ROLES OF INDEPENDENT DIRECTORS

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THE ROLE OF MANAGEMENT…

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EMERGING BOARD AND GOVERNANCE CONSIDERATIONS COVID-19 Pandemic: Emerging Board and Governance

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An Insight to the Corporate Governance Implications of Changes to the Companies and Allied Matters Act 2020

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The Society for Corporate Governance Nigeria has announced changes on its management team. Speaking at its recent 2020 Annual Corporate Governance Conference, the President Mr. and Board Chairman M. K. Ahmed announced the appointment of Mrs Chioma Mordi as the new Managing Director/ CEO of the Society. Mrs Mordi holds a Bachelor’s Degree in Demography and Statistics from Obafemi Awolowo University, Ile-Ife, a Master of Business Administration (MBA) Degree from the Lagos Business School and has attended different management courses in some of the country’s prestigious institutions and IESE Business School, Barcelona.

She is also an Associate Member of the Nigerian Institute of Management and a member of Women in Management and Business (WIMBIZ). She has over ten years of management experience in operations, strategic development & execution, programmes curriculum development, partnership engagement, and research experience with a focus on corporate governance and leadership. Prior to her appointment, Mrs Mordi was the Chief Operating Officer – COO of the Society and provided leadership and strategic direction for its brand management, business development, financial management, human and material resources, knowledge management and operations. As COO, she was primarily responsible for the development of resource materials and had direct oversight of the Society’s research and publications and has to her credit the following publications – “Corporate Governance and Regulatory Compliance”; “Understanding Financial Statement & Reports”; Leading an Effective Board: A Guide for the Chairman”; “The Director’s Handbook on Corporate Governance (First and Second Editions); Company Secretaries Guide on Corporate Governance (First and Second Edition); Corporate Governance Reporting in Nigeria – a review of the top 30 capitalised companies on the Nigeria Stock Exchange” the Nigerian Observatory on Corporate Governance in publicly quoted companies on the Nigerian Stock Exchange”. She is the Editor-in-Chief of Journal of Corporate Governance (a bi-annual publication of the Society for Corporate Governance with 22 editions) and C-Governance Newsletter, a newsletter of the Society. Mrs. Mordi has worked to move the Society to an organisation of substantial national and international reputation through collaborations with key institutions, including the AFOS Foundation for Entrepreneurial Development Co-operation of Germany, Central Bank of Nigeria (CBN), Nigeria Deposit Insurance Corporation (NDIC), Nigerian Stock Exchange (NSE) and other regulatory agencies in different sectors of the economy. In addition, she regularly engages chief executives, chairpersons and directors of blue-chip companies and regulators in various fora including breakfast meetings, seminars and conferences for the promotion of corporate governance in Nigeria. With her contributions and immense work over the years, Mrs. Mordi is placed to lead the Society with great energy and focus in repositioning corporate governance processes in these unique and interesting times. The Board expressed its gratitude to the outgoing CEO, Mrs Hilda Nkor, for her contributions to Society.

For: KP NOMINEES LTD

SCGN Letter announcing Mrs Mordi

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Nonetheless, the board should not be deterred and should bear in mind, the responsibility of
leadership, establishing and promoting the company’s values rests on its shoulders. Also, in the
event of corporate scandals, the spotlight is always thrust on the board. Therefore, this paper aims
to examine the concept of corporate culture to highlight its importance to a company’s performance
and the role of the board towards an effective corporate culture.

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The emphasis on sustainability and the pronouncement of the Sustainability Development Goals (SDGs) have encouraged companies to develop strategies for their long-term growth with sustainability as a key element. Academic research has established the positive relationship between sustainability and financial performance. The American Governance & Accountability (G&A) Institute reported that approximately 82% of S&P 500 companies issued sustainability reports in 2016. In Nigeria, over 77% of the top thirty most capitalized companies on the Nigerian Exchange provided a detailed report on their sustainability activities in the companies’ 2020 annual report, according to a survey by the Society for Corporate Governance Nigeria. High sustainability companies are known to outperform low sustainability companies. In addition, sustainability financing has become a keen area of research, with investors conducting due diligence on sustainability activities of a business before investing.

