Hansmann and Kraakman argue that the growing acceptance of the shareholder-centred system in corporate law by global businesses, governments and legal experts will bring about changes in corporate law, resulting in corporate governance convergence towards the Anglo-American system.Footnote 74 Milhaupt notes that Hansmann and Kraakman provided a provocative account of one of the principal devices driving corporate governance convergence in their argument: the ascendancy of the shareholder primacy norm.Footnote 75 However, Romano expresses scepticism about the degree of global corporate governance convergence.Footnote 76 In a similar vein, Gilson contends that, even if global convergence is unlikely to be attained on account of the regulatory and institutional inhibitions existing in various jurisdictions, there could be contractual convergence of the best corporate practices.Footnote 77 For instance, a corporation may decide to avoid its national corporate governance standard by choosing another corporate governance system. This means convergence at the corporate level rather than at the federal, national or state levels.Footnote 78 There has been an appreciable increase in such contractual schemes of convergence over the past few decades through cross listings,Footnote 79 a switch to the state of incorporation, as well as cross border mergers and acquisitions.Footnote 80
While the proponents of the Anglo-American system may claim its superiority, the advocates of alternative models, such as the state-oriented and other stakeholder-based systems in continental Europe and the Asia-Pacific model, have different views. In other words, the advocates of this alternative model believe that the major benefit of the system is found in the manner in which the system resolves the problem of misalignment of interests between the managers and shareholders.Footnote 81 In the common law jurisdictions, this crisis is addressed through effective monitoring, a market for corporate control as well as regulations that mandate managers to pay particular attention to shareholders’ interests.Footnote 82 Under the stakeholder models epitomized by the German and Japanese models, the role of the stock market in the provision of financing is played down and a harmonious stakeholders’ relationship is emphasized,Footnote 83 with the bank considered the major source of capital.Footnote 84 For instance, there is relative underdevelopment of the capital market in Germany compared to the stock markets in the US, UK and other similar jurisdictions.Footnote 85 Similarly, the market for corporate control remains weak and takeovers tend to be rare in jurisdictions with a stakeholder model. The ownership structure is concentrated, unlike in jurisdictions with a shareholder model, where ownership remains dispersed.Footnote 86 Further, large national banks hold substantial shares in corporations under the stakeholder model.Footnote 87 In the Asia-Pacific model, in particular the Japanese model, the “Keiretsu” system consists of an interconnected web of banks that act as the lenders, which could engage in a monitoring role including intervening in firms to avert corporate collapse.Footnote 88
A further perspective is based on the international competition hypothesis, which contends that the major competing systems should borrow from one another, which is likely to end up with a “hybrid model” giving room for the right mix of market discipline, corporate stakeholder power and corporate regulation.Footnote 89 This view is in line with the position of the European Commission, which advocates that corporations should be given the space to choose the practice that best suits their needs. Accordingly, corporations in various countries should channel their attention towards addressing the observed weaknesses that should form the basis of their reforms, without attempting to converge to one model.Footnote 90 In effect, each system appears to enjoy certain comparative advantages with regard to solving the agency problem.Footnote 91 Since the long-term interests of the shareholders and stakeholders may not necessarily conflict, it is only reasonable to expect the monitoring devices to produce related outcomes in the form of long-term wealth creation for corporations.Footnote 92 Consistent with this argument, the empirical literature shows mixed evidence about the relative benefits of the models, indicating that the alternative systems illustrated by the Japanese and German models are as efficient as the Anglo-American system.Footnote 93 Consequently, the diversity of national cultures and cultural practices among countries entails that corporate governance rules and practices around the world will remain largely divergent in the foreseeable future, but with a greater emphasis on integration and convergence.
Unitary versus two-tier board structure
Divergence in the corporate governance model is also reflected in board structures. The Anglo-American systems operate a unitary or one-tier board structure.Footnote 94 A unitary board structure has also permeated other jurisdictions, including Australia, Nigeria, Singapore and South Africa. It is characterized by a single board made up of the executive and non-executive directors, with the active participation of the shareholders in nominating members. The board structure benefits from collaborative meetings of all members,Footnote 95 but appears to suffer from a lack of independence provided by the supervisory boards.
