AVERTING

ECONOMIC CRISIS
CG v. Crisis

The eCrisis
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How Can Corporate Governance

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help?

PRESENTED BY CHRISTIE EZE (FCIS)

 The Crisis: What is Economic
• Economic crisis: A situation in which the economy of a country experiences a sudden
Crisis?
downturn brought on by a financial crisis. An economy facing an economic crisis will most
likely experience a falling GDP, a drying up of liquidity and rising/falling prices due to
inflation/deflation. An economic crisis can take the form of a recession or a depression.

• Economy: An entire network of producers, distributors, and consumers of goods and

services in a local, regional, or national community.

The Crisis
• Financial Crisis: A situation in which the supply of money is outpaced by the demand for
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money. This means that liquidity is quickly evaporated because available money is
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withdrawn from banks, forcing banks either to sell other investments to make up for the
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shortfall or to collapse.

• Recession: A period of general economic decline, defined usually as a contraction in the

GDP for six months (two consecutive quarters) or longer. Marked by high unemployment,
stagnant wages, and fall in retail sales, a recession generally does not last longer than one
year and is much milder than a depression. Although recessions are considered a normal
part of a capitalist economy, there is no unanimity of economists on its causes.

• Depression: Lowest point in an economic cycle characterized by reduced purchasing

power, mass unemployment, excess of supply over demand, falling prices, or prices rising
slower than usual, falling wages, or wages rising slower than usual, and general lack of
confidence in the future. Also called a slump, a depression causes a drop in all economic
activity. Major depressions may continue for several years, such as the Great Depression
(1930-40) that had worldwide impact.
 The Crisis: Recession Defined
• The National Bureau of Economic Research (NBER) defines a recession as "a significant
decline in economic activity spread across the economy, lasting more than a few
months, normally visible in real gross domestic product (GDP), real income,
employment, industrial production and wholesale-retail sales." A recession is also said
to be when businesses cease to expand, the GDP diminishes for two consecutive
quarters, the rate of unemployment rises and housing prices decline.
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• The nature and causes of recessions are simultaneously obvious and uncertain.

about
Recessions can result from a cluster of business errors being realized simultaneously.
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Firms are forced to reallocate resources, scale back production, limit losses and,
sometimes, lay off employees. Those are the clear and visible causes of recessions.

• Generally, the cluster of business errors is an indication of poor corporate governance.

The result is that individuals and businesses curtail expenditures in an effort to trim
costs, GDP declines and unemployment rates rise because companies lay off workers to
reduce costs. It is these combined factors that cause the economy to fall into a
recession.

.
 The Crisis: Causes of Recession

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• Every economic crisis is unique, and most economists do not subscribe

to a single theory of the causes and prevention .This paper looks beyond
the common theories regarding the causes of economic and financial
crisis and aims to provide an understanding of how corporate
governance can be a helpful prevention measure when applied
effectively.
 Governance: What is Governance?

• Governance comprises all processes of governing over a social system

Governanc

or network.
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• Governance refers, therefore, to all processes of governing, whether

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undertaken by a government, market, or network, whether over a

family, tribe, formal or informal organization, or territory, and whether
through laws, norms, power or language. Governance differs from
government in that it focuses less on the state and its institutions and
more on social practices and activities.
Bevir, Mark (2012). Governance: A very short introduction. Oxford, UK: Oxford University Press
 Governance: The Integral
Components

1 2 3 4
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POLITICAL/ ECONOMIC
e

LEGAL, CORPORATE
SOCIAL INSTITUTIONAL
&
REGULATORY
 Governance: The Integral
• Components
Political/Social governance is the manner in which power is exercised in
the management of a country's economic and social resources for
development.

