INTRODUCTION
Corporations are of great consequence in the world today because they play a fundamental role in wealth creationFootnote 1 as the main vehicles through which economic activities are undertaken. Finance is the main source of corporate power, and an important source of finance for corporate entities is provided through the equity investments of shareholders.Footnote 2 Shareholders will, however, only invest where their rights are protected by the law.Footnote 3 Hence, it is necessary to investigate the existing frameworks for investor protection in developing countries. Before proceeding with this investigation, it is perhaps important to note the different classes of shareholders, as this will help put this investigation into perspective.
There are two basic categories of shareholder investors: majority and minority shareholders. Globalization and integration of the world economic market has created a third and important shareholder investor class, generally referred to as foreign investors. Foreign investment has become an important source of capital for many developing countries, including Nigeria. This article focuses on Nigeria as one developing country that has shown a clear desire to attract international investment through various developments in its legal / regulatory environment. The country has opened its economy to foreign investment since the 1990s with various legislative and regulatory reforms.Footnote 4 The Nigerian Stock Exchange underscores this fact in its Listing Rules (LR).Footnote 5 For instance, rule 1.2 states that “[t]he Exchange through the Premium board aims to provide a platform for greater global visibility for eligible Nigerian entities, which will make it easier for them to attract global capital flows and reduce the cost of borrowing”.
Given the importance of the corporation as the major driver of economic activities and the importance of shareholders as an important source of corporate finance, it is not surprising that investor protection has become a topical issue in international and national socio-political and economic discourse since the 1990s. This is because of the dual nature of the corporation as both an association of its members and a person separate and distinct from the shareholders or investors. This person is, however, an artificial person, “invisible, intangible and existing only in contemplation of law”.Footnote 6 As an artificial person, it cannot perform its own acts. It requires human organs to represent it and act on its behalf. In many jurisdictions these human organs are embodied in the company's directors acting collectively as a board. This article focuses on how the activities of the human organs (involved in the governance of the company) affect the interests of different corporate shareholder / investor groups, and how far legal protection for investors in the Nigerian corporate environment guarantees those interests.
At this stage it is important to put the corporation, the governance of which is at issue in this article, in perspective. Although investigating how large and small firms are governed is equally important,Footnote 7 the focus here is on large corporations: the “public” companies with numerous and constantly changing owners whose shares are traded in a public market. They are the main vehicles for raising finance from the public and thus the main source for the importing of the external investment capitalFootnote 8 needed by most developing markets to improve their economies. Apart from the fact that shareholdings in public companies are atomized and dispersed, ownership is separate from management.Footnote 9 As a result, separation of ownership and management has been identified as a core issue in corporate governance. This makes the distinction between public and private corporations imperative in this article, because the separation of ownership and control provides the basis for the pivotal role that directors play, especially in public companies. This is not always the situation with private companies, where “it is often the same people who are the owners and the controllers so that those same individuals have management and shareholder roles”.Footnote 10
Some commentators argue that investor protection is crucial because, in many countries, expropriation of minority shareholders and other corporate outsidersFootnote 11 by the human organs who act for the company is extensive.Footnote 12 To protect themselves against expropriation by corporate insiders, outside investors rely to a large extent on a set of mechanisms referred to as corporate governance.Footnote 13 Although the development of corporate governance is a global matter, there is no universal set of basic concepts, dimensions or conceptual framework for it.Footnote 14 As a result, its theory and practice at the national level reflect legal, cultural, ownership and other structural differences. These factors have influenced the classification of corporate governance in various ways by different corporate governance theorists.Footnote 15 One important classification relevant to the analysis in this article is that which categorizes corporate governance according to the interests that the corporation serves.Footnote 16 This is because of the distinction it makes between a corporate governance system that emphasises shareholder supremacy (classified as the shareholder model) and the other end of the scale, namely a system that accounts for a wider group of constituents (classified as the stakeholder model).Footnote 17
The assumptions underlying this, admittedly important, classification are outside the scope of this article, the focus of which is on the shareholder model represented by the US and the UK. This focus is based on two main reasons. First, the vision of shareholder primacy and, thus, the UK corporate governance model is the model that has spread around the world and been embraced by many developing markets, including Nigeria.Footnote 18 This model is highlighted by separation of ownership and control of the corporation. This separation created the potential for shareholder and managerial interests to diverge.Footnote 19 It is based on the perception that these two interests could collide and that, given the importance of shareholders as providers of capital, corporate law focused on the duties of managers to protect the property of the owners and maximize profits in their interest.Footnote 20 This is the beginning of what some authors have termed “the central problem of corporate governance”.Footnote 21 This is because, although shareholders (as the residual claimants on the corporation's assets and earnings) are entitled to the corporation's profits, “it is the directors and managers, not the shareholders, who decide how to spend the firm's earnings”.Footnote 22
Secondly, since this article primarily concerns the protection of investors (shareholders), it is justified that it adopts insights from the shareholder model. The limited economic development in developing markets, including Nigeria, has been attributed in part to a dearth of foreign investment.Footnote 23 This raises some fundamental questions, since Nigeria operates the shareholder model (common law), which is acclaimed to provide better access to investment capital because of the protection it offers investors.Footnote 24 This article compares the corporate legal protection for shareholders in the UK and Nigeria. Since Nigeria's corporate legal framework is modelled on that of the UK, it is reasonable to compare these jurisdictions. This comparative analysis will help to identify the deficiencies in the Nigerian legal / regulatory regime. This will provide the basis for suggesting the reforms required to enhance shareholder protection in the Nigerian corporate legal / regulatory environment, which will in turn make the country's business environment more attractive to foreign investment.