In contrast, the continental model represented by the German corporate structure is underpinned by a two-tier board structure consisting of the management board (Vorstand) and a supervisory board (Aufsichtsrat).Footnote 96 Both shareholders and employees participate in appointing members.Footnote 97 Unlike the unitary board structure, the two-tier board structure ensures better monitoring of the executive board. However, the German supervisory board lacks adequate power to direct the management board, as its power is merely advisory.Footnote 98
In Asia-Pacific, the board structure reflects both the cultural peculiarities and influences of the western-oriented approach. In China, a two-tier board structure is generally practised, comprising a supervisory board and an executive board of management.Footnote 99 The supervisory board monitors the executive, while the latter undertakes the day-to-day management of the corporation. In Japan, the Commercial Code (as amended in 2002) permits corporations to elect to adopt either a one-tier or a two-tier board structure.Footnote 100 In accordance with Japan's Corporate Governance Code, which became effective in 2015, corporations are required to appoint at least two independent directors to the board.Footnote 101 In order to protect the non-identical stakeholders in the corporation, the culture of lifetime employment and employee participation through board membership remains a cardinal feature of Japanese corporate practice. In keeping with the tradition of rewarding the loyalty of employees, board members are chosen from within companies, among the senior managers who have served the company over a long period.Footnote 102 In return, employees feel valued and incentivized to improve performance as they regard themselves as equal partners and residual claimants in the firm. Even in the instances where a shareholder-style form of governance is being instituted, it is carried out within the framework of Japanese culture.Footnote 103 As an illustration, the Japanese Commercial Code carefully gave employees a voice in decision-making to ensure that their rights are strongly protected.Footnote 104 Unlike the shareholder primacy jurisdictions, where the position of independent director may not be mandatory in most corporate codes, independence in this model is widely defined to permit executive directors to sit on the board to protect employees’ interests.Footnote 105 In sum, Japan appears to be creating a hybrid that incorporates certain shareholder-oriented principles that are believed to enhance their investment, as well as some aspects of stakeholder-oriented principles. The following section examines the code-based harmonization of corporate governance.
DIVERSE CONTOURS OF HARMONIZATION DEBATE
Harmonization does not strictly mean unification. For the sake of clarity, unification aims for the total substitution of the existing legal arrangement with a new order through regulation.Footnote 106 On the other hand, harmonization seeks to effect an approximation or co-ordination of different legal provision or systems by eliminating major differences so as to create minimum requirements or standards.Footnote 107 Harmonization can be seen as a step towards unification and, in a way, it strives towards unification.Footnote 108 A well-coordinated corporate governance structure through harmonization has the potential to create a more favourable climate for investment and economic revival.Footnote 109 At the EU level as well as at the national level, harmonizing the corporate governance framework can encourage investor and lender confidence, including the ability to promote both local and foreign investment, which ultimately inspires corporate competitiveness.Footnote 110 However, given existing polarization, it is doubtful whether the desired harmonization of corporate governance frameworks is attainable. These polarized boundaries of governance systems present a harmonization conundrum.Footnote 111
Models of harmonization and diversity of regimes
Demands for the harmonization of laws are generally based on the belief that legal diversity causes transactional costs, leads to legal uncertainty and lowers economic trade and welfare. Hence, different shades of harmonization are deployed to address national legislation, national control procedures or cross-border rules typified by the EU approach.
Total harmonization
This occurs when no derogation is permissible, except safeguard measures as needed.Footnote 112 For instance, the European Community Council directive of 1970 relating to additives in foodstuffs is an example of total harmonization.Footnote 113 Total harmonization was the preferred approach in the early days of the European Community's harmonization programme when the specific and detailed provisions eliminating barriers to trade were still being defined.Footnote 114 However, total harmonization lacks the flexibility needed to regulate at the national level. Indeed, such flexibility and power to administer rule at the national level were lacking under this concept.
