Security & Exchange Commission

Corporate Governance Scorecard

for Listed Companies
in Nigeria

Austin Sams Udeh

BA, MBA, ACA, ACTI
 Corporate Governance Scorecard
for Publicly Listed Companies by Security & Exchange Commission

Table of Contents
1.0 Introduction ................................................................................................................................... 3
1.1 Evolution of Corporate Governance ............................................................................................. 3
1.2 What is Corporate Governance? ................................................................................................... 4
1.3 Corporate Governance, Capital Market and Regulations ............................................................. 5
1.4 Good Corporate Governance System ............................................................................................ 5
1.5 Poor Corporate Governance System and Implications ................................................................. 6
2.0 Core Areas of Corporate Governance ........................................................................................... 6
2.1 Security and Exchange Commission’s Corporate Governance Scorecard.................................... 8
2.2 The Expectation from Enforcement of the SEC Scorecard .......................................................... 8
3.0 Conclusion ................................................................................................................................. 11
References .............................................................................................................................................. 12

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 Corporate Governance Scorecard
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1.0 Introduction

“If there is a lack of good corporate governance in a market,

capital will leave that market with the click of a mouse”.
Mounir Gwarzo (D-G, Nigerian SEC, 2015)

“If a country does not have a reputation for strong corporate

governance practices, capital will flow elsewhere. If investors are not
confident with the level of disclosure, capital will flow elsewhere”
Arthur Levitt, (Chair, US SEC, 1993-2001)

T
he concept of good governance is as old as good behavior. It was later extended
to corporate organizations, hence, the name “corporate governance”. While there
is no universally agreed definition of the term, experts from different field such
as sociologists, economists, management experts, accountants, psychologists, organization
development experts etc. have offered various definitions.

Interestingly, the two major corporate governance schools of thought emerged, the narrow
and broad school of corporate governance. The narrow is basically concern with the
structures within which a corporate enterprise receives instruction, orientation and
direction on how it conducts it affairs (Rwegasira, 2000). The broad, on the other hand,
regards corporate governance as central to both market economy and a democratic society
at large (Sullivan, 2000). While narrow focuses more on how an entity is directed and
controlled with a view to actualizing it set corporate objectives, the broader look beyond
the entity to impact of such structure of instruction, direction and control on the whole
economy. For example, issues such as privatization campaign which swept through many
developing economies in the 1980s, transition economies of the former communist
countries, strengthening of institutions, legal framework and capacity building as well as
the rule of law form are broadly, core areas of modern corporate governance systems.

1.1 Evolution of Corporate Governance

The subject of corporate governance has enjoyed long and rich history. According to
researchers (see, Mason 1959) the concept of governance is traceable to the establishment

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of modern corporations, which date back to the time of East India Company, the Hudson’s
Bay Company, the Levant Company and other major chartered companies during the 16th
and 17th centuries.

In fact, it was noted that the 1609 dispute between the shareholders /investors
and directors of the Dutch East India Company, was generally regarded as the world's
first listed public company as well as subsequent corporate scandals involving large
companies necessitated the need for good corporate governance system around the world.
However, the term was only popularized in the United States and United Kingdom in the
1970s. The need to balance roles, responsibilities, power, and decision-making between
board directors, executives as well as shareholders has been evolving for centuries,
resulting from the separation between the absentee’s owners or shareholders and the
appointed managers, regarded as the foundation of the well-known principal-agency
problem (Jensen and Meckling, 1976). The debate on what constitute effective corporate
governance system has been a hot topic among practitioners, researchers, regulators, and
business leaders globally.

1.2 What is Corporate Governance?

Put it simply, it is a structure put in place including processes, customs, policies, rules, laws
and institutions for directing and controlling the affairs of corporations in the way they
should act to achieve it set objectives (Iyang, 2009). According to Adrian Cadbury Report
(1992) it was defined as a system by which companies are directed and controlled with a
view to achieving it set goals.

In a nutshell, corporate governance is concerned with how a corporate entity conduct it

business affairs including with its interaction with the immediate environment and the
larger society. It borders on level of compliance with set market rules and code of
behavoiur, policy direction of the entities, behavoiur of leaders, composition of board,
stakeholders’ interest, ethical disposition, stakeholder’s management processes, entity’s
core values, display of honesty and integrity and the balancing of diverse interests in the
corporation among others.

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1.3 Corporate Governance, Capital Market and Regulations

It is long been noted that strong relationship exists between effective corporate governance
system and the development of capital market and regulation (Gilson, 2000). Research has
shown that the level of improvement in corporate governance practices of organizations in
the capital market have significant impact on level of market development (Mason, 1959;
Jensen and Meckling, 1976). In the same vein, to develop Nigerian capital market, the need
to improve the corporate governance practices of companies becomes indispensable,
hence, the urgent need some sort of regulations to ensure that companies conform to set
governance codes of the security and exchange commission.
As shown in figure 1 and 2 below; corporate governance, and regulation all have direct
impact on the activates in both primary and secondary capital markets.

