Corporate governance principles and business sustainability

Corporate governance is a system of direction and control that dictates how a board of directors governs and oversees a company. It is a system of rules, policies, and practices that dictate how a company’s board manages the operations of a company;

Simply put, corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled while balancing the interests of a it’s many stakeholders.

Poor corporate governance, at best, leads to a company failing to achieve its specified goals, and, at worst, can lead to the collapse of the company and significant financial losses for the shareholders.

Effective corporate governance requires dedicated focus on the part of directors, the CEO and senior management to their responsibilities and, together with the organization’s shareholders, to the collective goal of building long-term value.

The main legislations, which are the swivel of corporate governance principles in Nigeria are:

• The Companies and Allied Matters Act; Investment and Securities Act;

• Banks and other Financial Institutions Act; Insurance Act; and

•  Financial Reporting Council of Nigeria Act, etc.

There are also various codes that regulate corporate governance in Nigeria as in other countries which contain certain key principles that companies need to imbibe for sustainability:

• The board should approve corporate strategies that are intended to build sustainable long-term value; selects a chief executive officer (CEO); oversees the CEO and senior management in operating the company’s business, including allocating capital for long-term growth and assessing and managing risks; and sets the “tone at the top” for ethical conduct;

• Management should develop and implement corporate strategy and operates the company’s business under the board’s oversight, with the goal of producing sustainable long-term value creation;

• Management, under the oversight of the board and its audit committee, should produce financial statements that fairly present the company’s financial condition and results of operations and make the timely disclosures investors need to assess the financial and business soundness and risks of the company;

• The audit committee of the board should retain and manage the relationship with the outside auditor, oversees the company’s annual financial statement audit and internal controls over financial reporting, and oversees the company’s risk management and compliance programs;

• The nominating/corporate governance committee of the board should play a leadership role in shaping the corporate governance of the company, strives to build an engaged and diverse board whose composition is appropriate in light of the company’s needs and strategy, and actively conducts succession planning for the board;

• The compensation committee of the board should develop an executive compensation philosophy, adopts and oversees the implementation of compensation policies that fit within its philosophy, design compensation packages for the CEO and senior management to incentivize the creation of long-term value, and develop meaningful goals for performance-based compensation that support the company’s long-term value creation strategy;

• The board and management should engage with long-term shareholders on issues and concerns that are of widespread interest to them and that affect the company’s long-term value creation; and

• In making decisions, the board may consider the interests of all of the company’s constituencies, including stakeholders such as employees, customers, suppliers and the community in which the company does business, when doing so contributes in a direct and meaningful way to building long-term value creation.

The core principles of corporate governance in Nigeria is on how to make those in the management of the companies more accountable, responsible and sensitive to the interest of all stakeholders.

Corporate governance discussions have progressively moved to sustainability, popularly expressed through the three Es, i.e., Social Equity, Economic Performance and Environmental Performance.

Corporate sustainability is understood as the ability of companies to positively influence environmental, social and economic development through their governance practices and market presence. Sustainability should become an integral part of strategic management and corporate planning.

The relationship between corporate governance and sustainability has been researched quite extensively separately, i.e. corporate governance and environment performance, corporate governance and social equity and corporate governance and economic value.

The sustainability performance of a firm is greatly influenced by its profile of corporate governance. Corporate governance plays a critical role in sustainability performance, owing to several reasons.

First, sustainability have long-term strategic significance and require top management commitment and substantial investment Hence, there can be impact on the firm’s capital structure and risk, thereby having impact on firm’s viability.

Second, addressing the social dimensions and natural environment demands extensive coordination at multiple levels that expands the significance of the company across stakeholders.

Businesses are big users of natural resources, so it makes sense that they’d also be interested in operating as “green” as possible without compromising the vigor of their operations.

Many businesses are finding that a good way to do this is by incorporating conservation principles into their mission, culture and strategic planning. Companies are also trying to develop a culture that encourages all employees and other stakeholders to reserve energy, cut costs, reduce waste and enhance other environmental factors.

That is the way to go. Companies need to incorporate sustainability principles in their sustainability agenda.

So ask yourself as a company the question: Are you incorporating sustainability principles in the implementation of corporate governance codes? If yes, that is the right and best way to go.