Optional harmonization
Unlike total harmonization, optional harmonization offers an option to follow either the harmonizing rules or the national rules. Products traded cross-border must meet the harmonized standards or standard of the country of destination. The main benefit of this is that businesses operating within a customs union can establish one product type.Footnote 115 An example of optional harmonization is the approximation of laws of EU member states regarding approved standards for the sound levels and exhaust systems of motor vehicles. The provision provides for free movement within member states as long as there is compliance with these standards, but there is an option to adhere to national rules instead. Optional harmonization provides greater flexibility in comparison with total harmonization.
Partial harmonization
Unlike optional harmonization, which is underpinned by two sets of rule (one for intra-community transactions and the other for domestic trade), in partial harmonization the harmonizing rule applies to cross-border transactions.Footnote 116 This requires cross-border businesses to be regulated by community rules. Nonetheless, the problem with partial harmonization is that it does not provide the necessary options for manufacturers when compared with optional harmonization. Similarly, partial harmonization is rarely used at national level given that the subject matter to be regulated can sometimes involve setting a rule beyond transnational movement.Footnote 117
Minimum harmonization
Minimum harmonization is set as an overarching framework but member states in a custom union have the option individually or collectively to provide for stricter rules.Footnote 118 Whether a member state can exercise the option to establish higher standards depends on the country's policy priorities and industry's strategic interests, as countries with a strong bias towards safeguarding critical national industries may find it politically wise to make stricter rules to ensure such protection.
Diversity of codes in application
In a study of 15 African countries selected on the basis of the strength of their GDP and the availability of corporate governance instruments, it was found that diversity underpins the application of harmonized codes. Hence, the “comply or explain” approach obtains in Egypt, Ethiopia, Malawi, Morocco, Rwanda, Tanzania and Zambia; the “voluntary” approach applies to Ghana, Mozambique, Tunisia and Uganda; the “apply and explain” approach obtains in Mauritius, Nigeria and South Africa; and “apply or explain” applies to Kenya.Footnote 119 The model adopted by these countries is far from total harmonization, given the continued application of sector-specific and / or subject-matter-specific codes operating alongside the national code.Footnote 120 In Nigeria, the existing sector-specific codes, such as the Central Bank of Nigeria (CBN) code, and the Securities and Exchange Commission (SEC) code, will continue to apply in areas not provided for by the 2018 Draft NCCG.
Harmonization of substantive law
It should be noted that no real effort was made towards harmonizing the corporate governance framework until the 1990s.Footnote 121 At the regional level, the concept is only an integral part of the EU harmonization process.Footnote 122 Before this, the existing EU structure on governance models was intended for total harmonization based on the legal systems of member states.Footnote 123 The integral part of the directive relating to the governance of companies was substantially influenced by the German model exemplified by the two-tier board system.Footnote 124 The criticism the draft directive received was an indication of the difficulty that underpins the harmonization of various corporate governance practices.Footnote 125 Because of the unsuccessful attempt to impose rigid substantive rules, the EU directive permitted greater flexibility at the national level. A major feature of this directive standard is the introduction of optional or minimal harmonization, including an “opt out” provision in the existing regulatory regimes.Footnote 126
However, it can be argued that this legal co-ordination through a community directive remains inconclusive, principally because other corporate areas outside the confines of cross-border issues were left untouched on account of being domestic in nature.Footnote 127 This weakness in the earlier harmonization of substantive rules leaves room for further diversity at the national level.Footnote 128 This prompted the need to search for more flexible approaches for interventions in corporate governance issues.Footnote 129 Consequently, an element of flexibility is required in the harmonization of the national codes of “best practices”.Footnote 130 A code-based model predicated on the “comply or explain” approach presents the relevant flexibility but requires bolstering with an element of mandatory prescription,Footnote 131 together with effective monitoring and enforcement.
