Ethical Governance & Stakeholder Management: The Role of Directors

Abstract

Following the failure of several corporate entities especially commercial banks in Nigeria and the financial crises of 2008, there has been a renewed recognition of corporate governance especially as it relates to compliance and ethics as the key element in the sustainability of any organisation. Consequently, there is a growing need for organisations to adopt ethical practices that increase value, build reputation, and guarantees the sustenance of any business. Directors must ensure that effective corporate governance, key strategies for ensuring implementation and compliance are introduced and encouraged. This paper will examine how ethical practices can be enthroned in an organisation. It will also proffer an overview of current corporate governance frameworks and practices while emphasising the crucial role of the Board and key management officers in ensuring ethics and compliance while entrenching good corporate governance culture within the organisation.

INTRODUCTION

Corporate Governance. Ethics and Ethical behaviour, form a huge part of Corporate Governance, they are the foundation on which all principles of Corporate Governance lie. Principle 1 of the Nigerian Code of Corporate Governance, 2018, provides that:

“A successful Company is headed by an effective Board which is responsible for providing entrepreneurial and strategic leadership as well as promoting an ethical culture and responsible corporate citizenship.”

This principle emphasises the need for a board of directors to exercise leadership, enterprise, integrity, and judgment in ensuring that decisions made are in the best interest of the Company and is aimed at guaranteeing the continued survival and prosperity of the Company.

The role of the directors of a company is trite and one can take a cue from the definition as provided for under the Companies and Allied Matters Act 2020 as to who a director is. The Act defines a director as someone who is duly appointed by the company to direct and manage the business of the company.

Consequently, the board of directors must ensure that the company is properly managed and that the Company is effectively managed in line with the various legal and regulatory frameworks applicable to it. Most importantly, The Boards of Nigerian Companies are saddled with the responsibilities of distilling and harmonizing provisions of the Code of Corporate Governance and ethical practices to ensure that the highest attainable corporate standards are achieved.

EVOLVING ROLE OF DIRECTORS FOR ETHICS AND COMPLIANCE OVERSIGHT

The word Ethics was formed from the Greek word “Ethos” meaning ethos which can mean “custom, habit, character or disposition”. In normal parlance Ethics generally means a system of moral principles that govern a person’s behaviour or the conducting of an activity. Ethics both inform the law and goes beyond its limits. More often than not, the law sets boundaries for what may or must be done while Ethics is concerned about what should be done — even if not required or prohibited by law. Ethics serves as the fulcrum for good corporate governance and the development of an ethical corporate structure in a company should be the primary objective for any Board.

Therefore, for a company to be said to observe good ethical practices, it means that the company adheres to the letters of the law and does not indulge in illegal or improper practices. It is trite that a company is not the physical building but the people that make up the company such as the Board of Directors, Shareholders and Employees. This, therefore, means that the persons tasked with the duty of observing these ethical practices are the persons that make up the company and as such, it is important, that a set of people (Board of directors and management) who are involved in the day to day running of the company be at the fore in ensuring the practice of good ethical behaviour.

Directors play a pivotal role in the administration of companies. They are regarded as trustees of the company as well as agents, it is the primary objective of the board of directors to ensure that a company is well managed. As the directors are responsible for the sustainability of any company, they are responsible for the effective performance of the company including protecting shareholders’ confidence in the company. The sudden failure of some established companies is an indication that there might have been little or no ethical behaviour by the board and the employees which jeopardized the existence of such a company.

Accordingly, the Directors are saddled with certain fiduciary and statutory duties to the Company which includes:

(a) duty to act bona fide for the benefit of the company

(b) exercise of proper purpose

(c) Duty not to fetter discretion

(d) Duty not to conflict duty and interest

(e) duty not to make secret profits by appropriating the company’s asset(s).

Accordingly, the directors in the discharge of their duties are responsible for ensuring the company’s compliance with relevant laws and regulations and for curbing fraudulent activities including insider dealings and conversion.

In addition, to the duties of the directors enumerated above, the roles of the board as summarised in the King’s Report as follows;

1. To define the purpose of the Company;
2. To define the values by which the company would discharge its duties;
3. To identify stakeholders relevant to the Company
4. To develop strategies combining and implementing the values and purpose of the Company

In resolving the ambiguity of how ethics should apply to board oversight of business strategy and the clarity of steps that can be taken by boards to improve compliance and ethics, the board needs to issue a code of ethics that defines the purpose and values of the firm, the framework for the implementation of the policy, whistleblowing etc. The board must depart from the “tick box approach ‘and employ more pragmatic steps in ensuring the ethical integrity of the company. Accordingly, directors need to think about compliance and ethics not just as an abstract, but considering the reality that corporate crime and corruption are widespread. Notwithstanding any ambiguity around the application of ethics in a company, directors have a clear responsibility to ensure transparency and accountability to the shareholders in light of the possibility of fraudulent acts involving employees and stakeholders in an organization.

