Corporate Governance the Key to business Longevity
Profits making is an essential part of any business but in recent time we've seen negative trend to the survival of companies around the world. In Nigeria for instance a lot of bank recently closed or were taken over by the central bank and some are still in distress. Though a company might be profitable there are some factors that may lead to the company folding up. One this major factor is leadership and management. In this writeup, we are going to be looking briefly at an important aspect of management and how it affects the longevity of corporate entities. This aspect of management is none other than
CORPORATE GOVERNANCE
Data indicates that Nigeria has lost 75 banks since the advent of banking since 1914. There is evidence suggesting that these bank failures were largely due to weaknesses in corporate governance. A CBN and Nigeria Deposit Insurance Corporation (NDIC) study of distress in the Nigerian financial services sector (October 1995) provides the following data, showing the factors that cause distresses in the banking industry: Economic depression (25%); political crises (17.9%); bad credit policy (25%); undue interference by board members (corporate governance) (32.1%).
Corporate governance is a set of rules, systems and directive by which corporate entities are governed to maximize profitability and protect stakeholders interest. Where there is lack of corporate governance it leads to system failure and eventual collapse of any corporate entity.
The stakeholders involved in corporate governance are the shareholders, Non-executive directors, Executive directors, Managers and employees.
Corporate governance was first introduced in December 1992 in response to corporate failure in the United Kingdom. The Cadbury report which had a significant effect on the world corporate system was the propelling factor to enactment of corporate laws in France (Vie not Report, 1995), South Africa (King Report, 1994) and Canada (Toronto Stock Exchange recommendations on Canadian board practices, 1995)
In the 21st century there arose a lot of corporate issues which led to the review of corporate governance laws and gave birth to one of the widely recognized corporate governance law of United States origin known as Sarbanes-Oxley Act of 2002, informally known as SOX.
An aspect of corporate governance that normally lead to failure in any corporate entity is the rule that stipulates that the chairman of the board of directors must not and cannot be the managing director of the business. When this happens there is no check and balance between the board of directors and the managing directors position which could lead to gross mis management of shareholders equity.
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The world is evolving when it comes to investment and growth rate of different economies and it’s obvious that corporate governance has a large role to play in any profitable entity.
Compiled by @ijele for @euronation
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