Corporate governance in a developing economy: barriers, issues, and implications for rms

John O. Okpara

John O. Okpara is Associate Professor of Management in the Department of Management, College of Business, Bloomsburg University of Pennsylvania, Bloomsburg, Pennsylvania, USA.

Abstract Purpose Effective corporate governance is signicant for rms in developing countries because it can lead to managerial excellence and help rms with a weak corporate governance structure to raise capital and attract foreign investors. The purpose of this paper is to examine the barriers, issues, and challenges hindering effective development and implementation of corporate governance in Nigeria. Design/methodology/approach A combination of quantitative and qualitative research methods was employed to collect information. Specically, data were collected from 296 managers, company presidents, and board of directors in selected rms. Descriptive data and interview analyses are presented with respect to the barriers and issues hindering effective corporate governance development and implementation in Nigeria. Findings The study provides signicant current information on corporate governance and barriers hindering its development and implementation in Nigeria. The ndings reveal a number of constraints that hinder the implementation and promotion of corporate governance in Nigeria. These constraints include weak or non-existent law enforcement mechanisms, abuse of shareholders rights, lack of commitment on the part of boards of directors, lack of adherence to the regulatory framework, weak enforcement and monitoring systems, and lack of transparency and disclosure. Research limitations/implications The study was limited to four cities in Nigeria. A broader geographic sampling would better reect the national prole. Another limitation could stem from the procedure used in data collection (drop off and pick up). However, extreme measures were taken to protect the identities of the respondents. Originality/value The signicance of this study stems from the fact that very few studies have explored the impact of human resource challenges and prospects in Nigeria. The results provide additional insights into corporate governance practices in Nigeria, a sub-Saharan African country. This region has thus far been neglected by management researchers, and so the insights gained from this study will contribute to the future development of this line of research, particularly in a non-Western country like Nigeria. Keywords Corporate governance, Developing countries, Boards of Directors, Nigeria Paper type Research paper

Introduction
Corporate scandals such as those involving Enron and WorldCom have exposed failures in corporate governance that shook the economies of developed countries and have drawn attention to the weak corporate governance in developing economies. Firms from developing economies with weak corporate governance will nd it difcult to raise capital and attract foreign investors. The issues of corporate governance have attracted the attention of scholars on a broad scale over the last three decades, even though these issues have long existed. In Nigeria, the topic gained importance in the post structural adjustment program (SAP) era. This era witnessed the growth of private ownership and nancial institutions. Because of the weak corporate culture in these institutions, the nation witnessed a very high incidence of

Received: May 2009 Revised: September 2009 Accepted: November 2009

PAGE 184

CORPORATE GOVERNANCE

VOL. 11 NO. 2 2011, pp. 184-199, Q Emerald Group Publishing Limited, ISSN 1472-0701

DOI 10.1108/14720701111121056

corporate failures. To regain the condence of the public, the Securities and Exchange Commission set up a committee in 2000 whose report was the rst to articulate a code of best practices for public companies in Nigeria. This was followed by a similar code by the Central Bank of Nigeria (2006) to address corporate governance practices in Nigeria. Based on the foregoing, it appears that there is a need to develop and promote good corporate governance in Nigeria. The purpose of this study is to bridge the research gap and uncover the barriers and issues hindering the development and implementation of corporate governance in Nigeria, and provide an understanding of these issues so that they can potentially be overcome.

Theoretical framework
There are several well-developed theoretical perspectives that are available to researchers to aid them in exploring the issues of corporate governance. These theories include: managerial hegemony theory, agency theory, stewardship theory, and resource dependence theory. A succinct review of each of them is as follows:
B

Managerial hegemony theory advocates that boards of directors are just statutory additions that are dominated by the management; boards play only a passive role in strategy or directing the corporation (Mace, 1971; Vance, 1983; Lorsch and MacIver, 1989). Agency theory is built on the premise that there is an agency relationship wherein the principal delegates the work to the agent and involves risk sharing and conict of interest between the two. Implicit in it is the belief that the agent will be driven by self-interest rather than a desire to maximize the prots for the principal. The board, as an intermediary, is expected to resolve such conict of interest and minimize the agency costs. Some see the boards role of control as also encompassing a role in strategy. At variance with the notion of the agent being driven by self-interest, as advocated by the agency theory, stewardship theory postulates that managers are motivated by a desire to achieve and gain intrinsic satisfaction by performing challenging tasks. Proponents of this theory argue that managers need authority and desire recognition from peers and bosses. Thus, their motivation transcends mere monetary considerations. The role of the board of directors in matters of strategy is seen as contributing to this managerial perspective. Finally, the interaction of the board with the environment can be a source of strategic information, and the resource dependence theory derives its insight from the fact that board members are also members of the boards of other rms, and this creates a web of linkages to competitors and other stakeholders. Linkages which are also created with the rms external environment help access important resources and create buffers against adverse external changes (Riana, 2008).

