CORPORATE GOVERNANCE AND NIGERIA CAPITAL MARKET DEVELOPMENT

The concept of corporation is foreign to the indigenous customary business practices of pre-colonial Nigeria. The first corporations to operate in Nigeria, British companies chartered in England, arrived in the second half of the 19^th century. One of first and most influential of these was the National African Company (later renamed the Royal Niger Company), which was chartered in 1886. Between 1862 (when colonial rule was formally established in Nigeria) and 1912, all of the corporations that operated in Nigeria were foreign companies registered in England and subject to the law and ideology of the British corporate governance system. The first corporate statute in Nigeria was enacted in 1912. However, corporate governance in Nigeria during the period of colonial rule remained a part of the British system of corporate governance. It was only in the post-colonial period that we began to speak of “Nigerian” corporate governance.

Following independence in 1960, several factors affected the direction of corporate governance in Nigeria. Perhaps, most important among these were the dominant ideological convictions of the post-colonial period, which stressed economic self-dependence. Economic self-dependence was primarily understood in terms of indigenous ownership and control of the means of production and was operationalized into two basic broad areas. First, the government imposed absolute control over public utilities, infrastructure and social service provision by establishing state owned corporations. While there was significant interest among foreign investors, especially British corporations, in many of these areas, the state prohibited foreign ownership. In many instances, the state did not even permit participation by private, domestic corporations. Activities in such areas as electricity generation and distribution, telecommunications, postal and telegraphic services, shipping and ports, and air

travel, among others, were restricted to wholly owned state corporations. Second, the government promoted indigenous ownership in other sectors of the economy, two pieces of legislation served as an impetus to this strategy, viz., the Foreign Exchange Control Act of 1962 and the Nigerian Enterprises Promotion Decree, No. 4 of 1972, often referred to as the “Indigenisation Decree’. The Foreign Exchange control Act prohibited the creation or transfer of any security or interest in a security in favour of a person resident outside Nigeria except with the permission of the Minister of Finance, while the Nigeria Enterprises promotion Decree restricted foreign ownership by creating three schedules of enterprises: (i) enterprises exclusively reserved for Nigerians; (ii) enterprises in respect of which foreigners cannot hold more than 40% of the shares, and (iii) enterprises in respect of which foreigners cannot hold more than 60%. This classification was based on the perceived financial and managerial needs of the country at the time. The second schedule was comprised of manufacturing companies where foreign participation was expected to bring foreign capital and managerial expertise. The third schedule included capital-intensive enterprises.

Although there was a great deal of optimism in 1960 about the development prospects of the newly independent country, fifty-two years on Nigeria is still largely considered a developing nation. The country still lacks an efficient infrastructure (e.g. Communications and transportation systems, electricity, water, etc.), unemployment rates are high and social needs far outstrip social programs. In addition, the country is rife with corruption and divided by ethnic and tribal tensions. These features of Nigeria socio-economic development have major repercussions for business, both in the private and public sector.

While commenting on the problems of the Nigerian economy, a former Governor of Central Bank of Nigeria expresses frustration felt by many:

           [t]here appears to be a certain built-in stubbornness

         in the attitude of the typical Nigerian

economic agent . . . It manifests itself in a strong

propensity to circumvent laid-down rules of

economic behaviour and to resist control and

regulation . . . it tends to encourage a kind of

softness and lukewarmness in the application and

implementation of legitimate rules of economic

conduct. Hence it provides a fertile ground for

bribery, corruption, idleness and the contrivance

of get-rich quick attitude which are antithetical

to hard work and discipline (Ahmed, 1996, p. 14).

Of course, the nature of Nigeria’s problems is not only rooted in the attitudes of individual Nigerians, but it is also related to larger political and economic structures and practices. Hence, the question of corporate governance in the Nigeria capital market is more of an ethical undertone defining the route of social economic growth of emerging and developed economies. The capital market has been identified as a network of specialized financial institutions with series of mechanisms, processes and infrastructures that in various ways facilitate the bringing of suppliers and users of medium to long term capital for market development of existing securities. The roles of the capital market in the development of the economy include: provision of opportunities for companies to borrow funds needed for long-term investment purposes; creating avenue for the marketing of shares and other securities in order to raise fresh funds for expansion of operations leading to increase in output/production; providing means of allocating the nations real and financial resources between various industries and companies. Through the capital formation and allocation mechanism the capital market ensures an efficient and effective distribution of the scarce resources for the optimal benefit to the economy; It reduces the over reliance of the corporate sector on short term financing for long term projects and also provides opportunities for government to finance projects aimed at providing essential amenities for socioeconomic development; The capital market  aid the government in its privatization programme by offering her shares in the public enterprises to members of the public through the stock exchange; The capital market also encourages the inflow of foreign capital when foreign companies or investors invest in domestic securities, provides needed seed money for creative capital development and acts as a reliable medium for broadening the ownership base of family owned and dominated firm.