In the UK and Nigeria, primary legislative instrumentsFootnote 25 supported by corporate governance codesFootnote 26 provide the source of regulatory rules for companies. As a result, this article focuses on the UK Companies Act 2006 (UK CA) and the Nigerian Companies and Allied Matters Act 2004 (CAMA). Reference is also made to Nigeria's draft National Code of Corporate Governance 2016 (NCCG 2016) to highlight some of the inadequacies under the current 2018 code. The next section of this article discusses the corporate legal environment in the UK, with references to the US for emphasis. The article then discusses the Nigerian corporate legal environment, before undertaking a comparative review of the corporate governance systems in the two jurisdictions. The next section discusses the relevance of enforcement to compliance with laws and regulations and why it is imperative to depart slightly from the UK corporate model in the Nigerian corporate environment. A conclusion follows.
SHAREHOLDER PROTECTION AND CORPORATE REGULATION IN THE UK: ORIGIN AND PRACTICE
Any meaningful discussion about UK corporations and issues concerning their role in the country's economy will necessarily begin with a review of the UK corporate legal regime, which is said to reflect a shareholder-centred structure.Footnote 27 In fact, some commentators argue that “UK company law has paid little attention to how anyone other than the members and creditors of the company may be affected by it”.Footnote 28
The focus on shareholders in the UK system has its roots in the 19th century industrialization era that triggered the demand for greater capital to promote economic activities, which was unaffordable to a small group of individuals or a family.Footnote 29 The need to attract investors necessitated the development of the two guiding principles of modern company law (the legal personality and its close cousin, limited liability) to support the promotion of the corporation as a vehicle for promoting economic activities.Footnote 30
On the one hand, the legal personality principle created the capacity for companies to act as an individual entity in law: to sue and be sued, to hold and transfer title to real or personal property and to act with legal effect under a common seal.Footnote 31 The result is that the enterprise is able to continue undisturbed in law by a change of shareholders or a change in their fortunes because, by virtue of the principle, corporate assets are shielded from both the shareholders and their creditors.Footnote 32 On the other hand, the limited liability doctrine encouraged contributions from diverse investors by limiting the risk to their personal wealth, as limited liability provides a statutory assurance that “nobody risks more than he chips in”.Footnote 33 Since industrialization and economic development were the focus during this era and the business corporation is the vehicle for achieving that purpose, it became imperative to protect those who contributed the capitalFootnote 34 and who were not part of the day-to-day running of the business.
As noted above, those who manage a company are different from its owners or shareholders. The UK CA and sundry corporate governance regimes in the UK recognize the separation of ownership and control. In fact, the UK Corporate Governance Code explicitly provides for directors to head UK companies, especially public companies.Footnote 35 Section 154 of the UK CA makes it mandatory for every private company to have at least one director and for every public company to have at least two. In addition, section 160 of the act makes elaborate provision for the appointment of directors of public companies. Arguably, this demonstrates statutory recognition of the separation of ownership from control in public companies.
Directors play a central role in the governance of UK companies. Their role has been linked to the underlying purpose of a registered company, which is to provide a legal form that enables investors to put their money into a business without being responsible for managing it.Footnote 36 This was the basis for the judicial recognition of the primary role of directors in the management of business as long ago as the 19th century.Footnote 37 According to Lord Wensleydale in Ernest v Nicholls, “for the purpose of contract, the company exists only in the directors and officers acting by and according to the deed [the deed of settlement, equivalent in those days to the articles of association]”.Footnote 38 The implication of such judicial pronouncements is the evolution of a system by which the two functions of ownership and control of the enterprise have been separated.Footnote 39 Charlotte Villiers argues that this divergence of interests between those in control of the firm and those who own it “could encourage the managers or controllers to direct the firm in their own interest rather than in the interest of the owners”.Footnote 40
The UK recognizes the implications of this divergence of interests and has since developed a number of legal and regulatory controls to ensure that directors and managers of companies act within their powers and run the company efficiently. These controls are provided for in the UK CA and the various corporate governance regulations, such as the corporate governance codes and standards set by City institutions, such as the Financial Reporting Council (FRC), the London Stock Exchange and the Financial Conduct Authority as the UK listing authority.
The UK CA assumes a shareholder-centred model for the company, giving priority to shareholders over other constituents. This is achieved in the act by what Mary Stokes describes as two mechanisms for ensuring that the directors of the company are subject to the control of the shareholders: first by structuring the internal division of power within the company; and secondly by treating directors as fiduciaries.Footnote 41 To ensure the internal division of power within the company, the act grants voting rights to shareholders,Footnote 42 including the right to vote on the appointmentFootnote 43 and removalFootnote 44 of directors. The UK CA then provides for a number of legal controls that seek to ensure that directors and managers act within their powers, through a broad range of directors’ general duties based on equitable principles relating to fiduciary duties, and the common law duties of care and skill.Footnote 45 Even though section 170(1) of the UK CA provides that the duties “are owed by a director of a company to the company”, section 172(1) underscores the primacy of shareholders. It provides that “[a] director of a company must act in a way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole”. It is worthy to note the gradual shift away from the “shareholder primacy” view in the UK, especially with adoption of the “enlightened shareholder value” approach. This is achieved in the UK CA through the high-level “statement of directors’ duties” set out in the act.Footnote 46
However, the idea behind section 172 of the UK CA is “that laws that promote shareholder primacy can simultaneously protect interests of other stakeholders if shareholders (or those representing shareholders) are properly empowered, informed or enlightened”.Footnote 47 The “enlightened shareholder value” concept still maintains that the interest of shareholders is the principal obligation of directors and requires that directors pursue shareholders’ interests but, in doing so, they are to have regard to the interest of other stakeholders.Footnote 48 As a result, the UK CA provides certain safeguards and control mechanisms for shareholders to rein in directors to ensure adequate protection for their class.Footnote 49 For instance, the UK CA provides that a shareholder has the power to petition for relief against unfairly prejudicial conduct of the company's affairs.Footnote 50 To reinforce shareholder protection, the act gives the courts wide-ranging jurisdiction to remedy conduct of a company's affairs “that is unfairly prejudicial to the interest of its members generally or of some part of its members”.Footnote 51
It is obvious from the above that shareholder protection is the main focus of shareholder rights and powers in the UK CA. However, these powers and rights may be of no consequence where the beneficiaries have no knowledge of company activities, because it is such knowledge that can trigger action on their part. As a result, the UK CA provides that the accounts and annual report for each financial year disclose information on many of a company's activities.Footnote 52 To enhance members’ access to adequate information about a company's activities, the annual report, which had generally been referred to as the directors’ or management report, has been renamed the Strategic Report and Directors’ Report.Footnote 53 As a result, a new chapter 4A requiring the directors of all companies to prepare a strategic report for each financial yearFootnote 54 now applies. Section 414C states that the purpose of the report is to inform members of the company and help those members assess how the directors have performed their duty under section 172.