Literature review
Corporate governance has been dened in different ways by different authors. Zingales (1998) denes corporate governance as a complex set of constraints that shape the ex post bargaining over the quasi-rents generated by a rm. Hussey (1999) denes corporate governance as the manner in which organizations are managed and the nature of accountability of the managers to the owners. From these denitions, it may be stated that different systems of corporate governance will embody what are considered to be legitimate lines of accountability by dening the nature of the relationship between the company and key corporate constituencies. In this section of the paper we discuss a number of corporate governance challenges and issues in general and in Nigeria in particular. We attempt to provide reasons why Nigeria is currently ill equipped to implement corporate governance to the levels that might be accepted in developed economies. In light of the above, we discuss these constraints as those arising from shareholders rights, a weak regulatory framework,

VOL. 11 NO. 2 2011 CORPORATE GOVERNANCE PAGE 185

lack of enforcement, weak monitoring, a lack of transparency and disclosure, and ineffective boards of directors, among others. Shareholders rights vary from country to country. These rights are crucial for the protection of investors against poor management. Jiraporn and Davidson(2009), investigated the impact of regulation on shareholder rights and corporate governance. They examined the strength of shareholder rights by measuring the number of restrictive governance provisions that suppress shareholder rights. They found that the more restrictive the governance, the weaker the shareholder rights. The importance of shareholder rights through alternative actions is an important aspect of controlling the behavior and actions of the Board of Directors and an important part of corporate governance. There is a need to provide effective protection in law to disgruntled minority shareholders (Kirkbride et al., 2009). One of the major issues of corporate governance in Nigeria is the lack of protection of minority shareholders rights. Although there are laws in Nigeria that were intended to protect minority shareholders rights, these laws are not strictly enforced and are frequently violated. According to BrabnersChaffeStreet (2003), the strict rights and entitlements that come with the ownership of shares in listed companies are rarely fully exploited or utilized by shareholders. Nigeria has adequate laws that are designed to protect shareholders rights and ensure good corporate governance. However, these laws are often ignored because shareholders are generally unaware of the rights that they have as a shareholder. Experts such as BrabnersChaffeStreet have argued that the greater the shareholding of an individual, the greater are his/her rights and the greater is his/her power within the company. This is so not only because the larger the shareholding the more likely it is to represent a controlling interest. It is then logical to expect that minority shareholders would be expected to play a lesser role on how the rm is governed. According to the Organisation for Economic Co-operation and Development (2004), to ensure an efcient corporate governance structure, it is essential that an appropriate and efcient legal, regulatory, and institutional foundation be established upon which all market participants can rely in establishing their private contractual relations. The Organisation for Economic Co-operation and Developments (2004) principles of corporate governance state that a corporate governance framework will typically comprise elements such as legislation, regulation, voluntary commitments, and business practices that are based on a countrys specic circumstances such as history and tradition. However, as new experiences accrue and business circumstances change, the content and structure of this framework may need to be adjusted (Organisation for Economic Co-operation and Development, 2004). In Nigeria, there are legal and regulatory systems in place to protect the rights and obligations of shareholders, rules and regulations for conducting business, and penalties for violations of these regulations (Okeahalam et al., 2003). As previously mentioned, one of the major laws regulating business conduct and operations in Nigeria is the Company and Allied Matters Decree (2009). However, the problem of supervision and enforcement of such laws and processes still remains a major issue hindering effective implementation of corporate governance. Judicial and administrative means of supervision have not been successful in bringing the type of changes necessary to implement effective corporate governance. Researchers have shown that the regulatory process should consist of setting the rules, creating standards of monitoring compliance, and enforcement of those rules and standards (Otobo, 1997; Okeahalam et al., 2003). According to the World Banks (2003) report on corporate governance, most developing and transition economies have failed to enforce their laws, rules, and regulations consistently and evenly. This failure was not anticipated by the OECD principles, which implicitly assume that countries have an efcient legal and regulatory framework in place and that courts and securities regulators have the means and capabilities to enforce it. Practices such as self-dealing and insider trading are widespread. Such offenses mostly go unpunished, even if stiff penalties apply in theory (World Bank, 2003). According to the report, auditing is another major area of weakness in corporate governance enforcement. Most countries delegate the setting of accounting and auditing standards to the accounting association

