What is Corporate Governance?
Two terms come to mind in the definition of corporate governance, to wit: Corporate and Governance. According to the Corporate Finance Institute, a corporate entity is created by individuals or shareholders with the purpose of operating for profit. On the other hand, Governance in this context, ‘encompasses the system by which an organization is controlled and operates, and the mechanisms by which it, and its people, are held to account. Ethics, risk management, compliance and administration are all elements of governance.’
Corporate governance, therefore, are the set of rules and mechanisms through which a corporation is guided. To adopt the definition of the Governance Institute of Australia, there are ‘the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations. It encompasses the mechanisms by which companies, and those in control, are held to account. Put differently, corporate governance emphasizes the rights and responsibilities of a firm’s management, its board, stockholders and various stakeholders. How well companies are run affects their performance, market confidence and private sector investment. It is the system of rules and practices by which a firm is controlled, without which the integrity of a company and financial market is questioned.
It is important to note that Corporate Governance has a special role to play in any vibrant financial market. As highlighted by the 2017 Cytonn Corporate Governance Ranking (CGR) Report, there is a strong correlation between Corporate Governance and returns on stocks of the listed entities. In Nigeria, particularly in 2018, the private sector alone accounted for 90% of our GDP. This underlines why countries aim at establishing strong corporate governance regimes.
On the flip side, the impact of bad corporate governance is detrimental to a company’s reputation as well as the financial market of an economy – The Enron scandal is a good example.
Hence, global best practices have evolved in determining good corporate governance. These practices have seen countries develop guidelines. In Nigeria, these guidelines are both general and industry-specific, with CAMA 2020 being the extant principal regulation. Other examples include the CBN guidelines and the Securities and Exchange Commission Code of Corporate Governance.