Building a Global Conglomerate on Corporate Governance Values: Challenges and Benefits in a Developing Economy
Transcript of lecture by Tony O. Elumelu CON at the Institute of Directors (IoD) Nigeria Biennial Lecture, Metropolitan Club, June 14, 2015.
Good evening distinguished council members here present.
It’s my pleasure to be here this evening and I’d like to thank the Institute of Directors (IoD) for the opportunity of discussing a very topical issue – corporate governance – especially from my own perspective. I’d like to thank you for inviting me to share my perspective in a very iconic and historical place – the Metropolitan Club.
The topic of today’s lecture is ‘Building a Global Conglomerate on corporate Governance Values, challenges and benefits in a developing economy’. We are lucky to have the Chair of IoD as the Chair of one of our investee companies, Africa Prudential Registrars, and what she preaches here, she displays in the way she directs the affairs of the board. So IoD is not only known for promoting sound corporate governance practices and I’d like to congratulate the council for having her as your chairperson.
I’ll approach this topic from three perspectives. One is what, two is how and three is why. This issue of sound corporate governance has become a challenge for people in the world today. We’ve had cases of failed companies, both in Nigeria and abroad. And following such cases of corporate failures, people have started talking more about corporate governance.
What is corporate governance?
So I will start from the beginning – what exactly is this concept of corporate governance? Then, I will discuss why companies get involved in sound corporate governance practices – what are the benefits? I will also talk about my experience in developing, implementing and using corporate governance practices to grow a business over time.
There are three definitions among so many of corporate governance that I want to focus on today.
I’d like to start with the one by Mervyn King. Mervyn King chaired the King Committee on Corporate Governance which is today called King’s Code. He simply sees corporate governance “as the system by which companies are directed and controlled”. Let’s keep it in perspective.
Then there’s the 2nd definition by the Organization for Economic Cooperation and Development (OECD), which in 1999 published its Principles of Corporate Governance. OECD describes corporate governance as:
“The internal means by which corporations are operated and controlled, which involve a set of relationships between a company’s management, its board, its shareholders and other stakeholders.”
And the third one I will share comes from your discipline, the Institute of Directors and it defines corporate governance as the “framework of company processes, attitudes that add value to the business, aids its reputation and ensures its long term continuity and success.”
I like these three definitions because they contain what I consider extremely important in many businesses today. They talk about long term continuity and success. They talk about the set of relationships between a company’s management and its shareholders and other stakeholders.
So corporate governance is not only good for managing relationship with shareholders but it is also good for creating the outcome of a long term company – a company that lives in the long term; a company that succeeds and the success is measured not just in terms of the shareholders of the business and other stakeholders.
Good corporate governance standards
And so if we know all this, then it helps us in setting up, shaping or defining our framework of practices. So the point therefore is, why do companies even bother to raise good corporate governance standards and also practice them?
There are various reasons. There’s corporate reputation issue. It helps you to enhance your corporate reputation when governed as an institution. It helps transparency and accountability. It helps long term-continuity and success of business and of course it helps to attract and retain good customers and workers.
It helps to attract capital and all businesses need capital. So if you have a company that is well run on the principles of sound corporate governance, investors pay a premium to invest and become part of this company. And so that is a clear benefit.
I’ve explained what the concept is about and why institutions should bother about it. How do you now go about it if you’ve decided that you want to run a company the right way? I’d like to share some theoretical approaches and more importantly how I applied it.
The first thing in trying to run a company very well is to have a charter, similar to the constitution – something you call a corporate governance code. The principles and the rules that govern and guide. There are key elements you need to factor in. First, you need to understand the rules of the country where you are operating in. So in Nigeria, you need to understand what the constitution says about guiding principles for businesses. Same thing applies in Ghana. You cannot put in place an internal governance code that is at variance with what the country says.
Second thing, you need to look at the article and memorandum of association of the company. Does it allow you to put some of the policies you want to put?
Third thing is sector regulations; depending on the sector you are playing in. For instance, in the health sector, there might be NAFDAC rules, in banking, there is the CBN, in insurance there might be NICON and in investment banking and in the capital market, there will be SEC. Then there’s global best practice because the world we live in today is a globalized world. What is good for people in country A should be good for everyone everywhere.
So you can look at all these and update your corporate values, whether written or unwritten. It’s a good start-off point for the journey in corporate governance to have your own internal corporate governance charter, approved by the board. Then you know that you have a framework that you can use to sanction your corporate governance.
It is also good to induct board members because corporate governance starts right at the top. Corporate governance does not start at the bottom. All of us at the top must understand, practice and reinforce it at every single opportunity we have, so the management and everybody should understand what the code is.
It’s not just enough to have the best policy. Develop the policy but more importantly, practice what you have developed. Ensure that you have a code of assessment and monitoring mechanism to ensure that your corporate governance code is put in place and that the rules to control businesses are actually being complied with. Then you need to allow the policies to work, so you are not putting in policies for just some, but for everybody. It should be no respecter of persons.