PAGE 186 CORPORATE GOVERNANCE VOL. 11 NO. 2 2011

(World Bank, 2003). However, professional associations usually lack the means to impose effective sanctions on their members. Auditors have been given unqualied opinions, certifying that the accounts audited provide a true and fair picture despite the many defects noted. The penalties for such behavior are minor and enforcement is generally lax. In Nigeria, the capacity to support the implementation of good corporate governance is undermined by the existence of weak monitoring and enforcement. Government departments and independent regulators responsible for monitoring corporate governance do not as yet fulll their roles as overseers. Many are generally weak and subject to external inuence by politicians and lawmakers. Community watchdog organizations such as consumer bodies are not well developed in Africa (Botha, 2001). There is a need for legislative overhaul or a decree that establishes a regulatory agency and indicates its functions, including its enforcement powers (Otobo, 1997). The contemporary literature of corporate structure has stressed the agency problem where ownership is dispersed and shareholders have a passive role. Professional managers have a strong independence and cross-incentives through bonus shares payments. This implies that they have incentives to disclose information when a companys investments succeed but they also tend to hide information when there are signicant losses. This gure usually applies to big American corporations and British publicly traded rms where legislation forbids individual stakes greater than 25 percent. In theory, a controlling shareholder can affect minority shareholders rights and rm performance in two opposite ways. Shleifer and Vishny (1997) argue that ownership concentration is, along with legal protection, one of two key determinants of corporate governance. Large shareholders can benet minority shareholders because they have the power and incentive to prevent expropriation or asset stripping by managers. In this vein, ownership concentration can be viewed as an efcient governance mechanism. On the other hand, large shareholders can collude with managers to expropriate minority shareholders benets, which is called tunneling (Johnson et al., 2000) and described as one of the central agency problems in countries with relatively poor shareholder protection (La Porta et al., 1999, 2000). Morck et al. (2000) also discuss how controlling shareholders may pursue objectives that are at odds with those of minority shareholders. Therefore, the relationship between ownership concentration and rm efciency is a complicated issue. When ownership of shares is widely dispersed, increasing ownership concentration is likely to mitigate the free-rider problem and enhance rm efciency. However, when the fractional ownership of the largest shareholder exceeds a certain threshold, increasing ownership concentration raises the likelihood of tunneling and decreases rm efciency. In Nigeria, a more prevalent constraint arises from restricted competition in the market for goods and services. Impediments to competition are diverse, ranging from anti-competitive practices by rms to policy restrictions on ownership and entry (Khemani and Leechor, 1999). Often, entry barriers are disguised as regulations supposedly designed to serve or protect the public interest. These policies usually give owners prots in excess of competitive returns. Such prots, however, come from distorted prices in the form of a hidden tax on consumers. The lack of competition also accentuates ownership concentration. Owners of incumbent rms have an incentive to retain control of protable operations. They may choose to remain a private rm or may go public, but without giving up control, by retaining a controlling stake or issuing non-voting shares (Khemani and Leechor, 1999). In response to recent corporate governance scandals, governments have adopted a number of regulatory changes. One component of these changes has been increased disclosure requirements. For example, the Sarbanes-Oxley Act (SOX) adopted in response to Enron, WorldCom, and other public governance failures required detailed reporting of off-balance-sheet nancing and special purpose entities. The Cadbury Report (1992) states that the lifeblood of markets is information and that barriers to the ow of relevant information represent imperfections in the market. The Cadbury Report (1992) also argues that a major barrier to the ow of relevant information is the risk of opportunism inherent to the managers inuence in the rm, which is referred to as an incomplete or