In addition to the exclusive focus of the UK CA on the interests of shareholders,Footnote 55 the UK Corporate Governance Code also sets out the principles of corporate governance in the interest of shareholders. The code sets standards of good practice for the board of directors and is concerned with issues of accountability and the integrity of the financial markets. Adoption of the code is not mandatory. However, because the code is connected to the listing rules of the London Stock Exchange, it is mandatory for premium listed companies in the UK to report on how they have complied with the standards in the code or explain where they have not and the reasons for non-compliance.Footnote 56 This is known as the “comply or explain” philosophy.
Even though adoption of the code is not mandatory, its significance lies in the fact that it is a requirement for those companies whose shares have a premium listing on the official list, which is now held by the Financial Conduct AuthorityFootnote 57 in its capacity as the UK Listing Authority.Footnote 58 In itself, official listing imposes extra responsibilities on issuers of securities so as to provide a lower risk for investors,Footnote 59 because one of the criteria for admission to premium listing in the UK is that the company must meet the continuing obligations of listed companies set out in chapter 9 of the UK LR. The continuing obligations require extra information to be provided in a premium listed company's accounts and reports, as well as compliance with the UK Corporate Governance Code. Every company with premium listed shares is subject to listing rules, which require an annual statement of how it has applied the main principles of the code.Footnote 60
Notwithstanding all the rights and powers granted to members in corporate statutes and sundry regulations, many commentators still doubt that shareholders could exercise meaningful control over corporate boards, because of their dispersion.Footnote 61 Although there are concerns, especially about the effectiveness of a standard-based regulation (which underpins the “comply or explain” philosophy approach to UK corporate governance),Footnote 62 such doubts have not affected its spread around the world: India, South Africa and Nigeria (discussed below) are some of the jurisdictions that have adopted the UK approach to corporate governance. The remainder of this article addresses how a corporate governance regime that leaves corporate managers with so much discretion could promote the interests of investors in a country like Nigeria.
SHAREHOLDER PROTECTION AND CORPORATE REGULATION IN NIGERIA: ORIGIN AND CURRENT PRACTICE
In the preceding section, it was observed that corporate law developed in England as a deliberate policy in response to changing commercial realities. The aim was to promote the use of the corporation to drive economic development. This is one of the reasons that the UK CA focuses on protecting those who provide finance for corporations (investors / shareholders). Nigeria is different, because corporate activities in Nigeria started with English corporations, which were subject to English company lawFootnote 63 by virtue of Nigeria's colonization by the British. The first Nigerian corporate statute was the Companies Ordinance of 1912, which is based on the UK Companies (Consolidation) Act 1908. The amendments to Nigeria's Companies Ordinance in 1922, 1929 and 1954 also followed the review of the legislation pertaining to companies in England in those years.Footnote 64 The 1954 ordinance later became Nigeria's Companies Act of 1963.
The first indigenous companies act in Nigeria was the Companies Act of 1968 (1968 Act), which repealed the 1963 act. One of the major highlights of the 1968 Act was the requirement that foreign companies intending to do business in the country had to incorporate in Nigeria. The 1968 Act did not depart from the principles of common law as it incorporated the main principles in English company law, recognizing the separation of ownership and control as a basis for its focus on shareholder protection. The enhanced position of shareholders under the 1968 Act was based on the safeguards and control mechanisms it provided for them to rein in directors to ensure adequate protection for their class. CAMA replaced the 1968 Act. CAMA provides a more comprehensive body of legal principles and rules for the operation of businesses in Nigeria.
The separation of ownership is well encapsulated in CAMA. For example, CAMA provides for the directors of a Nigerian company to exercise management power in the company.Footnote 65 This received judicial approval in Baffa v Odili Footnote 66 where the court stated that, by virtue of section 244, directors of a company are the persons duly appointed by the company to direct and manage the business of the company.Footnote 67 Thus, section 244 of CAMA puts directors at the centre of corporate governance in a Nigerian company.
As a consequence of the separation of ownership and control and the pivotal role that directors play in corporate governance in a Nigerian company,Footnote 68 CAMA places an emphasis on shareholder protection. For instance, section 283(1) provides that directors are trustees of the company's money and property, and that they are required to exercise their powers honestly in the interest of the company and all shareholders. As with the UK CA, CAMA provides a number of legal controls to ensure that directors and managers act within their powers and run the company efficiently through a broad range of directors’ general duties (set out in section 279), based on equitable principles relating to fiduciary duties. Section 279 provides that company directors have a fiduciary relationship towards the company and that they are to observe utmost good faith towards the company. This might explain why CAMA grants shareholders of a Nigerian company extensive powers to control the board of directors or review its activities as a basis to ensure that directors always act in the interests of the company.