So for instance, Transcorp Hotel is one of our subsidiaries and we have some policies that guide the way we operate. I visit Abuja almost every week or two and I stay at the Hilton. I’ve never stayed at the hotel without paying because I must live by example. If they have to give corporate discounts, they give to us when we go. If I submit myself to such level of accountability, people who work under me can’t do otherwise. Sound corporate governance entails that the top must practice what it preaches. So we need to allow policies to work.
We need to appoint CEOs that are good and it is a core function of the board and it is a key pillar of sound governance principles in an organization. When you have a good CEO, corporate governance principles will be adhered to. If you have a good board and everyone abides by the policies, then you’ll have a good CEO in your organization.
I’ve always said in my assessment of CEOs before board members, that if the CEO is doing the right thing, commend the CEO. If the CEO is not, then have zero tolerance for non-compliance. We do not want a situation where we keep changing CEOs. Where we have CEOs that are compliant, it’s good for success. No organization wants to start changing CEOs every time, even though the board has authority to change CEOs.
It’s good to select the right CEO who is a fair balance between ability to create value in terms of profitability and ability to get the right image for the entity and understand, enforce and comply with the rules of the organization. So it is not just good to have a CEO that is strong in only one area. You might have a CEO that is not strong in bringing business to the table. I would rather have someone who on a scale of 1 to 10 will produce 6 over 10 in profitability and highly compliant than appoint someone who will rate 9 of 10 in profitability but not compliant because in the long run, that performer will destroy value for the entity. One who is not so strong in profitability but abides by the rules of the organization will definitely create long-term value for shareholders. And by the way, we must also remember that this business of building strong institutions with good corporate standards is a long term thing.
There should be zero tolerance for contravention. Compliance can be very costly, but the benefits can also be very significant. It is good to create internal awareness. If your company has a corporate governance code, from time to time, look and find things that are obsolete and remove. Whatever you do to that document, have a means of internal awareness, have circulars. Have a corporate governance committee, discuss issues and make sure it cascades over the system and there will be strict enforcement.
A company should have very strong company secretariat with a good company secretary to ensure that the commitment to the corporate governance code is strong. Chances are that if you have a company secretary, your business will be strong. You’ve read about failed businesses, both in Nigeria and elsewhere. If they had a good company secretariat, chances are that they might not have gone bankrupt. So it is important to have very good company secretaries to let companies know when they are derailing and then report to the board to deliberate and take further action appropriately.
The Transcorp Story
I want to share our experience at Transcorp. When we took over in 2011, it had not published an annual report in years and had different sanctions from SEC. I recall the first week, we had a session. The shareholding structure, the ownership of Transcorp was not even there and we reconciled about 3-5m shares once we restructured ownership of the company. We had 99 court cases. And of course, Transcorp had never paid dividends before and market capitalization then was like 11 billion naira.
So what did we do? It was all the things I talked about.
First, I decided that we ought to create internal awareness and have a change management programme. One of the reasons change programmes succeed is when you have sufficient internal mobilization and you have to let people know that something is seriously not acceptable. So you galvanize internal mobilization and involve all the stakeholders in the change process. We had internal sessions and at our board meetings, we decided to turnaround Transcorp on the path of sound corporate governance; we had meetings with the Nigerian Stock Exchange. I recall meeting the president of the Nigerian Stock Exchange and we invited his team to come and talk to us about compliance since Transcorp as a company was not compliant with their regulations.
Two, we invited SEC also – the Director of Operations of SEC came and we had a weekend session. They talked to us about corporate governance and what to expect from a Plc, a listed company. So it was clear and we made a resolution that we needed to position the company in a different way. And so that was the first thing we did. Our internal mobilization of people was also very good and it helped us, till date.
To the amazement, happiness, satisfaction and pride of all of us, the NSE named Transcorp the most compliant company on the Nigerian Stock Exchange, in 2014. This was in just two years, 2011-2013; from a company that was sanctioned to one that now became rated as the best because of compliance. This was possible because we created internal awareness and internal cohesion and that was how we achieved it. So, to others who are trying to do the same, don’t be discouraged – you too can work and run a company that is globally accepted in terms of compliance.
Second thing we did was to prepare proper corporate governance code and put a document in place. We did this, again approved it and then we started the journey. Today, we are better for it. We have serious zero tolerance for non-compliance from my level to everybody. When you hear people say organizations walk their talk, then it means they say something and they do it. When you don’t walk your talk, you say something then you do a different thing. Actions are easier to emulate than talk, so it is important that in corporate governance, you lead from the top and not the bottom.