VOL. 11 NO. 2 2011 CORPORATE GOVERNANCE PAGE 187

distorted disclosure of information and calculated efforts to mislead, distort, obfuscate or otherwise confuse the public and shareholders. A credible disclosure is vital for allocation of resources. For example, the lemons problem arises where investors cannot distinguish between good and bad ideas; they will value both good and bad ideas at an average level (Healy and Papelu, 2000). A credible disclosure solves the lemons problem in which a bad security can appear to be as valuable as a good one. The adverse selection avoidance, disclosure, and transparency, should therefore lower the rms cost of capital by the impact of skeptical investors (Lundholm and van Winkle, 2006). Investors typically view a well-governed company as one that is responsive to requests from investors for information on governance issues (Okeahalam et al., 2003). In an African country like Nigeria, an independent board of directors remains a challenge, not only for the government, but also for those with whom such enterprises contract because of shortage of skills and lack of familiarity with board functions and duciary responsibilities. The responsibilities of the board of directors of any company are explicitly stated by the statutory framework of the country in which the company operates. The corporations by-laws and its declaration of board values and charter for the country in which the corporation operates serve as a guiding principle of the role and duciary duties of the board. The board has been dened as the relationship between the shareholders of the rm and the management delegated with undertaking the day-to-day operations of the organization (Stiles and Taylor, 2001). Several researchers have identied the key functions of the board as strategic, controlling (monitoring managers and accountability), institutional (building links with investors and stakeholders), approval of a core philosophy and mission, maintenance of legal and ethical practices, communication with shareholders, and review (Riana, 2008; Zahra and Pearce, 1989; ICC, 2009). Board structures are not uniform across countries (Hopt and Leyens, 2004; Keenan, 2004). There is a diversity of ownership structures around the world. Most notably, company law in France, Germany, The Netherlands and China requires and/or allows listed rms to adopt a two-tier board (as opposed to a unitary board) composed of a Board of Management (or decision-making unit) and a Supervisory Board (or monitoring unit). For example, in Germany the supervisory board (Aufsichtsrat) is by law composed of independent or non-executive directors and includes employee representatives of 50 percent in companies with more than 2,000 employees (Aguilera, 2005). The dual-board structure, strongly embedded in some national systems, is currently being questioned. For instance, the EU allows new rms registering under European statutes (societas europea) to choose between one or two-tiered systems (Hopt, 2002). A comparative perspective highlights the immense power, charm, and leadership given in the US corporate governance system to the Chief Executive Ofcer (CEO), who usually also exercises the role of Chairman of the Board. In fact, in the USA, the split of these two roles is generally perceived as a transitional arrangement or a sign of weakness, particularly in the case of new outside CEOs (Khurana, 2002). One of the challenges facing modern corporations in Nigeria may stem from lack of qualications of corporate board members. According to the Central Bank of Nigeria (2006), many board members may lack the requisite skills and competencies to effectively contribute to leadership of modern corporations. According to CIPE/IEA (2001), there are several constraints in the promotion of corporate governance in Nigeria. These constraints include lack of qualications of board members, weak or non-existent law enforcement mechanisms, ignorance on the part of stakeholders, government interference in the operations of state-owned enterprises, and the lack of corporate governance regulations for businesses in the informal sector, among others (CIPE/IEA, 2001). The studies cited in this review indicate that issues such as disclosure and transparency, ineffective board, corruption, and weak regulatory framework among others are barriers hampering the development and promotion of good corporate governance in Nigeria.

PAGE 188 CORPORATE GOVERNANCE VOL. 11 NO. 2 2011

Research questions
The following research questions were developed based on the previous studies and the Organisation for Economic Co-operation and Developments (OECD) corporate governance assessment instrument: RQ1. RQ2. RQ3. RQ4. RQ5. RQ6. To what extent are minority shareholders rights protected? To what extent do boards of directors effectively fulll their functions? How are listed companies in Nigeria regulated? How well are the company laws, rules, and regulations enforced? What are the compositions of ownership in your company? To what extent do all shareholders have equal access to information?