Furthermore, quality IT governance can minimize the risk of suboptimal investment in digital assets and can maximize the opportunities for growth and competitiveness. IT governance requires viable system models, and a substantial alignment between the company’s IT and business strategies.

The (International Corporate Governance Network) ICGN principles provide detailed specifications of the responsibilities of boards and shareholders with the goal of minimizing incongruity of interests between the two parties. The ICGN principles were developed in 1995 when the network was initially founded. The principles provide practical description and best practices for key corporate governance elements such as board evaluation, board tenure, audit, board independence, and diversity. In 2021, the network refreshed and updated these principles to provide further clarities on certain corporate governance themes as required, as well as incorporated emerging trends in corporate governance and the current global realities such as the recent global pandemic.

It is in this light that the Society for Corporate Governance Nigeria has indicated the focus of the 2021 Annual Corporate Governance as – emerging trends in corporate governance. The conference explored and brought to awareness the current dynamics and improved corporate governance systems across the globe.

This includes a discussion on the top traditional corporate governance and sustainability-related changes made to the ICGN Principles, such as an emphasis on the importance of independent board leadership and a clear division of responsibilities between the Chair and the CEO to avoid unfettered powers of decision-making.

There was also discussion on the approach Nigerian boards should take with regards to creating/selecting a framework and how can they really identify the aspects of ESG that are most material to their organizations and how to set goals for improving on these. In addition, there was a broad analysis of the patterns observable in the Nigeria market with respect to investments in strictly ESG-compliant businesses, and how this evolves in the future. Furthermore, the possibility for a convergence of sustainability reporting framework was examined. Particularly, how small companies may engage with these frameworks, such as companies who cannot afford high-end sustainability specialists.

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INTRODUCTION

The purpose of corporate governance is to promote regulatory compliance, ensure organizational integrity and growth, guide structures of decisions emanating from the board and generally provide the need to work according to laid down principles. Corporations can have many different structures, but the most typical structure consists of the  shareholders, board of directors, officers and employees. The structure of corporate governance determines the distribution of rights and responsibilities between the different parties in the organization and sets the decision-making rules and procedures. The Board plays a major role in sustaining good corporate governance, and to ensure such competency of the board, measures of selection are put in place of directors1. Directors are acknowledged as being among key participants and stakeholders in the corporate governance practice. In Nigeria, the awareness of corporate governance and the importance attached to it is taking on increasing significance. Thus, the roles of directors are important, thus essential to the board of directors and as individuals in the life of a company. Directors take interest in better understanding their roles as well as what makes for enhanced board effectiveness, hence the increasing attention to corporate governance awareness and training. Nigerian law defines directors as ‘persons duly appointed by the company to direct and manage the business’ (section 244[1] the Companies and Allied Matters Act Cap 2020 Laws of the Federation of Nigeria (CAMA) Directors of a company registered under this Act are persons duly appointed by the company to direct and manage the business of the company. (2) In favour of any person dealing with the company there shall be a rebuttable presumption that all persons who are described by the company as directors, whether as an executive or otherwise, have been duly appointed. However, by section 245(1) CAMA, notwithstanding that they were not ‘duly appointed by the company’, a person by whose directives the directors of a company are accustomed to act, is also deemed to be a director of the company albeit a ‘shadow director’ Shadow director. Without prejudice to the provisions of sections 244 and 250, and for sections 253, 275 and 281 of this Act, “director” shall include any person on whose instructions and directions the directors are accustomed to act.2 According to the Nigerian Code of Corporate Governance (NCCG), there are types of directors, executive directors, non-executive directors, non -independent directors, each director playing a different role, and selection criteria. Executive Directors (EDs) are employees holding senior managerial positions in the Company.