The UBA Story
It was the same experience at United Bank for Africa (UBA). What we did and continue to do is improve corporate governance. I say to people that sound corporate governance is a long term journey, not a short term thing. So you need to keep improving. You can’t stop one day and say I have attained the highest level of corporate governance. No, you have to keep improving as things keep changing and keep learning.
So again at UBA, a lot has happened and the market continues to be rewarding for us. And UBA Africa continues to enjoy from that style of corporate governance as we operate in 19 countries.
It is on record that when the United States gave licenses to African banks to operate in that country, the only African bank that remains and continues to operate in the US is United Bank for Africa.
This is for two reasons. One, we knew we’d be able to withstand the heightened regulatory practices in a new environment and also because we have been able to key into the fact that we believe in the robust governance system that we practice at UBA globally.
Corporate governance is an ongoing conversation and is evolving in the world. I’d like to say Nigeria is not doing badly but we can do better and I’d like to say organizations like the IoD are doing a good job. The CBN, PENCOM and especially the FRCN I mentioned too, are all doing a great job.
So I’d like to add a few comments and parting shots. One is: corporate governance should not just be limited to businesses. NGOs should practice corporate governance. We see what’s ongoing at FIFA. FIFA is not a business organization, so to speak and they felt they could operate the way they like but we live in a different world today.
We live in an interdependent and interrelated world – a world where there is insistence on corporate governance. So it’s not just enough to look at businesses on corporate governance. We need to look at non-businesses and organizations that are accountable to the public should embrace corporate governance standards.
Two, all businesses should develop corporate governance codes and religiously, meticulously implement them, practice them and have zero tolerance for contravention by any persons.
Three, corporate governance practitioners should not leave the business of state governance to only politicians. Corporate governance practitioners should begin to show interest in national politics and national affairs because what is good for the corporates is good for the people. And we have seen that there is a direct correlation between sound corporate governance practices in an environment and economic development and progress. So we have to begin to deliberately encourage and inject into our public life, people who have held themselves to the highest level of accountability of corporate governance in private institutions.
Four, I have argued that there are certain practices that the corporate world should learn from developed countries on corporate governance. One of the areas we have not done so well as Africans so to speak is that we have not been able to grow our businesses to outlive us. We have not succeeded in being able to grow our businesses to live forever. That is the difference between General Electric and a local company here. While General Electric has decades of experience, we know where they’ve been.
Longevity helps in the long run to build iconic national and international global institutions. So we need to have a strong foundation for sound corporate governance practices and that’s why I keep saying in creating awareness about corporate governance, we need to continue to propagate and create awareness and partner with similar-minded organizations to make this. It is a strong pillar for building our organizations to last.
We should not make mockery of governance. I can’t stop making emphasis on practice, practice, practice. Practice what you have said. It’s just now that some companies are trying to work together and specify corporate governance codes because to a large extent, you determine how you want to run your business. So we need to make sure that what we have embraced as our policies, as corporate governance policies to guide us as we implement and practice them. Again as I said before, sound corporate governance is a journey and not necessarily a destination. We need to keep improving so we don’t just rest on our oars and say we are there; we need to go further.
When we talk about corporate governance, people think it is limited to just listed companies on the stock exchange. One-man businesses should also have some set of rules about how you want to govern your business and that has some advantages, including succession. Despite the fact that it is a one-man business, a key concept is succession and when you have sound corporate governance practices, succession to a large extent is addressed.
The ultimate ambition of small businesses is to take a business, start small and make it public. So if you have a small business and an ambition, then you need to begin to embrace and put some corporate governance policies in place and practice them. It helps you to prepare your company for future opening up to the market as well as helps you to attract private capital and public capital to your business.
Four: Remember, corporate governance starts from the top. It is everyone’s business and not just the business of the junior staff. In fact, it is more of a concern for senior people.
To end, I’ll like to draw the attention of everyone here to the Federal Reporting Council of Nigeria (FRCN). I believe that organization is doing a fantastic job and they have come up with a compendium and new ideas of corporate governance practices in Nigeria. They have recently released a special draft on how companies should be governed in the country and also for NGOs. I’d like to urge everyone who is interested in sound corporate governance in public and private companies and also in NGOs to find time to read this and do make your comments known to them so that together, we can have a document. Right now, we have different policies for different regulatory bodies so what they want to do is to bring everything together in one place. If they succeed, we will have national governance code that we can all refer to along the way. If you have not seen it, try to reach out for it. I believe IoD has done a seminar on it.
Ladies and gentlemen, let me end by thanking IoD for this opportunity to share a few thoughts and comments on the benefits of sound corporate governance and to recommend it to everyone, both people in businesses and NGOs. I would also say that SMEs that are not listed, are not excluded from this. You need to prepare your company for the future and for the capital market. We need to build Nigerian companies to last; we need to have iconic institutions that will become future General Electric out of Nigeria, out of Africa. That should be our collective aspiration, and we need to have sound corporate governance for this to work.
Thank you very much!
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