The imperative role of the Nigeria capital market in the economy makes the analysis of its development a proper and precinct course of discussion. In recent years the Nigeria capital market has performed fairly despite the numerous challenges and problems cluttering her, some of which include: the buy and hold attitude of Nigerians, massive ignorance of a large population of the Nigerian public of the nature and benefits of the capital market, few investment outlets in the market, lack of capital market friendly economic policies and political instability, private sector led economy and less than full operation of recent developments like the Automated Trading System (ATS), Central Securities Clearing System (CSC), On-line and Remote Trading, Trade Alerts and Capital Trade Points of the Nigerian Stock Exchange. The records also indicate that the market capitalization which is the most widely used indicator in assessing the size of a capital market to an economy; either in a bearish or bullish market has fairly been on the increase. Before 1988, the total market capitalization was less than N10 billion, from 1988 to 1994 it hovered between N10 billion to N57 billion. In 2003 it was N1.3593 trillion, N2.1125 trillion in 2004 and N5.12 trillion in 2006. However, the market capitalization nose- dived from an all time high value of N13.5 trillion in March 2008 to less than N4.6 trillion by the second week of January 2009.Besides, the all share index ( a measure of the magnitude and direction of general price movement) also plummeted from about 66000 basis points to less than 22000 points in the same period; the stock prices have also experienced a free for all downward movement regime with more than 60% of slightly above 300 quoted securities on constant offer (supply exceeding demand) on a continuous basis. A number of factors have been attributed to this sorry state of affairs, such as: global phenomenon in the world economy which has not spare the Nigeria capital market of its global malignant cancer, lack of infrastructure and high production cost; impact of commercial banks following the forced capitalization of banks to a minimum of N25billion; avalanche of private placement offers; bank short term orientation imposed on long term capital market; inability of the federal government to plot a bailout option etc.

Vividly, this sorry state is being exacerbated by the abuse of share holder rights; it is conceived in terms of principal- agent problem in which the managements (agents) of widely held firms are predisposed to maximize its own interest rather than those of shareholders (principals). In this context, many managers and directors have been able to use corporate opportunities and resources for their own personal benefit at the expense of the corporation and its shareholders thereby resulting into a near extinction of the capital market. An odious example is the case of Lever Brothers Plc., a public listed company in Nigeria.  Between 1996 and 1998, there were reports of abuse by senior management, including insider dealings, shares racketeering and the awarding of supply contracts to companies in which senior management had interests. Sources also disclosed that one of the key officers of the company had up to 18 official cars, while almost all of the company’s major contracts were handled by a company registered in his wife’s name. The reports further revealed that employment and other management decisions were based more on ethnic solidarity than efficiency consideration. Corporate abuse in Lever Brothers culminated in serious financial irregularities. The Nigerian Stock Exchange suspended the company in 1998 for submitting an annual return with irregularities. The company’s turnover in the first quarter of 1997 before adjustment stood at N4 billion, with a profit before and after tax at N791.3 million and N554.7 million respectively. After adjustment, there was a N5.8 billion turnover, while profits before and after taxes were N351million and N244.95million respectively. The Lever Brothers case raises several issues, but most importantly the inability of majority shareholders to monitor management. The buck to institute a woe- free Capital market stops at the desk of productive reforms in corporate governance. The reform process must involve choosing the best form of corporate governance; existing structures and practices like economic liberalization and deregulation (e.g tax cuts, privatizing state-run industries etc) should be streamline while other reforms that directly affect governance, e.g., strengthening company law (to provide greater legal guarantees to investors), reforming the legal system (so that shareholders’ rights can be effectively enforced) and liberalizing capital markets (to allow for a more efficient allocation of capital and attract investment funds) should be initiated. In addition, the liberalization of  foreign investment laws should be encourage in other to facilitate the inflow of foreign capital, which is likely to monitor managers more effectively.

Finally, we should understand that the capital market woes which the corporate government reforms seeks to address are deeply rooted in a socio-economic and political context characterized by ethno-religious tensions, poverty and a history of military rule and human rights abuses. Hence, the reforms are unlikely to be successful if these fundamental issues are not address and if the reforms are not linked to broader governance reforms of the Nigeria state.