Methodology
This section includes a description of the research design, population, sample, data collection procedures and instruments validation. In order to generate data of appropriate range and depth, a mixed-method approach using both a questionnaire and in-depth telephone interviews was adopted. Research design Data for this study were collected in the late summer of 2007, using a questionnaire survey and in-depth interview methods. These methods have been described by researchers as methodological pluralism, and have been used in conducting research related to developing countries (Ibeh and Young, 2001). According to Okpara and Wynn (2008), cross-cultural studies are believed to have certain challenges due to the cultural, business practice, and communication differences of research respondents. Mixed methods help to prevent some of these challenges and provide rich data (Okpara and Wynn, 2008). Sample and survey administration The sample for this study consisted of managers of listed corporations located in four major cities in Nigeria (Aba, Abuja, Kano, and Lagos). The research questionnaire was administered to a random sample of 400 managers. The companies were chosen at random from the Nigerian Yellow Pages: Nigeria Businesses Companies. Four hundred rms were identied from the directory and contacted by telephone. The rms who agreed to take part formed the research sample. To enhance the response rate, the questionnaires were delivered by hand to the addresses of the companies identied for the study and collected by hand on a scheduled pick-up date. Ten trained assistants and four eld supervisors were responsible for questionnaire distribution and collection. The distribution was done in this way to avoid problems with the local communications system and to t with local cultural issues, such as the background of the researcher and purpose of the research. A total of 400 questionnaires were distributed and 296 were returned, representing a 74 percent response rate. Instruments A modied version of the Organisation for Economic Co-operation and Developments (OECD) corporate governance assessment instrument was used for this research. The questionnaire consisted of 31 items related to the common problems in developing and implementing a corporate governance program. The statements were phrased with a possible response continuum based on a ve-point Likert-style scale (1 strongly agree to 5 strongly disagree). The instrument was submitted to a panel of ten experts in corporate governance in Nigeria, the UK, and the USA for validation. The experts were asked to review the items in the instrument and determine whether these items were within the linguistic capabilities and understanding of Nigerian managers, and to eliminate items they found to be irrelevant to the Nigerian cultural environment, as well as to make suggestions on how to simplify items that were irrelevant or too complicated. After some minor revisions and

VOL. 11 NO. 2 2011 CORPORATE GOVERNANCE PAGE 189

modications were made, instruments were resubmitted to the experts for another review. The experts recommended the use of the modied instrument for the study. The correlation of random split-halves for internal consistency for the questionnaire ranged from 0.80 to 0.90; the step-up formula ranged from 0.85 to 0.90. Interview method In addition to collecting data through the questionnaire survey, a qualitative data collection technique involving one-on-one interviews with selected respondents was conducted. This stage of research involved the selection of a quota sub-sample of 15 rms for in-depth interviews. The 15 included ve banks, ve insurance companies, and ve manufacturing rms. These rms are part of the original rms selected for this study. The actual number of respondents interviewed was 20. In-depth interviews We developed semi-structured questions based on the OECD questionnaire. The following questions were asked: 1. Do members of the Board understand their responsibilities? 2. Are members of the Board committed to their responsibilities? 3. Is there a transparent and clear structure of responsibility between what, the Board can do, and what managers and employees can do? 4. How does the organization ensure that the basic shareholders rights are protected? 5. How does the organization ensure that minority shareholders rights are not violated? 6. How does your company ensure that the independence of the auditors? 7. Does the organization have any kind of mechanism in place to ensure that laws and stock market rules listing rules are not violated? 8. Are regular meetings of the Board and sub-committees held? 9. How are shareholders informed about annual meetings? 10. Does the organization have a separate Fraud and Corruption Policy? 11. Does your corporation have a corporate wide training program that teaches every employee the principles of corporate governance and internal control? 12. How does your company ensure equitable treatment of all shareholders, including minority and foreign shareholders? Selected interviewees had to be one or more of the following: an auditor, a board member, human resource director, a middle manager, a senior manager, a managing director, or a president of a company. The interviews lasted on average about 45 minutes and were tape-recorded where permitted and later transcribed. In four cases, where recording was not permitted, detailed notes were made both during and directly following the interview. The transcripts were then analyzed using template analysis (Crabtree and Miller, 1992). The purpose of the template is to generate a list of codes representing themes identied in the text.

Results
Characteristics of survey respondents Table I presents the characteristics of the survey respondents. Most of the respondents (194, or 66 percent) were male as compared to 102 (34 percent). With regard to age, the data in Table I show that the majority of the respondents (65 percent) were 50 years of age and under. While the majority of the respondents ranged from 30 to 50 years of age, the mean appeared to be approximately 40 years old. Pertaining to education, more than half of the respondents (54 percent) held Bachelors degrees, 29 percent had Masters degrees,

PAGE 190 CORPORATE GOVERNANCE VOL. 11 NO. 2 2011

Table I Characteristics of survey respondents (n 296)