They have a dual relationship with the Company as Directors (accountable to shareholders) and as employees – members of the management team, answerable to the Board. Typically, they have responsibility for specific aspects of the business – Operations, Risk, Credit, HR & Admin, IT, etc. and report to the Board in respect of these specific business areas. They are usually technically competent in the area of oversight and responsibility for the day-to-day running of the Company. As employees of the Company, they are expected to devote their whole time and attention to the business of the Company. Non-Executive Directors, Executive Directors are expected to contribute to the robustness of deliberations on the Board to engender optimal decision making. The full complement of the Board’s diversity reckons with the skills set and experience Executive Directors bring on board. It will thus be a disservice to the Board and the enterprise if the only view the Board gets to hear from the Management side is that of the CEO. Independent Non-executive Directors are entirely independent of the relationship of the board3. The directors run about 98% of decisions in the company, and therefore every corporation pays tax and allowable deductions clearly with the knowledge of directors. Corporate tax is the company’s tax due on any profits made. This is calculated on a corporation’s tax return which is due for each year. The corporate tax, also called company tax or corporation tax, is a direct tax levied on a company’s income or capital by the government. The maximum corporate tax rate is equal to
35%. Directors of limited companies are usually also shareholders. Many small startup companies are one-person operations, whereby the only person who owns, manages, and works for the company is the single director shareholder-employee. Therefore, the Corporate Tax Rate in Nigeria stands at 30 percent.

CHANGES TO TAX LAWS AS INTRODUCED BY 2021 FINANCE

• Profits of companies engaged in educational activities are now liable to tax due
  to the removal of educational activities from the exempt provisions of Section
  23(1)(c) of CITA.
• The profits of companies from the exports of goods produced in Upstream,
  Midstream and Downstream Petroleum operations are liable to tax as clarified
  in section 23(1)(q) of CITA.
• Non-resident companies liable to tax on profits arising from providing digital goods or services to Nigerian customers under the Significant Economic Presence (SEP) Rule may be assessed on a fair and reasonable percentage of their turnover if there is no assessable profit, the assessable profit is less than what is to be
  expected from that type of trade or business, or the assessable profit cannot be ascertained [Section 30 (1)(b)(iii) of CITA].
• Capital allowance on qualifying capital expenditure incurred in generating taxexempt income is not deductible from the assessable profits arising from income not exempt from tax under CITA. Capital allowances accruing in respect of QCE employed for both taxable and tax-exempt income shall be pro-rated where the tax-exempt income constitutes more than 20% of the total income of the company [section 31(1A) – (1B) of CITA].
• Capital allowance on qualifying capital expenditure incurred by small companies is deemed utilised during the periods such companies are tax-exempt [section 31(1C) of CITA].
• The minimum tax rate is reduced from 0.5% to 0.25% for any two consecutive accounting periods falling from 1 January 2019 to 31 December 2021, as may be elected by the taxpayer [Section 33 of CITA].
• A company engaged in a trade or business of gas utilisation in downstream operations in Nigeria is entitled to a tax-free period, concerning that trade or business, only once in its lifetime; additional investment, reorganisation or other forms of corporate restructuring shall not qualify it for further incentive. The company will also not be entitled to similar incentives under any other sections of CITA or other law [Section 39(1)(a) of CITA]. Any company that claims the reduced 0.25% rate under the minimum tax rule in section 33 of CITA but filed its tax returns late is liable to a penalty that is equal to the benefits or reduction claimed [Section 55 of CITA].

In ascertaining the profits under the CITA, certain deductions are allowable. CITA fully encapsulates the deductions allowable in determining the taxable profits of the company5. It provides that “save where the provisions of subsection (2) or (3) of section 14 or 16 of this Act apply, for the purpose of ascertaining the profits or loss of any company of any period from any source chargeable with tax under this Act, there shall be deduction all expenses for that period by that company wholly, exclusive, necessarily and reasonable incurred in the production of those profits…” It further includes the following categories of deductions:

(a)any sum payable by way of interest on any money borrowed and employed as capital in acquiring the profits;

(b) rent for that period, and premiums the liability for which was incurred during that period, in respect of land or building occupied for the purposes of acquiring
accommodation occupied by employees of the company.