CAMA grants shareholders the right to attend general meetings and vote at such meetings,Footnote 69 including the right to vote on the appointmentFootnote 70 and removalFootnote 71 of directors. In addition, CAMA provides certain safeguards and control mechanisms for shareholders to rein in directors to ensure adequate protection for their class.Footnote 72 As provided in section 310(1)(a), a member has powers to petition for relief if the company's affairs are being conducted in an illegal or oppressive manner, based on the grounds provided under section 311. To reinforce shareholder protection in this regard, section 312 gives the courts a very wide-ranging jurisdiction for giving relief against the illegal or oppressive conduct of a company's affairs.
Since directors are expected to promote the company's interest for the benefit of its shareholders, the power of control CAMA grants to shareholders is the primary means by which they can ensure that the directors focus on promoting their interests. Their ability to exercise this power depends upon the information they have about board activities. As a means of providing information to shareholders, CAMA requires companies to keep accounting records to show and explain the company's transactions.Footnote 73 In addition, directors are required to prepare a “directors’ report”, “containing a fair view of the development of the business of the company”.Footnote 74 The accounting records are the basis for the annual accounts (financial statements) that directors are required to prepare each year.Footnote 75 The purpose of the directors’ report is to “enable the directors to ensure that any financial statements prepared under this Part [part XI] comply with the requirements of this Act as to the form and content of the company's financial statements”.Footnote 76 Directors have a duty to lay and deliver financial statements before the company in general meeting,Footnote 77 and CAMA grants shareholders the right to obtain copies of such financial statements.Footnote 78
The importance to shareholders of financial statements cannot be overemphasized, given that the “true and fair view of the state of affairs of the company”Footnote 79 that they embody will provide shareholders with the information they need to assess how the directors are promoting their interests, as mandated by the act. It is on the basis of such information that shareholders can effectively exercise their rights of supervision and control over the directors, including the power under section 310 to petition for relief if the affairs of the company are being conducted in an illegal or oppressive manner.
In addition to the protection CAMA grants to shareholders, the Nigerian Corporate Governance Code 2018 (CGC 2018) also focuses on protecting the shareholder class. The code recognizes the responsibility of the board of directors to exercise management powers in a Nigerian company.Footnote 80 However, the fact that part C of the CGC 2018 is dedicated to board relationships with shareholders underscores the “shareholder primacy” vision of the code. As a means for shareholders to protect their statutory rights effectively, principle 21 of part C requires the board to “provide shareholders with an opportunity to exercise their ownership rights and express their views to the board on any areas of interest”. Companies of varying sizes and complexities operating in Nigeria are required to adopt the CGC 2018 and explain how they have applied its principles in their operations.Footnote 81 The code covers a wide range of issues concerning the office of directors: executive, non-executive, independent non-executive directors and other principal officers, such as the chairman of the board and company secretary. It also effectively covers their functions and issues of risk management,Footnote 82 as well as how the board should engage with shareholders in a manner that will provide shareholders with an opportunity to exercise their ownership rights.Footnote 83
One may therefore argue that CAMA and the CGC 2018 make effective provision for the shareholders of Nigerian companies. However, the existence of three groups of investors / shareholders (majority, minority and foreign investors) makes further investigation necessary to understand the vulnerability of these different groups and how protection for shareholders in the Nigerian legal environment addresses the interests of different shareholder groups. This is especially so with respect to minority and foreign investors as this will form the basis for determining whether the protection offered in CAMA and the CGC 2018 is adequate to engender investor confidence, because poor investor protection discourages foreign investors from considering specific countries when diversifying their investment portfolios.Footnote 84 As a result, the next section undertakes a comparative review of the legal / regulatory regime for investor / shareholder protection in the UK and Nigeria. This is with a view to identifying the possible deficiencies in Nigeria's corporate legal / regulatory regimes, and thus provide a basis to suggest improvements necessary to engender investor confidence in Nigeria.
LEGAL PROTECTION FOR INVESTORS / SHAREHOLDERS IN THE UK AND NIGERIA: A COMPARATIVE REVIEW
Even though recognition of other stakeholders is growing, especially in the UK, discussion so far shows a legal and regulatory focus on investor and shareholder rights, in both the UK and Nigeria. However, some commentators argue that simply writing shareholder rights into the law is not enough, because legal protection for shareholders includes the rights prescribed by laws and regulations and the effectiveness of enforcement.Footnote 85 They emphasize the place of effective enforcement because legal strategies are relevant only to the extent that they help to induce agents to act in the principal's interest: what has been termed “agent compliance”.Footnote 86 Securing agent compliance depends on the existence of other legal institutions, such as courts, regulators and procedural rules.Footnote 87 This makes enforcement fundamental to the decision to invest in a corporationFootnote 88 because the probability of enforcement operates to prevent fraud; as Charlotte Villiers argues, “the close connection between fraud prevention and investor protection is self-evident”.Footnote 89 This supports the view that enforcement is most directly relevant as regards regulatory strategies such as rules and standards, because they operate to constrain the agent's behaviour,Footnote 90 thereby promoting accountability as a strategy for fraud prevention. Therefore, even though the main focus of this review is on legal protection for investors, the next section addresses issues concerning enforcement as a strategy for securing compliance with laws and regulations, and how enforcement capacity or the lack of it can promote or deter foreign investment.
