Nonso Okpala, the Managing Director/CEO of VFD Group Limited, a company that seeks to implement a long-term investment strategy on June 28, 2018, wrote an article titled ‘NEM Insurance Plc’s 48th AGM and Associated Governance Issues’. The article succinctly points out the modern hindrances to a long-term strategic approach to corporate governance and investment holding. He does so with particular reference to NEM Insurance, a company whose stock price has skyrocketed in recent times and with the aid of sound visionaries has become a force to be reckoned with in the Nigerian insurance industry.
He highlights the company’s weak corporate governance practices and flagrant disregard for basic company law principles. Four of the directors of the company who own less than 23.73 per cent of the company’s issued shares have succeeded in excluding other shareholders from critical decision making, through excluding them from attending the Annual General Meeting of the company by failing to notify them as required under the Companies and Allied Matters Act Cap C20 LFN (2004). This is all in a bid to secure their shareholding by seeking to pass a resolution issuing 1.056 billion shares of the company by way of private placement at the price of ₦2.50, a price lower than the market rate and without clear justification for the need to raise funds and investment through such a channel clearly designed for companies struggling to make investments through a public or rights offer.
The case of NEM Insurance is a clear example of contemporary corporate governance issues of long-term value creation and shareholder participation. Directors and shareholders tend to be more concerned with short-term profits as opposed to long-term value. Companies are focused only on making money and as a result, take decisions that are beneficial in the short-term but in the long run will lead to the downfall of the corporation. However, trends in corporate governance are evolving, with a focus on the long-term creation of value that is “equitable, shared and sustainable.”
It is advised that Nigerian companies should also adopt these emerging trends of long-term sustainability. These issues of short-term value creation are increasingly made easy by the fact that shareholders have become passive investors with the sole aim of deriving quick turnover on their investments and thus are only interested in their periodic dividends as opposed to the sustainable development of the corporation. This results in shareholders ignoring their rights and duties towards the corporate governance of the company. Such a lax attitude to the affairs of a corporation has led the perpetuation of unfavourable decision making and even fraud by corporate directors.
Shareholders have rights under both common and corporate law to participate in key corporate governance decisions. Importantly, good corporate governance practices entail the active participation of shareholders in the direct and indirect control of the company through the board of directors and an arrangement of effective checks and balances among shareholders, the board and management.
However, the major problem with the participation of shareholders in the governance process emanates from the agency problem of information asymmetry. Shareholders are therefore disenfranchised as there is a divergence between the management and the shareholders which remains unchecked because of a lack of incentive of holders of insignificant shareholdings to monitor management in a highly diffuse ownership structure. Shareholders are also inactive as they lack knowledge concerning the legal rights and powers available to them. The problem of the lack of shareholder inclusivity in the affairs of a company is heightened when there are a few shareholders involved in the management of the company through their present board, as these few shareholders are able to prey on the inactivity of other key shareholders to their own advantage as can be seen in the case of NEM Insurance.
The role of institutional shareholders like VFD Limited in curing the above-mentioned problems and in ensuring the observance of good corporate governance principles as compared to individual shareholders cannot be overemphasised. Institutional shareholders play a much bigger role in monitoring directors’ actions. As a collective unit, institutional shareholders can voice their opinions directly to management, and by using their power and influence, they can also ensure that directors comply with self-regulatory codes of best practice. Institutional investors and investors at large must ensure that they take into consideration a number of factors before investing in a company. Investors must ensure that the company is responsible for sustainability issues on both a strategic and an operational level through its corporate governance practices.
Another factor that accommodates the disregard of best corporate governance practices and even the provisions of the Companies and Allied Matters Act, is the lack of appropriate sanctions on erring corporations or directors. The basis of Nigeria company law is not to interfere in the activities of corporate entities. Furthermore, regulatory bodies such as the Securities and Exchange Commission and the National Insurance Commission (NAICOM) as a policy tend to impose sanctions on corporations and directors as a last resort. It is advised that regulatory bodies of corporate entities must take a stronger role in monitoring the activities of influential and top-tier corporations in their various industries and in ensuring that shareholders are informed of their powers, rights and duties and the protections afforded to them as investors.