Beyond Compliance: a Case for Corporate Governance from The Cradle

It is typical to hear the phrase “corporate governance” at board meetings in large companies. As a Company Secretary in a listed public company, it would be commonplace to hear Directors deciding on a particular course of action by using the litmus test of what would be considered to be “good corporate governance practice”. Governments through regulators mandate the implementation of good corporate governance practices by virtue of laws and regulations.

In Nigeria, corporate governance implementation is required by some provisions of the Companies and Allied Matters Act, 2020, the Nigerian Code of Corporate Governance and some other sector specific codes like the Central Bank of Nigeria Codes for various categories of financial institutions. Beyond a legal requirement, corporate governance is also a system. Sir Adrian Cadbury in the 1992 Cadbury Report defines corporate governance as “the system by which a company is administered and controlled”. A system is something that is invisible to the eyes but controls the outcome of the process being implemented. This is exactly how corporate governance should work; first it must be a desire and then a philosophy to adequately govern the activities of those that manage and control the affairs of the Company.

While these conversations are taking place in larger companies, in the halls of the small and medium enterprises, corporate governance is seldom discussed. The reason for this is not farfetched. In the first years of running a company, emphasis is often placed, very rightly so, on profitability. The management team is working to ensure that the products introduced are penetrating the market and that no competitor steals the ground they have gained. Does this mean, smaller organisations should not bother with corporate governance? Many answer this question in the positive and conclude that smaller companies are not troubled by governance issues and as such should not pay any attention to corporate governance.

This conclusion, though rightly founded, does not take into consideration the fact that the large company of today is the small company of yesterday. The small company that is solely focused on profitability today and believes it has no need of corporate governance would become large organization fraught with governance challenges if the right controls are not put in place. Where a company grows to overcome the hurdle of profitability, it could now be killed by corporate governance issues. Remember it would be more painful to plant a seed in the right soil, watch it grow into a tree and then see it die because you failed to treat the soil with the right pesticides at the right time. Lack of due attention to corporate governance is like a disease coming to kill the company later.

This lack of due attention manifests itself in the following ways at the small company level even though it is not called by the more technical terms we use at the large company level:

1. Inaccurate Financial Record Keeping: One of the corporate governance issues that manifests in large companies is the use of creative accounting. Investopedia defines Creative Accounting as: capitalizing on loopholes in accounting standards to falsely portray a better image of the company. This has led to all sorts of schemes including creation of off-balance sheet vehicles to hide the liabilities of the company. At the smaller company level, this manifests as reclassification of certain personal expenses as company expenses; acting as the accountant or mandating the account to find a way to classify an expense to avoid being discovered during the audit process.

2. Focusing on the profit without building a sustainable structure: One of the areas that small to medium sized enterprises fail to take care of is building a sustainable structure. If you truly believe in your product then you must take the bold step to create an environment that will cultivate its growth. Companies that last are only able to do so because they have a solid structure. The Founders constitute a Board with superior experience to guide the management team in order to help in areas like strategy, financial control, risk management, human resource management etc. A good Board is a treasure and can help you as an entrepreneur avoid many a heartbreak. So while you pour all your efforts into ensuring your product is profitable, do not forget to create the controls that would protect the product.

One of the reasons, smaller companies do not prioritise corporate governance is that it often sounds like a lot of clichés with no clear link to profitability. However, as an entrepreneur, you must realise that companies that last, take the time to build a proper structure. By all means ensure that your product is profitable, but do not do this at the expense of building appropriate controls for your business.

So then, what can you do as a small business owner interested in building that effective corporate governance system:

1. Keep it simple – there is the tendency to run away from building governance systems, like a sound board, because it appears difficult. With consultation, a Board can be set up that will help the business achieve its objectives.

2. Take time to read up on corporate governance laws and select an implementation plan that would work for your business.

3. Set up a simple framework that would guide corporate governance activities in the organization.

This is a great starting point for beginning your corporate governance journey as a smaller company. I look forward to your amazing story.