The current scholarship view is that the leading shareholder model jurisdictions of the US and the UK address the conflicts between shareholders and corporate managers with different strategies.Footnote 91 The US strategy (characterized as law-oriented) depends on strong regulatory and enforcement mechanisms, while the UK strategy (characterized as governance-oriented) depends on corporate governance rules and sophisticated, well-informed institutional shareholders who are able to oversee and control management.Footnote 92 The UK strategy seeks to facilitate the principals’ control over their agent's behaviour.Footnote 93 This is dependent on the governance rules in the CA 2006, the UK Corporate Governance Code, listing regulations and the activities of institutional investors.
The UK adopts a compliance mechanism that largely relies on intervention by principals.Footnote 94 However, both the formal enforcement (of regulatory strategies) and intervention (by governance strategies) have been identified as substitutes, although they both impose penalties on agents in a bid to secure compliance.Footnote 95 Because the focus here is on how the corporate governance regimes in the UK and Nigeria protect the interests of shareholders, the remainder of this article reviews the strategies adopted by both countries to facilitate the control of corporate managers by shareholders, as well as the enforcement strategy through which they seek to generate compliance.
The UK has adopted three basic strategies to enhance shareholders’ exercise of control over corporate managers. The first is the extensive disclosure requirements that seek to enhance the quality of information available to investors / shareholders. Second is the introduction of a Stewardship Code that seeks to promote shareholder participation in corporate governance. Third is the adoption of a Corporate Governance Code, with a view to promoting accountability by corporate managers. This article now compares these strategies with the strategy operated in the Nigerian system to highlight the weaknesses in the Nigerian corporate environment.
Corporate disclosure as a corporate governance strategy
The separation of ownership of the corporation from control is the basis for the disclosure philosophy that underpins corporate governance in the UK and those countries that operate the UK model, including Nigeria. However, the frequency and scale of corporate financial crises,Footnote 96 which commentators attribute to corporate governance failure, has intensified the ongoing debate about the role that shareholders should play in corporate governance.Footnote 97 This ongoing debate is an indication that improving the current regimes has become imperative if we are to achieve effective shareholder protection. Since 2006 when the current UK CA was enacted, the UK has responded to corporate governance challenges with several amendments to the act, with the primary aim of improving the disclosure philosophy. The objective is to enhance the quality of information the board makes available to investors and shareholders so they can be better informed to make effective decisions. The first such reform was the introduction of the Business Review (BR) by section 417, which came into operation on 6 April 2008. The issue that section 417 seeks to address, as stated in the act, is that:
“The Government believes that companies work best … where there is effective communication and engagement between directors and shareholders, and where there are efficient mechanisms for taking decisions critical to the running of the company … Shareholders have a key role to play in driving long-term company performance and economic prosperity. Informed, engaged shareholders – or those acting on their behalf – are the means by which the directors are held to account for business strategy and performance.”Footnote 98
This is the basis for the elaborate shareholder engagement procedures in the UK governance system. As some authors argue, shareholders’ rights (including the rights to review corporate board activities) under various laws and regulations can only be exercised effectively when the shareholders have the necessary corporate information.Footnote 99 Andrew Keay has noted that “one major cause of the financial crises was that companies embraced excessive risk”.Footnote 100 According to him, the requirement in section 417(3)(b) of the UK CA that companies include in the business review a description of the principal risk and uncertainties that the company is facing might provide a basis for shareholders to address the issues that lead to those crises.Footnote 101 It is on this basis that some authors have submitted that the BR is an integral element of the directors’ duty of loyalty to shareholders, because the effect of section 417 will “focus the minds of the directors on shareholder interests”.Footnote 102
The new chapter 4A Strategic Report (SR) that became applicable from October 2013 replaced the BR. It incorporates the provisions of the BR, and requires the directors of all companies to prepare a strategic report for each financial year.Footnote 103 As Keay observed regarding the implication of the requirement in section 417 (which is now contained in section 414C(2) in respect of the new SR), it “might be seen as empowering small investors and ‘outsiders’ who do not share the privileged ‘insider’ relationships”.Footnote 104 The FRC has issued its Guidance on Strategic Report as a means of enhancing the quality of information directors are to provide. In its consultation draft, the FRC states that the Guidance on Strategic Report “encourages companies to experiment and be innovative in the drafting of their annual reports, presenting narrative information in a way that allows them to ‘tell their story’ to investors concisely”.Footnote 105
Many authors argue that increased disclosure makes a company more attractive to investors, and this is especially important in attracting foreign investors.Footnote 106 This is because disclosure rules help to enhance the quality of information that investors need to make informed investment decisions. The UK relies on disclosure to enhance the quality of shareholder oversight over corporate boards. This article focuses below on the Nigerian system to determine how well its disclosure rules provide corporate shareholders with the information needed to enhance their ability to exercise their rights under CAMA and other regulations.
