In Nigeria, startups often discuss funding, taxes, credit, business environment and power. But only very few talk about corporate governance. In this piece, Henry Falaiye explores why poor corporate governance must be of serious concern to Nigerian startups and small businesses
Corporate governance has become an issue of global concern. It is the framework that allows companies to thrive by addressing the interests of various stakeholders, including employees, shareholders and customers, experts say.
According to Investopedia, an online investment dictionary, “Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled.”
The dictionary further says that a bad corporate governance can mar a business and cast doubt on its operations, systems and profitability.
Corporate governance has a significant impact on companies and determines their success or failure.
A number of startups in Nigeria have collapsed because they were unable to incorporate clearly spelt-out corporate governance structures.
Experts believe that the failures of Nigerian startups are not always tied to lack of funds or harsh environment, but are also a result of lack of internal processes that would guarantee success. Consider a company that dips hands into its coffers to settle bills owed by the chief executive officer. The firm’s failure is likelier, according to experts.
The focus of corporate governance is not only to manage an organisation’s present state but also to control its future.
The Companies and Allied Matters Act (1990) is the guide for corporate governance issues in Nigeria. However, experts say it has failed in sanctioning companies for violating the stipulated laws, especially in the area of non- compliance with its provisions.
There are many challenges to the effectiveness of corporate governance in Nigeria. They range from corrupt practices, ownership structure, slow and inefficient judicial process, to lack of enforcement mechanisms by regulatory bodies, amongst others.
The initial focus of corporate governance was on shareholder interests. However, it has been discovered that increasing shareholder value may affect the wider range of stakeholders who will be affected directly or indirectly.
Organisations have ethical obligations to consider the society they are operating in; hence, they have social obligations to a wider range of stakeholders. Thus, stakeholders’ interests are at the core of corporate governance.
Corruption is one of the major challenges that hinder the practice of corporate governance among startups in Nigeria. It has become a norm in Nigeria for private sector directors and managers of startups to offer bribes, according to industry watchers.
Many private business managers who need to obtain some permissions, contracts and waivers from government officials cannot do so unless they perpetrate one form of corrupt practice or the other. The illegal act is common even among senior and high-ranked officers in both the public and private sectors.
Even with the anti-corruption mantra of the Buhari-led administration, the situation has continued to hinder corporate governance practice in the country today.
Corporate governance consolidates government practices that help startups to thrive. It establishes codes of ethics, which are formulated principles set down by regulatory bodies like the Institute of Directors and others to promote the integrity of companies, rules and laws that directors, managers, business owners must abide by.
Corporate governance helps operations to run better. People know what to do because their roles are outlined and meet global best practices. That results in a good reputation for both the companies and their employees. It also aids clarity in achieving the organisations’ objectives. When startups incorporate good corporate governance, their processes are efficient and consistent.
Good corporate governance ensures consistency in the act of repeatedly doing the right things because there is a set of rules and principles that guide everybody in the organisation, from the subordinates to the managers and board of directors.
According to management experts, it also helps them to ensure a sustainable level of efficiency in the process. There are checks and balances, so fraud can be spotted easily. This will ensure sustainability and longevity in the business
Speaking with PUNCH in an exclusive interview, the Director General of the Institute of Directors, Mr Dele Alimi, said poor corporate governance was largely responsible for the high mortality rate of startups in Nigeria.
The absence of good governance allowed negative tendencies to fester in an organisation and it was only a matter of time before such an organisation would start to feel the stress and challenges, which, if not nipped in the bud, would lead to hemorrhage and ultimately business demise, Alimi said.
Furthermore, he said setting up a corporate governance structure would help managers and business owners to run their organisations properly and ensure that their firms were sustainable.
“It should be a part of the issues to be considered from the start of the business. In fact, it helps to properly streamline all other areas of the business. A deliberately-planned good governance structure helps you to embrace a good administrative, accounting and marketing process that will conform to best practices and ensure a successful business.
“Like we always say, the corporate governance journey is a marathon and not a sprint. Even in climes where corporate governance has been on the front burner for decades, there are still infractions. That however does not take away the virtue of good governance system. Even sometimes, big firms toe the line of poor governance. However, we have seen how poor corporate governance has brought down firms that were seen as ‘too big to fail.’ It is imperative that the best solution and most enduring one is that organisations must embrace and practise good corporate governance if they want to remain profitable and sustainable.
‘For startups, they must learn the lessons from such occurrences and from the outset embrace a good structure that will ensure their success. They must take heed from the failures of the big ones and start with the best aim on their minds and in sight.”
The Chief Executive Officer, Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, said the impact of poor corporate governance on startups was obvious.
“Poor corporate governance leads to a high mortality rate of small and medium enterprises, particularly because many of them do not apply the principles. Many of them cannot distinguish between their business and their personal life. Some of them set up businesses and put people there, especially their relations or children, even when those individuals know little or nothing about the businesses in question.
“So, those things accelerate the collapse of many businesses because people do not apply those sound corporate principles, so the business doesn’t endure. For me, that is the main consequence and when SMEs are dying very fast, it also affects the economy. The SMEs also have a very big role to play, especially in job creation. There is the need to give capacity among startups on the imperative of corporate governance and running businesses properly,” Yusuf further said.
The Chief Executive Officer, Financial Derivatives, Mr Bismarck Rewane, said it was public knowledge that poor corporate governance, which included nepotism, insider trading, lack of accountability, was killing Nigerian companies.
“And it is true that the highest mortality rate of startups is within the first five years. If a company should survive the first five years, it is likely to last for many more years and many more generations. So, what happens in the first five years is very important and critical. We had the first round of bank failures in the 1940s, second and third round bank failures because of poor corporate governance and loss of confidence and loss of liquidity.
“It happened years back in corporate companies. Even when international companies came into Nigeria, the Nigerians infected them with their poor corporate governance culture. We have seen that even Nigerian entities have now embarked on proper corporate governance. They now engage auditors, interim audit, final audit and regulatory bodies.”
Also speaking, the Managing Director, Green Door Africa Limited, Mr Olatunji Ope, said that the failure of startups could be attributed to the ignorance of what corporate governance or running business was all about.
“A lot of small businesses, probably startups, just have the intentions of buying, selling and producing. They just want to serve as intermediaries between wholesalers and organizations, but in terms of selling out structures and how the people manage those structures, operate and behave, it is a completely different ball game. That comes from not having a standard operating manual to work with or they don’t even see the need for having the standard operating procedure in the first place for a whole lot of people basically in Nigeria.
“Starting up a business, especially in Nigeria for some SMEs, is to get extra income or just go with the flow with a business that seems to be thriving. A typical case is the telecommunications companies picked up in 2001.
“You heard a lot of people who wanted to be distributors with the telecoms companies. Most of them did not have a full grasp of what it meant to be able to function as distributors. So, down the line, when the economy started to contract, a lot of them started to struggle with the fact that their businesses were not properly structured. They did not have distribution channels that could sustain the business for a the long-term. A lot of practices worked against them because it was essentially within the same circle.
“They did not understand that the kind of market or trade behavior that they exhibited was essentially counter-productive and it was traceable to the fact that they just didn’t know how things should run. Some did not even have the idea on how to run the business in the first place.
“They were struggling with price-cutting and the rest. The networks were struggling with the economy and dropping margin discounts from 13 per cent to 5 per cent but, on the other hand, the distributors had already established these business behaviours with their markets and found it very difficult to pull back from the previous behaviour to really understand that nobody benefits from a price wall.
“When you start leading your market penetration strategy with price, everybody suffers from it.”