EFFECTIVE IMPLEMENTATION OF ETHICS AND COMPLIANCE UNDER THE NIGERIAN CODE OF CORPORATE GOVERNANCE

The Nigerian Code of Corporate Governance 2018 (NCCG Code) is the primary code that creates a corporate governance framework for all companies which incorporates the core principles of governance being fairness, accountability, transparency, and responsibilities. Another purpose of the Code is to promote public awareness of essential corporate values and ethical practices that will enhance the integrity of the business environment. Notwithstanding that the provisions of the Code are not mandatory, the Code charts direction for the board in promoting ethical values for a company.

It is therefore not a surprise that the first principle of the NCCG Code states the role of directors in promoting an ethical culture and responsible corporate citizenship.

Principle 1 of the NCCG Code provides that a successful Company is headed by an effective Board which is responsible for providing entrepreneurial and strategic leadership as well as promoting ethical culture and responsible corporate citizenship. As a link between stakeholders and the Company, the Board is to exercise oversight and control to ensure that management acts in the best interest of the shareholders and other stakeholders while sustaining the prosperity of the Company. 

This principle underpins the board’s role in ensuring adequate compliance with the Code of Corporate Governance and determining its impact on the daily operations of the organization. The Board is expected to govern the Company on behalf of the shareholders through establishing a framework that guarantees transparency, integrity, and sustainability of the Company. The board, being the highest and central governing body in a company should have a Board Charter which may include the following responsibilities for the Board;

1. To exercise leadership, enterprise, integrity and judgment in its oversight and control of the Company to ensure the Company’s survival and prosperity;
2. To ensure that the Board and its committees always act in the best interest of the Company
3. To ensure compliance with the laws of the Federal Republic of Nigeria and other applicable regulations
4. To consider and approve long term and short-term strategies for the business of the Company and monitor their implementation by management to ensure that the business of the company is operated effectively and ethically in conformity with the strategies and goals approved by the Board.
5. To ensure the implementation of a succession plan, appointment, and training process for both the board and senior management of the Company
6. To be accountable to the Company as well as identifying and managing the relationship with shareholders and other stakeholders
7. Establishing and maintaining the Company’s values and standards (including an ethical culture) as well as modelling these values and standards
8. Overseeing the internal audit function
9. Establishing the Company’s risk management framework and monitoring its effectiveness, setting the Company’s risk appetite, and receiving and reviewing risk reports
10. Providing oversight over Information Technology governance
11. Defining formal schedule of matters specifically reserved for board decision and matters delegated to board committees
12. Oversee the effectiveness and adequacy of the internal control system
13. Oversee the company’s communication and information dissemination policy
14. Perform the appraisal of the board
15. To ensure the integrity of the annual reports and annual reports and accounts and all material information provided to regulators and other stakeholders
16. Ensuring that management systems are in place to identify and manage environmental and social risk and their impacts.

Another important provision of the NCCG code as it relates to the directors’ duty of fostering ethical behaviour is Principle 24 which addresses the need for the establishment of professional business and ethical standards for the protection, enhancement of the reputation of the Company and promotion of good conduct and investor confidence. In furtherance of this principle, the board should set a clear tone to formulate and review the Code of Business Conduct and Ethics. The Code of Business Conduct and Ethics sets the tone for compliance with the business and ethical standards by establishing sanctions within the company for unethical behaviours.

The Code specifically states that the Board of Directors should be responsible for monitoring adherence to the Code of Business Conduct and Ethics and to ensure that breaches are effectively sanctioned, and an efficient system is set up to encourage the reporting of unlawful or unethical behaviours and protection for those who report a violation in good faith. The Board needs to put in place an effective reporting system at all levels and incentives to ensure that unlawful and unethical behaviours are not only reported but are reported in due time.

Accordingly, the Code of Business Conduct and Ethics should in a bid to ensure that the interests of not only management but of the stakeholders in the Company are catered for, contain the following;

1. Commit the company, the Board, management, employees, suppliers, and other related entities to the highest standard of professional behaviour
2. Be designed with due consideration of the interest of management and employees
3. Receive its implementation commitments from the Board and the executive management of the Company
4. Be sufficiently detailed as to give clear guidance to users
5. To be formally communicated to all persons to whom it applies.

Principle 25 of the NCCG provides for the establishment of policies and mechanisms for monitoring specific ethical issues such as insider trading, related party transactions, conflict of interest and other corrupt activities, mitigates the adverse effects of these abuses on the Company and promotes good ethical conduct and investor confidence.

In the same vein, the recent sack of the Board of a leading Commercial bank in Nigeria by the Central Bank of Nigeria (CBN) for allegations relating to insider abuse, insider credit and breakdown of corporate governance. It is the duty of the Board to ensure that these unethical practices had no place in the Company. Principle 25 of the NCCG is aimed at preventing abuse of the Company and boosting investor’s confidence in the stability of a Company by espousing principles for the regulation of insider trading similar to the position under the Investment and Securities Act, 2007 and the rules regulating conflict of interest under the Companies and Allied Matters Act, 2020.