Unlike in the UK, where concerted efforts have been made to improve the quality of information to be provided by directors by the introduction of SR among other regulations, CAMA appears to be the major source that provides for meaningful corporate disclosure under the Nigerian system. This is provided for in part XI of CAMA, which is dedicated to financial statements and audit, and generally requires every company to keep accounting records that show and explain the company's transactions. In addition, the directors are also required to prepare a Directors’ Report each year, containing a fair view of the development of the company's business. The board presents these financial statements (which mandate sundry disclosures) to the shareholders.Footnote 107
The major problem with the disclosure rules under CAMA is how investors can extract meaningful information out of this model of auditors’ and directors’ reports mandated by CAMA. As Charlotte Villiers has observed, “[a] poorly designed disclosure system could also lead to information overload by which the participants are unable to process the information effectively”.Footnote 108 She notes that, while interrogating the Greenbury Committee Report, Ernst and Young saw “sheer volume of information” as “a barrier to effective communication”Footnote 109 and suspected that “all but the most determined readers, when faced with a page or more of dense figurework simply skip to the next paragraph of narrative”.Footnote 110 She concludes that “[t]hese shortcomings in the disclosure system could result in poor decisions, causing loss to participants or, perhaps in extreme cases, even failure of the company”.Footnote 111
This may explain why the UK has engaged in rigorous modification of disclosure requirements under the CA 2006 with the development of the BR, and now the SR that aims to inform shareholders adequately and help them to assess effectively how the corporate board has performed its responsibility of promoting the corporation's interests for the benefit of shareholders.Footnote 112 This is unlike in Nigeria, where the major modifications focus on the ease of business registration and foreign exchange regulations,Footnote 113 without a corresponding modification of the rules that could enhance shareholder oversight over corporate boards. Providing adequate information to shareholders is important, as it helps them to make the decisions required to address directors’ irresponsibility before the event. The absence of adequate information, as observed above, would result in poor decisions, which could lead to corporate board misbehaviour and insider opportunism that could only be addressed after the event.
This article has identified foreign investment as an important source of corporate finance. It has also identified the “public” companies as the main vehicles for the importing of external capital. Given Nigeria's desire for foreign capital, one would expect the country to develop a disclosure system that focuses on providing adequate access to information for small investors and “outsiders” who do not share the privileged “insider” relationships. The UK achieved this through section 414C(2) of the CA. This is important for a country like Nigeria, since investor protection has been linked to economic development as it is said to influence the real economy through its effect on financial markets.Footnote 114 Thus, the relatively undeveloped disclosure rules in CAMA pose a major challenge to economic development in Nigeria because of their role in investment decisions.
Dominic Baidaki observes that disclosure enables shareholders to make investment decisions.Footnote 115 He argues that the devices cannot be an effective and proper way of subjecting the activities of corporate boards to the control of shareholders because, “[p]ossession of information per se is meaningless without an adjunct active shareholder to crystallize the information into [sic] active supervisory check on the directors”.Footnote 116 The discussion below shows how the UK provides for an active shareholder group to achieve this purpose, as well as the lack of an active group in the Nigerian corporate environment.
Shareholder engagement and shareholder protection
The discussion above shows a clear intention to provide adequate information to shareholders and investors with a view to promoting the accountability and integrity of the financial market, thereby making the UK corporate environment investor-friendly. Although “traditionally shareholders have not been either ready or able to engage with the affairs of companies”,Footnote 117 the introduction of Stewardship CodesFootnote 118 in the UK is a clear attempt to change the way shareholders engage with a company's affairs by making them active participants in corporate governance. For instance, the 2012 Stewardship Code “sets out the responsibilities of institutional investors as shareholders and provides them with the guidance for meeting those responsibilities”.Footnote 119 The 2012 code had seven key principles, but the one relevant to shareholder participation in corporate governance, and thus important to the discussion here, is the requirement that “they should be willing to act collectively with other investors where appropriate”.Footnote 120
The Stewardship Code is one of the initiatives that has been developed as a strategy for bringing institutional investors on board, and making them effective participants in corporate governance. According to Talbot, the aim of the Stewardship Code is to “improve dialogue between the multifarious persons or firms that manage and advise institutional funds and institutional shareholders, so that they can promote the long term responsible investment which may curtail future crises”.Footnote 121 The active participation of a shareholder group in corporate governance will no doubt be beneficial to all (especially minority) shareholders because the monitoring they provide through their participation will help to reduce corporate board misbehaviour.
The community of institutional investors plays a critical role in the UK corporate governance system. This key shareholder group is in its infancy in Nigeria, where institutional shareholders are an emerging group consisting mainly of pension funds. Pension funds are regulated by the Pension Funds Act 2014. There is no law or regulation that provides for their participation in corporate governance except that the CGC 2018 provides that the board should encourage institutional investors to influence the standard of corporate governance positively.Footnote 122 In the absence of a functional and active body of institutional shareholders and a regulatory framework, it is doubtful that Nigerian institutional shareholders are in any position to take effective advantage of the disclosure provisions provided in CAMA to check the activities of Nigerian corporate boards.
Adopting the UK stewardship approach may pose a different challenge because, unlike in the UK where the major conflicts are between shareholders and management, the major conflicts in the Nigerian environment are between majority shareholders and the minority. However, there is the need to provide opportunities through which shareholders, especially minority and “outsider” shareholders, can access corporate information as well as oversee the activities of corporate boards. This is important for a country like Nigeria, because dissipating control among several large minority groups is said to be a credible method to limit expropriation when legal protection is weak.Footnote 123 This article now examines the corporate governance codes in the two jurisdictions under review to assess how the codes address issues of shareholder risks.
Corporate governance codes and shareholder engagement in the UK and Nigeria
This article has identified the UK Corporate Governance Code as one of the strategies adopted to promote the accountability and integrity of the financial market in the UK corporate environment. The connection of the UK code to the London Stock Exchange LR provides further grounds to ensure compliance with the code's provisions as well as the extra responsibilities imposed by the LR on issuers of securities, which aim to reduce the risk for investors. This shows a deliberate policy by the UK to address issues regarding investor protection with a view to preventing economic crises, thereby promoting economic development.
Under the Nigerian regulatory regime, although CAMA and other corporate governance regulations focus on investor and shareholder protection, there is no comprehensive legal or regulatory procedure for achieving that protection. For example, unlike in the UK where the corporate governance code is connected to the LR of the London Stock Exchange as a strategy for enhancing compliance, the Nigerian Corporate Governance Code is a stand-alone regulation. It is not connected to the LR of the Lagos Stock Exchange or other legal and regulatory regimes in a way that will promote compliance with the code. In fact, the only reference in the CGC 2018 to the statutory rights of shareholders is in principle 23, which requires “[e]quitable treatment of shareholders and the protection of their statutory rights, particularly the interest of minority shareholders”.