“Comply or explain” code-based approach
The UK pioneered the corporate governance framework based on the “comply or explain” model, following the 1992 Cadbury Report on the Financial Aspects of Corporate Governance (Cadbury Report).Footnote 132 Companies are not bound to adopt the rules in the resulting UK Corporate Governance Code (UK Code),Footnote 133 as it is non-binding. However, they are required to state the reasons for non-compliance with the recommendations in the UK Code. The UK Code sets standards of good practice in relation to board leadership and effectiveness, remuneration, accountability and relations with shareholders. It further provides that all companies with a premium listing of equity shares in the UK are required under the Listing Rules to report in their annual report and accounts on how they have applied the code.Footnote 134 The UK Code contains broad principles as well as more specific provisions. Listed companies are required to report on how they have applied the main principles of the code, and either to confirm that they have complied with the code's provisions or, where they have not, to provide an explanation. Compliance with some of the provisions of the UK Code require disclosures to be made.Footnote 135 It is important that companies provide clear and meaningful explanations when they choose not to comply with one or more of the provisions of the code, so that their shareholders can understand the reasons for doing so and judge whether they are content with the approach the company has taken.
Pathways of “comply or explain” approach
Following the UK example, codes of corporate governance best practices predicated on flexibility swept other jurisdictions such as Belgium, France, Germany, Sweden, other EU members states, Japan and some developing countries.Footnote 136 In the EU, however, the large-scale uniform application of a code-based approach was jettisoned given that corporate governance influence reflects local realities and the need to uphold a country's idiosyncratic traditions. Indeed, differences in content and structure of codes of corporate governance must be seen in the perspective of the legal systems of different countries.Footnote 137 However, the practical reality is that attention has now moved towards harmonizing the implementation process rather than the substance of codes.Footnote 138 Because of the changing business environment, the “comply or explain” approach has afforded UK and EU companies the opportunity to deviate from the codes and explain the reasons for non-compliance, which is more flexible than the traditional approach that sought mandatory legislation.Footnote 139 Overall, the efficacy of the EU harmonization effort remains debatable, largely because the implementation of the code-based approach is currently differentiated by the diversity of national codes.
Indeed, discrepancies in national codes not only contribute to the implementation of multiple results but also lead to fragmentary applications of corporate governance practices.Footnote 140 However, it is considered that a single corporate governance code is not suitable at the EU-wide level given the existing diversity in legal systems and the need to encourage innovation and competition. Conversely, a homogenous code at the national level should be encouraged. The Belgian experience, based on the “comply and explain” model but requiring a rigorous approach,Footnote 141 strikes the right chord with the requirement in Nigeria.
HARMONIZING THE CODE-BASED APPROACH IN NIGERIA
The Nigerian corporate governance landscape is code-based, drawing from the UK model. Hence, the 2003 Atedo Peterside committee set up by the SEC to develop a Code of Best Practice for Public Companies in Nigeria was partly influenced by developments in the UK.Footnote 142 This code remained voluntary and was designed to entrench good business practices and standards for the boards, directors, chief executives and auditors of listed companies.Footnote 143 In the banking sector, the CBN developed the Nigerian corporate governance guidelines for the post-consolidated banks in 2006.Footnote 144 The SEC and CBN codes have since been revised. The SEC code was initially made a voluntary code while the CBN code was mandatory, although the revised 2014 edition made both codes mandatory for all businesses in Nigeria.Footnote 145 Similarly, the FRC introduced the 2016 NCCG, hinged on three main areas: the private sector, public sector and not-for-profit sector.Footnote 146 The code aimed to harmonize the various corporate governance principles and practices existing in the country. However, the controversy that underpinned the provisions led to its suspension.
The private sector code applied to: all public companies (whether listed or not); all private companies that are holding companies or subsidiaries of public companies; and all other companies, excluding companies that routinely file returns only with the Corporate Affairs Commission and the Federal Inland Revenue Service and small private companies.Footnote 147 The 2018 Draft NCCG generally maintains the same scope of application. On the other hand, the public sector code applied to: all government ministries, departments and agencies; all state-owned entities; all parastatals; and all government commercial agencies.Footnote 148 The not-for-profit sector code, which remains suspended under the 2018 Draft NCCG, applied to the whole gamut of entities and organizations with such appellation and mission, including charitable organizations, educational institutions or entities, professional and scientific entities, religious organisations, literary and artistic outfits, political and administrative groupings, social clubs and associations, and trade unions.Footnote 149
The harmonization of disparate and separately pre-existing frameworks into a single code eliminates fragmentation (where each sector has its own corporate governance framework), which more or less hampers good corporate governance practices and compliance.Footnote 150 Harmonization engenders systemic regularity and uniform approaches in the Nigerian corporate governance system. One distinctive feature of the suspended code is prescription of mandatory rules in the private sector code,Footnote 151 which created consternation among the business community and reawakened debate regarding the suitability of rules over principles, and the possibility of the two co-existing.