Figure 1: Primary Capital Market Activities Figure 2: secondary Capital Market Activities

1.4apitGood Corporate Governance System

Generally, factures of Good Corporate Governance include; transparency, accountability,
shareholders right, integrity, honesty and fair dealing among others as presented in figure
3, below

Fair
Dealings
Honesty

Integrity

Shareholder rights

Accountability
rporate governance focuses on publicly traded
Transparency (Full disclosure)

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1.5 Poor Corporate Governance System and Implications

The role of effective corporate governance system cannot be overemphasized and so, poor
governance system could lead to total economic backwardness resulting from the following
among others;

• Unfair market dealings

• Corruption
• Unemployment
• Poor performance of companies and capital market
• Withdrawal of investors and investments (FDI); and
• Financial and economic crisis

2.0 Core Areas of Corporate Governance

There is a growing demand for effective corporate governance practices around the world
and in response, countries have initiated strategies to instill discipline into how corporate
entities especially, the publicly listed corporation should be directed and controlled, hence
the establishment of various code and principles for corporate governance such as; OECD
corporate governance principles, Cadbury Report recommendations, etc to improve
governance system and reduce systemic risk worldwide.

In order to instill good corporate governance principles and practices to capital market
participants in Nigeria, SEC charged with the responsibility of ensuring that corporate
entities comply with set standards or governance code otherwise referred to as “Set of best
practices has not only sets governance codes but developed a tool for assessing compliance
of corporate organizations.

In line with the international best practice, the code as indicated in figure 1 below covered
the key areas of governance system aimed at ensuring that companies are properly directed
and controlled to achieve it set objectives including; board; board committees, management
and operations, audit and accounts, shareholders rights, and disclosures.

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Figure 1: Core areas of Corporate Governance Code (Source; Researcher)

Essentially, from the discussion above, codes of corporate governance are usually issued
to serve as recommendation to the board of directors of a company in terms of structure,
composition, board committees, remuneration and auditing standard for effective manning
of affairs of a company. It also serve to encourage to be committed toward good corporate
governance; they can provide guidance for financial and nonfinancial disclosure, fair
dealings, integrity, stakeholder relations and foster better engagement of minority
shareholders as well as help clarify the roles and responsibilities of managers and directors.

The need effectively enforces good governance code became imperative, drawing on vital
lesson from the recent 2008 global financial crisis when majority of participants held
erroneous impression that mere existence of a corporate governance code around the globe
will automatically amount to better governance practices (Gilson, 2000).

Following the global financial which started with the US subprime lending in the late 2007
through to 2009 that caused the world great losses, emphasis was now shifted to effective
implementation, as having codes was never enough but judicious enforcement of such
governance code around the world becomes imperative to avoid similar incidence in the
future.

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2.1 Security and Exchange Commission’s Corporate Governance Scorecard

To avert the danger or systemic risk associated with poor governance system in the
economy as highlighted above, the Nigeria Security and Exchange Commissions (SEC)
was primarily saddled with the core mandate of regulating the capital market. Like every
other capital market regulator, it set standards often referred to as “Governance code” or
“simply best practices” in line with international best practices and expect all publicly listed
companies to adhere strictly to in their day -to-day business conduct.

To effectively to monitor and measure conduct of the individual company against the set
codes, it developed a scoring card, “known as SEC CG Scorecard”. it is a quantitative
and qualitative model for measuring the level of observance or otherwise compliance of
set standard of corporate governance practice. It is capable of comparing corporate
governance practices of individual firms to a national benchmark code of practice or
international best practices. Typically, the scorecards are applied to determine firm’s
governance practices, to reveal progress or improvement over time, and benchmark with
different entities over a period of time. The overall goal is to instill a market-wide Good
Governance Practices through better disclosure, accountability, protection of shareholders
interest, entrenching fair dealings, encouraging high level of integrity and honesty among
the listed companies.

While the objectives of the scorecard include; facilitating analysts and investors’
understanding of individual firm’s governance practices, enabling inter-entities
benchmarking, it facilitates availability of compliance reports to investors, it raises
awareness of effective governance practices, and provide guidance to potential investors
in reaching informed investment decisions.