The major problem with the CGC 2018 as a stand-alone regulation is that it is a standards-based regime that depends on the board of directors for its implementation. Implementation itself is monitored by the Nigerian FRC through sectoral regulators and registered exchanges.Footnote 124 There are two major problems with this. The first is that the procedure for monitoring by the sectoral regulators is without reference to any statute. Thus, unlike in the UK where the LR require listed UK companies to apply the principles of the UK governance code, there is generally no obligation on a Nigerian company to adopt the code. Secondly, the sanctions provided under the sectoral codes principally involve the payment of fines.Footnote 125 This makes the CGC 2018 a weak instrument for corporate governance in Nigeria. It is difficult to see how the sectoral regulators can monitor compliance with the code without any guidelines set out in a statute or regulation to which companies are subject.
A brief comparison of the CGC 2018 and the NCCG 2016 is important here to highlight some of the major weaknesses in the current regime (ie the CGC 2018). The CGC 2018 does nothing to drive so-called corporate accountability, which is its major aim.Footnote 126 The Steering Committee (Nigeria) for the NCCG 2016 made two important observations that shaped the focus of the NCCG 2016. First, the committee observed that the sectoral multiplicity of governance codes in Nigeria is a major source of confusion for corporate governance in the country and thus harmonized the various codes into the NCCG 2016.Footnote 127 Having harmonized the country's corporate governance codes, the NCCG 2016 made compliance with its provisions mandatory.Footnote 128
Secondly, the committee observed the mismatch between Nigeria's ownership structure and corporate governance. As noted above, ownership structure and national culture influence corporate governance in different jurisdictions.Footnote 129 This committee acknowledged this fact.Footnote 130 Thus, even though Nigeria's corporate governance system mirrors the Anglo-American model based on its dispersed shareholding and unitary board structure in which the dominant conflicts are between the shareholders and corporate managers, the committee considered the Nigerian investment environment to be “replete with ownership concentration, in which the dominant conflicts are usually between the controlling shareholders and minorities”.Footnote 131
The CGC 2018 would therefore be expected to address the major corporate governance challenges in Nigeria's corporate environment by reference to the statutory protection for small investors and “outsiders” under CAMA. However, unlike the NCCG 2016 (many of the principles of which are subject, or without prejudice, to CAMA),Footnote 132 as noted above the CGC 2018 made no reference to CAMA or any other statutory instruments to guide the operation of the code. This is a major challenge for a governance regime that depends on the corporate board for its implementation, especially given that the CGC 2018 did not prescribe mandatory compliance as had been prescribed in the NCCG 2016.Footnote 133
In view of the peculiarity of the Nigerian investment environment, the focus on shareholders as a single class poses a special challenge. It is argued that such a focus disadvantages minority shareholders, since members take decisions by a majority.Footnote 134 Consequently, the tenuous provisions for minority protection under CAMA are not sufficient to address the implications of majority rule in the Nigerian corporate environment. This has a major implication for foreign investment because, as some argue, investor protection is “particularly important for investors considering purchasing securities issued by a company from another country”.Footnote 135 Thus, the Nigerian government's promotion of ease of investment, which has helped the country to rise 24 places on the World Bank ease of doing business index for 2018,Footnote 136 is not sufficient to promote investor confidence.
Commentators have identified that major factors that influence investment decisions include laws and regulations relevant to foreign investors as corporate disclosure rules, in addition to simplifying and concentrating investment approval in a “one-stop” investment agency, ie a single agency responsible for all investment-related matters.Footnote 137 This may be the case, but it is argued that such corporate disclosures will need to be designed in such a way that will allow those for whose benefit they are made to be able to process the information that they provide. In addition, providing investors with the information they need will enable them to exercise their legal rights, which are generally protected through enforcement.Footnote 138 In many countries, laws and regulations are enforced partly by courts, and partly by corporate participants themselves.Footnote 139 The discussion so far shows that corporate governance in Nigeria is weak. This is a major issue for the Nigerian corporate environment because strong corporate governance is the first line of defence for vulnerable groups, such as small investors and “outsiders”. Therefore, in the absence of strong corporate governance, corporate minority shareholders have to rely on the courts to enforce their rights prescribed in laws and regulations.
Three things are clear from this discussion. The first is that disclosure rules in Nigeria are largely undeveloped. Secondly, legal / regulatory regimes for investor protection in Nigeria did not provide adequate opportunities for vulnerable groups, such as small investors and other “outsiders”, to participate in corporate governance in the Nigerian corporate environment. Finally, the Nigerian Corporate Governance Code did not address these weaknesses, as it failed to address the protection of minority shareholders specifically. This leaves minority shareholders with only one channel of enforcement: recourse to the courts. The next section discusses the capacity of the courts to deal with issues concerning corporate misbehaviour by the controlling majority, to underscore the need for a new approach to corporate governance in Nigeria.
MINORITY PROTECTION AND MINORITY RIGHTS ENFORCEMENT: A CASE FOR A NEW APPROACH TO CORPORATE GOVERNANCE IN NIGERIA
This article has noted that shareholder protection in the Nigerian corporate environment is weak. Meanwhile, strong corporate governance is said to make a company more attractive to foreign investors.Footnote 140 This may account for the limited foreign investment in Nigeria, and underscores the need to address the peculiar corporate governance challenges identified in the country's corporate environment. The corporate governance problem in Nigeria has been identified as the conflict between majority and minority shareholders. This makes it imperative to depart to some degree from the UK corporate governance model by granting some control rights to minority shareholders as a credible method to check opportunism by the controlling majority before the event. This would reduce the need to rely on the weak legal enforcement infrastructure in the country.