Principles-based and rules-based regulation
The interplay between principles-based regulation and rules-based regulation is not a new phenomenon.Footnote 152 Indeed, each of the two regulatory paradigms has been applied in a broad spectrum of areas including securities regulation, capital markets regulation and corporate governance frameworks.Footnote 153 Similarly, scholars have analysed the dichotomy between rules and principles (also called standards) from broad spectrums, including from legal to economic perspectives and from behavioural to political perspectives.Footnote 154 While some lean towards divergence,Footnote 155 others contend that there is more convergence than divergence between them.Footnote 156 As aptly observed, “there is no polar opposition between rules and standards. It takes a rule to make a standard legal; it may take a standard to make [sic] rule satisfactorily workable. That there can be rules which do not incorporate standards does not show that standards can operate legally without incorporation of rules”.Footnote 157 Thus, each has essential attributes convergent with the other while maintaining a certain degree of diverging attributes. This has huge implications for the dichotomy between flexible and mandatory rules.
“Comply or explain” versus mandatory rules
As noted above, the suspended corporate governance code adopted the “comply or explain” model for its not for profit code while incorporating mandatory rules for the private sector code. The contemporary paradigm recognizes the interrelationship between the two, on the basis of their relative strengths and weaknesses including the need to balance coercive compliance with constructive engagement.Footnote 158 Although the prescriptive rules of corporate governance anchored on mandatory rules and compliance are still obtainable,Footnote 159 particularly because of unexpected corporate and accounting failures,Footnote 160 the relevance of non-mandatory principles has never been denied and the mandatory prescriptions do not totally eschew principles-based regulation.Footnote 161 While mandatory prescriptive rules provide certainty and sanctions, non-mandatory principles leverage in being flexible and less expensive. Indeed, “[r]ules have their virtues, and they have been widely used, but they also may allow corporate actors to find ways to comply with the letter of the law while circumventing its spirit”.Footnote 162 Thus, there is a trade-off between the rules and principles necessitating the conceptualization based on actual or projected outcomes and navigating the maze to create an optimal paradigm that underlies the mandatory rules and the “comply or explain” model. Arguably, such an optimal paradigm would be a hybrid model. As the new technical committee on corporate governance reform is constituted to develop an improved corporate governance code, Nigeria is once again presented with an opportunity to craft a code that is not only consistent with the country's cultural peculiarities but also with global best practice.Footnote 163
Of course, there is no unanimity among scholars on the preferred balance between rules and principles.Footnote 164 However the adoption of the “apply and explain” model in the 2018 Draft NCCG essentially reflects the rigidity of mandatory prescriptions. Although the “apply and explain” model would ensure compliance without exceptions and prevent box-ticking, it also entails jettisoning the flexibility that underlies evolving practice.Footnote 165 The Chartered Institute of Bankers in Nigeria has already expressed dissatisfaction.