(c) in the case of any property-holding company expenses attributable to the maintenance of the property, directors’ remuneration, which shall not exceed N1O,OOO per annum in respect of each director, and the number of directors to be so remunerated shall in no case exceed three;

(d) any outlay or expenses incurred during the year in respect of salary, wages, or other remuneration paid to the senior staff and executives cost to the company of any benefit or allowance provided for the senior staff and executives which shall not exceed the limit of the amount prescribed by the collective agreement between the
company and the employees.

(e) Any expenses incurred for repair of premises, plant, machinery or fixtures employed in acquiring the profits.

(f) Bad debts incurred in the curse of a trade or business proved to have become worse during the period for which the profits are being ascertained.

(g) Any contribution to a pension, provident or other retirement benefits fund, society or scheme approved by the Joint Tax Board under the powers conferred upon it by paragraph (g) of section 85 of the Personal Income Tax Act.

(i) in the case of profits from a trade or business, any expense or part thereof
(i) the liability for which was incurred during that period wholly, exclusively, necessarily and reasonably for such trade or business and which is not specifically referable to any other period or periods, or
(ii) the liability for which was incurred during any previous period wholly, exclusively, necessarily and reasonably for such trade or business and which is specifically referable to the period of which the profits are being ascertained;

Section 25 and 25A of CITA also provide for deductions of donations made to fund, body or institutions in Nigeria to ascertain the profits. Section 26 of the Act also permits a deduction for research and development, provided such a deduction does not exceed 10% of the profit ascertained before any deductions. Finally, all corporate taxpayers including the directors are subject to the same company income tax rate of 30%, except companies in the petroleum upstream sector. Additional, other taxes may be applicable to companies in Nigeria. Such taxes include the Withholding Tax, which is payable in advance on executed contracts by the companies but subject to deduction from taxable profits; Value Added Tax, which is payable on certain goods and services; Education Tax Fund; Industrial Training Funds among others.

Nonetheless, the board of directors face a lot of ethical issues in its operations, and therefore its imperative role in combating them with a comprehensive corporate governance strategy is inevitable and essential. The role of the directors in ensuring the regulatory compliance of the finance act is collective and cannot be overemphasized, as the need for corporate governance is identified, corporate governance aims to ease effective, entrepreneurial and prudent management that can deliver the long-term success of the company, to ensure corporate governance, there should be maximum compliance of regulation, beginning with the directors.

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There is a need to manage the ownership, control and identity of any corporation in order to maximally harness resources for the corporation’s good and growth. The board of directors or management and shareholders play vital roles in the fulfilment of the corporation’s objectives and visions.

One of the major challenges to the fulfilment stems from the assumption on the different interests between the shareholders and directors, and who bears the full cost of underperformance if the firm visions and objectives go otherwise since the managers are mostly concerned about their salaries, and shareholders are more concerned about their benefits and dividends. It is therefore pertinent to note that even though shareholders’ intervention may improve performance as a result of monitoring the excessiveness of the directors or managers, it could also kill creativity as a result of a hostile or intolerant environment. The influence of shareholder activism is geared towards directors’ accountability which is akin to performance accountability.

Shareholders are one of the crucial parts of any corporation. Although they do not occupy managerial duties, they are pivotal to the corporation’s decision-making process. They provide financial backings that enable the corporation to achieve its goals and vision. Because of the enormous impact and importance of shareholders in any corporation, they also influence corporate decisions through various forms of which shareholder activism is among. Shareholder activism has evolved over the years from using the shareholders’ resolution into the use of media to influence corporation policies and decisions.

Shareholder activism aims at intervening and changing the factors that inhibit the performance of any corporation. They serve as a watchdog to the management on issues affecting the efficiency of the corporation while procuring strategic ways of overcoming challenges confronting it. Shareholder activism cuts across various corporate policy-making processes whether social, financial, environmental, governance, internal culture and building strategic business models.