• Economic Governance consists of the processes that support economic

activity and economic transactions by protecting property rights,
enforcing contracts, and taking collective action to provide appropriate
physical and organizational infrastructure.
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• Legal, Institutional & Regulatory governance is the manner in which

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complex systems are managed according to a set of rules and norms.

e

• Corporate Governance is the system of rules, practices and processes by

which an organization is directed and controlled. Corporate governance
essentially involves balancing the interests of a company's many
stakeholders, such as shareholders, management, customers, suppliers,
financiers, government and the community.

• Good governance can play a critical role in the process of building

strong domestic financial markets. It increases public confidence in the
securities markets, improving liquidity and enhancing bank, corporate
and sovereign ratings.
 CG v. The Crisis

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e
CG Versus Economic
The system of rules,
practices and processes by Crisis
A sudden downturn
brought on by a financial
which an organization is crisis.
directed and controlled.
 CG v. The Crisis: Corporate governance in the wake of Economic
Crisis

• The impact of the global financial crisis on the world

economy has served to underscore the interconnectedness
of the health of large global enterprises and the livelihoods
of ordinary people.
• In UNCTAD’s* analysis of the causes of the global financial

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crisis it points to regulatory weaknesses at the national and

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international levels as well as poor corporate governance

practices as being responsible.
• It emphasised that the failure lay in the lack of application of

e
mind to governance principles, particularly in regard to risk
management.
• It found that strengthening corporate governance, more so
in the banking sector, will also extend better corporate
governance to connected firms which would lead to
economic growth.
* United Nations Conference on Trade and Development and United Nations
 CG v. The Crisis: Corporate governance in the wake of Economic
Crisis

• Although corporate governance in the private sector is of

general interest to the Nigerian public, that of the banking
industry is of particular interest because of the roles of
banks in any economy. The strength of their corporate
governance is of prime interest to government, depositors,

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shareholders and the public at large.

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• The chances of an organizations success improves

substantially when they practice good corporate

e
governance. Equally when the principles of good
governance are not observed, the chances of failure become
very significant and inevitable.
• In the wake of Nigeria’s economic crisis it is clear that
strengthening CG in our banking sector ought be the next
step.
 Final
Thoughts
Next Steps
01

REFORM
02

STRENGTHEN
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03

SUSTAIN

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 The Next Steps: Reform, Strengthen, Sustain
Strengthening board oversight of
management
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Encouraging remuneration practices
that balance risk and long-term
performance criteria
Improve the mechanisms through
which shareholders are able to
influence corporate governance
Transition to stakeholder governance.
Positioning risk management as a key
board responsibility
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Improve accountability, fairness and
transparency in financial markets to
inspire investor confidence and
facilitate increased investment.
Financial reform efforts being
promoted should be applicable to
corporations operating in emerging
markets.
Ensure sustainability
 Final Thoughts
• Non-financial matters contribute to financial performance and vice versa. There is a
critical interdependency between financial capital, natural capital, human capital, social
capital and manufactured/technology capital. For example, a beverage manufacturer
today cannot plan long-term without strategically taking account of the scarcity of potable
water.

• The way we steer and manage our companies, the strategic direction in which boards
steer the company and management implements those directions, have become
inextricably linked with the sustainability issues pertinent to the business of the company.

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Major shareholders today are financial institutions, representing their ultimate

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beneficiaries, the people in the street. These institutions have to make responsible

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investments and in order to do so they need to make informed assessments of the
economic value of a company as opposed to its book value. They can only do so if the
company reports on the basis that there is a holistic and integrated representation of the
company’s performance in terms of good Corporate Governance in both its finance and its
sustainability.

• Sustainability of a company means conducting operations in a manner that meets existing

needs, without compromising the ability of future generations to meet their needs and
has regard to the impacts that the business operations have on the life of the community
in which it operates and includes environmental, social and governance issues.
Consequently, its important that companies are transparent to the extent of reporting on
how their operations have both positively and negatively impacted on a community
economically, socially and environmentally and how they intend to enhance the positive
aspects and eradicate or ameliorate the negative aspects.
Questions Contributions
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