Corporate governance has been defined by the Central Bank of Nigeria as the systems by which corporations (emphasis mine) are governed and controlled with a view to increasing shareholder value and meeting the expectations of the other stakeholders. This definition embodies the common misconception among organisations and regulators alike, that Corporate governance is reserved for corporations or companies listed on the stock exchange; nothing indeed could be further from the truth. Corporate governance operates to ensure proper decision making in organizations ranging from Ultra-high net worth companies to the little corner shop owned by a sole proprietor. It is the cornerstone upon which strong, sustainable organizations have been built.
Corporate governance deals with the rights and responsibilities of a company’s management, its directors (reference to Directors here is general, and includes all those undertaking the responsibility of being the governing mind of the organization), and various stakeholders such as employees and customers. A well developed code of corporate governance effectively harmonises the relationship between owners, managers and stakeholders of the target organizations; by mitigating friction between management and owners of organizations, the organization is positioned to make highly effective decisions, leading to improved profitability and/or market share.
The entrepreneur who embarks upon a new venture often remains the key operator in the venture long after the business has expanded beyond the technical or managerial competence of the promoting entrepreneur. This normally manifests in insider abuses arising from the pervasive influence of related parties and unfettered decision making powers. These abuses more often than not, lead to the demise of the organization.
How may this unfortunate state of affairs be averted?
The answer depends upon the organization and its structure. In most corporate organizations it is theoretically easy to separate the managerial and controlling functions especially as shareholders are not required to be directors. Furthermore, most contemporary corporate governance codes usually stipulate that a proportion of the Board of Directors be composed of Independent Non executive directors. In addition, many companies separate the positions of the Chairman of the Board of Directors and the Chief Executive in order to provide for checks and balances, preventing corporate autocracy. It is essential that these independents should not be vendors, suppliers, contractors or parties with hold interest in the company. In the event that any such conflict of interest arises, it is the duty of the director to promptly advise the Board of Directors of the facts and nature of the conflict of interest.
Empirical studies conducted by Gill, Sharma, Mand and Mathur revealed that a positive relationship exists between strong corporate governance systems and corporate cash flows; effectively, the stronger the corporate governance systems, the higher its investment returns and cash flows. When you clearly define corporate governance standards for your organization, you effectively mitigate the risk of corporate failure arising from technical or managerial incompetence, thereby positioning the organization for sustained growth and increased profitability.