Addressing corporate board misbehaviour in a country like Nigeria after the event poses a significant challenge, because of the weak and inefficient legal enforcement infrastructure. In fact, this infrastructure is a major challenge in developing markets and this is more apparent in Nigeria in cases involving high profile defendants such as corporate board executives. A case is point is the failure of five Nigerian banks in 2005, attributed to fraud by their board executives. The managing directors of the banks were charged with fraud in 2005. Apart from Cecilia Ibru, who pleaded guilty to the charges, the other cases are still pending in court 15 years later.Footnote 141 The immediate past chief justice of Nigeria, Walter Onnoghen, had the opportunity to discuss the weakness of Nigeria's justice system and its implication for foreign investment at the opening ceremony of the 2018 National Seminar on Construction Law for Judges on 30 May 2018. He expressed concern over the effect of delay in justice delivery on foreign investors.Footnote 142 Since dissipation of control among several large minority groups has been identified as a credible method to limit expropriation when legal protection is weak, creating the opportunity for small investors and “outsiders” to be represented effectively on corporate boards will help to address corporate governance issues before they arise.
The suggestion of addressing insider opportunism in advance is not entirely novel. The UK already operates a system that aims to achieve the same result with the introduction of the Stewardship Code and section 414C(2) of the CA. However, unlike in the UK where institutional shareholders are empowered to participate actively in corporate governance, the alternative suggested for Nigeria is aimed at empowering small investors and “outsiders” who do not share the privileged “insider” relationship. The purpose is to put their protection in their own hands. This approach will help to address the peculiar governance challenges in the Nigerian corporate environment, especially the problem of monitoring the majority shareholders. It will provide small investors and “outsiders” with the inside knowledge about how the board and majority shareholdersFootnote 143 exercise their powers to manage the company. There are two ways that this could be achieved: developing comprehensive disclosure rules; and creating a special role for independent non-executive director to represent the interests of small investors and “outsiders” on Nigerian corporate boards.
Available research indicates that “an important, and necessary, condition for directors (in this case independent non-executive directors) to be able to be effective is the amount and nature of information that they have”.Footnote 144 This makes comprehensive reform of Nigeria's disclosure rules necessary to support the suggested new role for independent non-executive directors. Research on corporate governance also indicates that director independence is associated with an improvement in some specific types of decisions, and has actually had an impact in critical areas, such as the turnover of chief executives, the incidence of fraud and other forms of insider abuse.Footnote 145 Thus, rather than have all the directors represent the interests of all shareholders, what is required in a country like Nigeria is a corporate governance model that mandates a specific function for independent non-executive directors to focus on the interests of minority shareholders.
It may be argued that CAMA and the CGC 2018 already provide for independent non-executive directors. This may be true of the CGC 2018, but is untrue regarding CAMA. CAMA makes no express provision for the office of independent non-executive directors. The reference to non-executive directors relates to the duty of care and skill under section 282 of CAMA, which appears to generalize the duty for all types of directors. According to section 282(4), “the standard of care in relation to the director's duties to the company shall be required for both executive and non-executive directors”. Without defining the office and the duties of non-executive directors under CAMA, it remains to be seen how their duty of care is to be measured.
The position of independent non-executive directors is not mentioned in CAMA but the CGC 2018 makes copious provisions for both non-executive and independent non-executive directors.Footnote 146 However, there is no provision as to how they may be appointed under the code. It is argued that they may not be in any position to look after the interests of small investors and “outsiders” if their appointment is to be regulated by the provisions of CAMA.Footnote 147 This is because the appointment of directors under CAMA depends on the approval of the majority of members, and they may also be removed by a simple majority of members by virtue of section 262. This will obviously make them beholden to those that control the majority of shares, thereby exposing small investors and “outsiders” in a Nigerian company to the dangers of insider opportunism. This makes a review of CAMA and other corporate governance regulations imperative to promote investor confidence.
CONCLUSION
The importance of the business corporation to the economic life of a nation cannot be overemphasized. However, the importance of the corporation derives from its economic power. This makes investors important stakeholders, since their contribution is the basis for a corporation's economic power. Corporate law recognized this as long ago as the 19th century and provided for control of corporate managers. This article has addressed how that control can be made more effective with a view to preventing corporate misbehaviour and promoting economic development in a country like Nigeria.
The comparative analysis of corporate regulation in the UK and Nigeria shows that corporate governance in Nigeria is undeveloped and thus deficient, especially regarding the disclosure requirements under CAMA. This makes a functional legal enforcement system imperative to address corporate misbehaviour after the event. However, because of the weak and inefficient legal enforcement infrastructure associated with countries like Nigeria, this article suggests a more comprehensive disclosure system and clear provisions for the participation of independent non-executive directors dedicated to the interests of small investors and “outsiders” under CAMA. This will provide them with a statutory guarantee of access to corporate boards. A review of CAMA is therefore suggested, with a special focus on how this group of shareholders could play a major part in the appointment and the discipline of independent non-executive directors.
In addition, a major review of the CGC 2018 is also required to address the issue of linking the code to CAMA and other statutory instruments. This is with a view to providing a basis for small investors and “outsiders” to monitor the implementation by boards of the principles of the code. This review should aim to place the protection of small investors and other “outsiders” in their own hands. This would promote trust and confidence in the management of Nigerian companies and better access to corporate finance.
CONFLICTS OF INTEREST
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