Similarly, this principle is targeted at ensuring that individuals who are in control of the company do not exploit the personal wealth and finances of the company for their personal gain or benefit. The Code prohibits transfer pricing activities by companies operating in Nigeria. Companies are to ensure that the pricing of transactions between related parties is to be carried out at arm’s length and based on fair market value. Corollary to this principle is the requirement that directors are to make relevant disclosures to prevent any real or potential conflict of interest that may exist because of their membership on the board.

Principle 28 of the NCCG provides that the Board must put in place an effective mechanism to prevent;

(a) any unreported cases of conflict of interest, insider trading, related party transactions, fraud or any illegal or suspected illegal activities;

(b) the impairment of the external auditor’s independence and objectivity, or failure to approach his work with an acceptable degree of professional scepticism;

(c) any violation of this Code, extant laws and regulations, and disregard for accounting standards, auditing standards or financial reporting requirements;

(d) the impairment of the independence of the Board or any of its committees; or

(e) condoning of unethical behaviour and conduct in the Company, to raise it promptly and escalate the issue to the Board of Directors.

Similarly, the Institute of Directors issued a Code of Ethics (the Code) of the Institute of Directors Nigeria which serves as a guide for Directors to follow in terms of upholding ethical behaviour in the workplace. The Code admonishes its members and staff to adhere to the provisions of the Code and promises to punish any violation of ethical standards. Regardless of the non-enforceability of the Code of Ethics outside the ambits of the institution, the Code restates the duties of directors and establishes a Disciplinary and Investigation Committee (DIC) to investigate and commence disciplinary actions on members who are accused of misconduct or violation of any provisions of the Institute’s Code of Ethics.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) REPORTING

In recent times, the ethical behaviour of a company has been expanded to cater for environmental, social and governance (ESG) impact and the management capacity of a company has become an increasingly important lens through which investors assess its performance and long-term sustainability. Environmental, social, and governance (ESG) are a set of standards for a company’s operations that socially conscious investors use to screen potential investments.

The Board, being the overseers of risk and stewards of the long-term enterprise value of a company, have a vital oversight role in assessing the organisation’s environmental and social impacts. They are also responsible for understanding the potential impact and related risks of ESG issues on the organization’s operating model. Accordingly, environmental, social and governance issues pose significant financial risks to the organisation and as such the board must consider these issues when making a decision.

Given that ESG concerns are influenced by operations, finance, risk, compliance, legal, human resources, and other considerations, the Board have ample opportunity to leverage ESG for the long-term good of the organization, its stakeholders, and society. It is beneficial for the company to prepare its ESG report and ensure that its activities reflect values that promote environmental, social and governance issues which would in turn promote the sustainability of the organisation.

CONCLUSION AND RECOMMENDATIONS 

Pearl Zhu, the author of Digital Master, said that: “A strategic board has a view of looking ahead, an insight to look deeper, and competency to look beyond.” The role of the Board of Directors in ensuring that the company and, by extension, its employees exhibit ethical behaviour cannot be overemphasized. Adopting the words of Pearl Zhu, A strategic board looks deeper and ensures that it is not caught in the web of bad practices and has the competency to look beyond, to predict whatever ethical infractions could occur in the future and nip it in the bud.

Every board in Nigeria is saddled with the duty of ensuring that policies and frameworks are put in place to foster and encourage ethical behaviour in the workplace and should imbibe the following:

Improve reporting mechanisms for unethical behaviours in the organisation

The board must foster ethical behaviour through establishing a detailed framework for the reporting of timeous reporting of unethical behaviours. Where the board fails to set up a structured reporting system that protects the whistleblower, such unethical behaviour becomes a menace, which jeopardises the existence of the organisation. Ethics and compliance are merely not about creating an atmosphere of box-ticking but rather, developing a corporate culture that hinges on the core principles of transparency, accountability, and fairness to both the stakeholders and shareholders. Consequently, proper reporting channels such as an extensive corporate governance report must be published by corporations.

Board’s role in strategy and implementation

It is generally established that the Board of Directors plays a key role in the formulation and adoption of the company’s corporate governance direction. It is paramount that the Board underline a clear strategy for implementation and take necessary steps to clarify its position with other key officers in the company. This ensures that the management of the company has a unified stance towards the corporate governance framework.

Monitor organisational Performance

Monitoring organisational performance through legal compliance and guidelines is the main aspect of the Board’s role. It ensures that the organisation is focused on providing higher levels of accountability and transparency to its stakeholders. It can be best achieved by identifying the company’s key performance drivers and establishing an agreed format for reporting performance obligations. Over time these reports will ensure that all matters that duly need to be reported will be properly documented.