2.2 The Expectation from Enforcement of the SEC Scorecard

According to Nigeria SEC, it is expected that the outcome of the SEC scorecard when
properly enforced will include;

• For the capital Market

o Increased Market Confidence

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The cornerstone or foundation of every developed capital market, globally is

confidence in the market. This is in terms of fairness, disclosure, integrity, honesty,
etc. In fact, there will be no capital market without participants confidence in it. It
is a crucial element of every modern capital market and this is one expected outcome
of the SEC scorecard.

o Transparency
An important ingredient of developed capital markets high degree of disclosure or
transparency of information and transactions in the market. It is expected that with
full enforcement of the Nigerian SEC scorecard, transparency in the capital market
will be improved for better appeal to potential participants.

o Accountability
For a robust capital market where participants will be willing at all times to do
transactions, there must be adequate accountability. It also expected that when the
scorecard is fully and properly enforced accountability will not only become a
watchword for operators but taken very seriously.

o Greater inflow of foreign direct investments

A major impact of good corporate governance system is it ability to attract investors
and other participants into the market. The presence of market confidence, total
disclosure, accountability resulting from enforcement of SEC scorecard will
reposition the market to better appeal to potential foreign investors thereby
increasing foreign direct investments flows into the economy. Therefore, a crucial
outcome expected of the SEC scorecard is to help facilitate inflows of FDI into the
country through the capital market.

o Information-driven-market
When the SEC scorecard is enforced effectively and all the basic features of good
governance system in put place, the market will be driven by information. So that,

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security prices and resource allocation will all be driven by the information filtering
into the market about entities and their conducts.

o Improved Liquidity
No doubt, also expected in the capital market as a direct result of enforcement of
the SEC scorecard is adequate liquidity in the capital market.

• For listed Public Companies

o Effective Control Systems
A vital role expected of the SEC scorecard is to help publicly listed companies put
in place effective system of control measures to checkmate it activities and conduct
against set governance code.

o Increased Performance
The overall impact of scorecard by SEC is to help individual corporate organization
improve its performance through conducting business transactions in the most
proper manner and by extension, the capital market as well as economy also
increases it performance.

o Improved Corporate Governance practices

Since the scorecard aims to instill good corporate governance practices in the
operators in the capital market, the enforcement of the same scorecard will
definitely bring about improvement in the systems by which companies are directed
and controlled towards realizing set corporate objectives. It is expected that
individual company’s governance practices will dramatically get better.

o Increased investor confidence

Successful companies are those whose customers have unwavering confidence in
them as that will keep them coming for repeat business, which assures
sustainability. When enforced effectively, the scorecard has the capability to

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increase investors confidence in the company and hence, will be willing to invest
in it.

o Attract investors
Majority of the successful organizations globally, try to appeal not only their
customers on the downstream end but also attract potential investors on the
upstream end. A core expectation from the SEC scorecard when effectively
enforced on the companies is ability to attract huge investors with effective
corporate governance system in place.

3.0 Conclusion
The overall essence of an effective corporate governance system is to ensure a
disciplined approach to how business leaders direct and control the corporation on
behalf of the absentees’ owners. This will enable business leaders focus on
achieving set its long- term objectives of maximizing wealth of owners and that of
other stakeholders including the larger society.
Essentially, to achieve the set goals by corporate entities as well as developing the
Nigerian capital market, there must be judicious enforcement of corporate
governance code for publicly listed companies as currently been championed by
SEC. Regrettably, failure to effectively enforce set code of corporate governance
could spell doom for company, capital market development, and ultimately, the
economy as it may result in financial and economic crisis. Hence, SEC, need to
ensure adequate system is put in place for effective enforcement of the governance
practice in Nigeria.

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References
o Adrian Cadbury Report (1992). Financial Aspects of Corporate Governance:
https://www.icaew.com/technical/corporate-governance/codes-and-reports/cadbury-
report: Accessed on June 11, 2019.

o Mason, E.S. (1959). The Corporation in Modern Society. Cambridge, MA, Harvard
University Press.

o Rwegasira, K. (2000). Corporate Governance in Emerging Capital Markets: Whiter

Africa?: Empirical Research-Based Theory –Building Papers. Accessed June 20,
2019. www.ssrn/corporate governance/201344%rwegasira.html.

o Jensen C. and Meckling H. (1976). Theory of the Firm: Managerial Behavior, Agency
Costs and Ownership Structure. Accessed June 22, 2019:
https://www2.bc.edu/thomaschemmanur/phdfincorp/MF891%20papers/Jensen%20an
d%20Meckling%201976.pdf

o Ronald J. Gilson (2000). Globalizing Corporate Governance: Convergence of Form

or Convergence of Function, Working Paper, Stanford Law School (April, 2000).
www. Accessed 28 June, 2019

o World Bank (2006). Report on the Observance of Standards and Codes (ROSC),
Zambia Corporate Governance. Accessed June 26, 2019;
http://www.worldbank.org/ifa/rosc_cg.htmlnance.

o Sullivan, J. D. (2000). Corporate Governance: Transparency between Government

and Business paper presented at the Mediterranean development forum 3 World
Bank Meeting, Cairo- Egypt. March 7

o Inyang B.J., (2009) ‘Nurturing Corporate Governance System: The Emerging Trends
in Nigeria’ 4(2), Journal of Business Systems, Governance and Ethics. Accessed June
22, 2019: http://www.sciepub.com/reference/203871

o www.sec.gov
o www.sec.org.ng

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