Arguably, the “apply and explain” model is unsuitable where reasonable deviation is necessary based on the circumstances. On the other hand, the implementation of the “comply or explain” model in a country in short supply of social capital such as Nigeria could be challenging. This is because the regulated entities may engage in the habit of circumvention by relying on the loopholes afforded by the code (ie providing explanations for non-compliance rather than indulging in compliance). In essence, the preferred approach should be a hybrid model.Footnote 166
Hybrid model
The hybrid model has been used to refer to convergence between the Anglo-American and German-led continental Europe models of corporate governance. It has also been applied to adaptations of either of these models to Asian or African cultures. Nevertheless, the concept is used here to refer to convergence in the application of principles-based regulation and rules-based regulation in light of the jurisdictional peculiarity.Footnote 167 In other words, the proposition refers to hybridization of the “comply or explain” approach and the mandatory prescriptions approach, optimizing the advantages offered by both and eschewing the disadvantages. This proposed hybrid model will be defined by flexibility, robust regulatory oversight, and shareholder and stakeholder monitoring. Regulatory oversight and shareholder monitoring would be necessary to avoid explanations for non-compliance taking the place of compliance. This entails that the existence of flexibility regarding compliance should not constitute an excuse for indulging in non-compliance. Regulated entities would be required to comply or provide an explanation for any reasonable deviation. The role of the regulatory authority would be to ensure that the discretion for non-compliance should not be abused. Similarly, the monitoring and enforcement role of shareholders and stakeholders would be through market forces, such as the selling of shares by dissatisfied shareholders, product or service boycotts by customers, employee unrest or resignation, and social backlashes such as probing and critical media, civil society and other stakeholders applying pressure on organizations to desist from abusing their discretion. To achieve this, the regulatory authority must enforce timely disclosure and accessibility by shareholders and stakeholders to corporate reports. Arguably, this will somewhat satisfy the government quest for regulatory oversight, while maintaining a reasonable level of flexibility for the business community.
Certainly, the “comply or explain” model remains the predominant framework in many jurisdictions,Footnote 168 but it is not well-suited for outright adoption in Nigeria because of the prevalent abuse of discretion.Footnote 169 On the other hand, the adoption of the “apply and explain” model in the 2018 Draft NCCG could re-enact the outrage of capital market investors because of the element of rigidity. Arguably, flexibility and robust regulatory oversight bolstered by shareholder and stakeholder monitoring should be the preferred option. Investors and the business community rejected the mandatory prescriptions of the suspended private sector code on the grounds of too much rigidity stifling entrepreneurial innovation.Footnote 170 Investors considered the suspended private sector code to be “anti-investment” and “high-handed” mainly because of the mandatory prescriptions; they would prefer the code to be more flexible in its approach to corporate governance.Footnote 171 Hence, the technical committee has a responsibility to ensure a balance between government policy and the interests of the investor community. The outcome of the drafting of the current private sector code should reflect the correct mix of hard and soft law, which will provide an element of flexibility for investors, and attract more investment and economic growth. By all means, the success of the application of the private sector code will be dependent on the legitimacy it enjoys with the regulated entities. The suspended private sector code lost that legitimacy when the business community rejected the mandatory prescriptions. Hence, it is time to consider the adoption of a hybrid code for the private sector that combines the flexibility of the “comply or explain” model and mandatory regulatory oversight, thereby creating a balance amid the dichotomy.
CONCLUSION
Corporate governance practices can be seen from four broad perspectives: the Anglo-American model, the continental European model, the Asian model and an emerging African model. Each is characterized by unique peculiarities while sharing certain attributes with the others. Despite intense debate about the superiority of one model over the others, and the possibility of convergence towards a single model, divergences remain even if contractual convergence exists and the harmonization of best practices obtains. The harmonization of corporate governance codes has become a catchphrase not only among the major corporate jurisdictions but also the emerging economies. Harmonization offers the predictability and certainty of content and application. Harmonization is preferable and more feasible when undertaken at the national level than the regional level, because of the inherent diversities that underpin the latter, as it is the case with the EU effort. Having undertaken the harmonization route, Nigeria has joined the retinue of countries adopting a homogenous code. The adoption of mandatory rules for the private sector has been denounced by investors on account of its rigidity. The same rigidity obtains in the “apply and explain” model. Mandatory rules enjoy a coercive nature, but the inherent disadvantages seem to have been overlooked. Hence, the proposed hybrid model is preferable. This proposed model will foster the optimization of the advantages of both the “comply or explain” and the mandatory rules regimes, while eschewing the disadvantages. This is consistent with the position of investors and the business community who rejected the suspended private sector code on the grounds of its mandatory prescriptions that stifle entrepreneurial innovation.