Over the years, shareholder activism has transitioned from not only being a management watchdog mechanism but a social movement. It uses various methods to achieve its interest such as dialogue during the annual meeting, use of the media, shareholder resolution and litigation. This is based on the notion that shareholders by all means will not want to waste their time and resources without any positive returns. So, in order to be on the safer side, they exhibit various forms of shareholder activism to propel a win-win situation through operational and cooperate efficiency.

Numerous studies have been conducted to examine the efficiency and impacts of shareholders activism on corporate governance as a result of social exposure. Also, studies have shown a positive correlation between shareholders’ intervention and a firm’s growth and productivity. For instance, when shareholders tend to monitor the performance of managers, there is always a change in behaviours in terms of careful consideration of policies that could prevent the firm from underperforming.

Two notable shareholders’ interventions or influences over corporate governance are; the threat to sell their shares in the corporation which will drastically affect the corporation’s stock price and reputation, and also the use of a voting mechanism to directly influence managerial decisions. Thus, giving the management to act based on the shareholders’ interest in order for the corporation not to decrease in value. It is, therefore, crucial to examine the various channels implored by shareholders in influencing corporate decisions:

• The Use Of Voting To Influence Corporate Decisions

In this context, shareholders activism can also be viewed as shareholders’ democracy. The voting done by shareholders helps to promote transparency in the corporation. The purpose of this mechanism is to promote transparency by providing a new means of expression of shareholders’ voices, and hence to improve corporate governance efficiency.

• The Use Of Public Campaigns

This is another way in which shareholders express their views on dissatisfaction with the policies and performance of the managers in the corporation. This campaign is implemented by presenting publicized letters directed to the management of the firms.

• Simple Negotiation With The Management Or Board Members

This is how shareholders settle their dissatisfaction with the management through dialogue on the underperformance of the firms. Issues arising from such discourse include environmental concerns, governance, profit distribution, internal culture and business model.

Furthermore, the impact of shareholders activism on corporate decisions and performance has been the concern of practitioners in the aspect of corporate governance. However, there has not been uniformity of results which some of the studies have attributed to context, methods of shareholders intervention, market-related effects, firm governance and the firm’s internal culture. While firms try to minimize cost and maximize benefits, it is also vital that they solve challenges arising from ownership, control and identity of firms. Studies have recommended three types of mechanisms that can be used to align the interests and objectives of managers with those of shareholders and overcome problems of management entrenchment and monitoring:

1. One method is the inducement of managers to carry out efficient management by directly aligning managers’ interests with those of shareholders such as direct monitoring by boards and executive compensation plan, etc.
2. This deal with strengthening the shareholders’ rights, so shareholders have both a greater incentive and ability to monitor management. This approach enhances the rights of investors through legal protection from expropriation by managers e.g., protection and enforcement of shareholders’ rights, prohibitions against insider dealing, etc.
3. The final method recommended is the use of indirect means of corporate control such as that provided by capital markets, managerial labour markets, and markets for corporate control such as take-overs etc.

In conclusion, the primary goal of any firm is to maximize profits, and shareholders are part of the profit-making and profit-distribution scheme, thus any underperformance of the firm affects the shareholders indirectly, and also the failure to yield to the request of shareholders can also affect the performance of the firms in terms of the reduction in shares. This dilemma has propelled various researches on how shareholders activism affects corporate decisions. Although shareholders activism can bring positive returns, operational and corporate efficiency, excessive monitoring from the shareholders can limit the performance of the managers thereby causing underperformance.

The Society for Corporate Governance Nigeria is a registered not-for-profit organization committed to the development of corporate governance and best practices in Nigeria. We are the foremost institution committed to the development and promotion of corporate governance best practices and aim to be the recognized reference point both nationally and internationally in matters relating to Corporate Governance. Also, we provide a template for formulation and enforcement of corporate governance standards for Nigeria and other emerging economies, using the tools of seminars, trainings, Research and advocacy.

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