Characteristic Gender Male Female Age 20-29 30-39 40-49 50 and over Education Bachelors degree Masters degree Doctoral degree Other Organization Banking Insurance Manufacturing Respondents Auditors/accountants Middle management Senior managers (vice presidents) Human resource directors CEOs/presidents Board of directors Company shareholders n Percentage

194 102

66.0 34.0

25 79 98 94

8.00 27.0 33.0 32.0

160 86 15 35

54.0 29.0 5.00 12.0

109 88 99

37.0 30.0 33.0

33 51 44 40 32 46 50

11.0 17.0 15.0 14.0 10.0 16.0 17.0

5 percent had received doctorial degrees and another 12 percent of the respondents had other forms of education, such as the Higher National Diploma (HND), the Ordinary National Diploma (OND) or other types of professional or business-related degrees. Survey participants were selected from three business areas: 1. banks; 2. insurance; and 3. manufacturing. Of the 296 usable questionnaires received, 109 (37 percent) were received from banks, 88 (30 percent) were from insurance companies, and 99 (33 percent) were from manufacturing rms. Survey participants were selected from auditors, board of directors, employees, majority shareholders, minority shareholders, company presidents, and senior managers. The data in Table I show the number and percentage of stakeholders who responded to the questionnaire. Factor analysis A conrmatory factor analysis of the items was performed to ascertain whether a resolute set of problems or factors existed. To be included in a factor an item must have had at least a 0.50 factor loading. Six factors explaining shareholders rights, regulatory framework, enforcement, ownership concentration, transparency and dislosure, and board of directors; 54.55% of the variance emerged from analysis (see Table II). To test the reliability of the factors, a coefcients were computed for each of them, and the resulting reliabilities were 0.88, 0.89, 0.84, 0.81, 0.85, and 0.88 for shareholders rights, regulatory framework, enforcement, ownership concentration, transparency and disclosure, and board of directors responsibilities.

VOL. 11 NO. 2 2011 CORPORATE GOVERNANCE PAGE 191

Table II Item wording and results of factor analysis

Item factor Shareholders rights (a 0:861) 1. Minority shareholders rights are protected 2. All shareholders have the same rights to elect/remove members of the board 3. Minority shareholders have the same rights to vote in general meetings 4. Aggrieved shareholders have recourse Eigenvalue Percentage of variance explained Regulatory framework (a 0:882) 1. Rules and procedures for transactions are in place 2. Commercial laws, stock market listing rules and regulations are in place 3. Auditors are regulated 4. Government agency responsible for enforcement of corporate laws Eigenvalue Percentage of variance explained Enforcement (a 0:84) 1. Inspectors investigate non-compliance with statutory requirements 2. Inspectors investigate complaints by shareholders about mismanagement 3. Inspectors investigate oppression of minority shareholders 4. Actions are taken against auditors failure to report improper nancial records Eigenvalue Percentage of variance explained Ownership concentration (a 0:86) 1. Have different compositions of ownership 2. Minority shareholders are allowed to express their views at general meetings 3. Chairpersons sometimes ignore minority shareholders at general meetings 4. Preferential treatment is often given to large shareholders Eigenvalue Percentage of variance explained Transparency and disclosure (a 0:85) 1. Independent auditors 2. Insider trading effectively prohibited 3. Equal access to information for all shareholders 4. Disclosure of managerial ownership and compensation Eigenvalue Percentage of variance explained Board of directors responsibilities (a 0:84) 1. Reviewing and guiding corporate strategy 2. Reviewing key executive and board compensation 3. Ensuring the integrity of the corporations nancial reporting system 4. Monitoring the effectiveness of the governance practices Eigenvalue Percentage of variance explained Factor loading

0.852 0.841 0.823 0.831 5.452 26

0.883 0.870 0.881 0.834 6.515 28

0.843 0.856 0.882 0.851 5.482 27

0.805 0.883 0.864 0.886 5.220 24

0.863 0.831 0.854 0.877 5.252 23

0.843 0.835 0.856 0.861 5.250 23

Descriptive statistics The mean and standard deviation scores of selected barriers shown in Table III are as follows:
B B B B

shareholders rights are not protected (mean 3.53, SD 0.45); minority shareholders rights are not entirely protected (mean 2.37, SD 0.52); aggrieved shareholders often have no recourse (mean 2.26, SD 0.54); preferential treatment is often given to large shareholders (mean 3.66, SD 0.56);

PAGE 192 CORPORATE GOVERNANCE VOL. 11 NO. 2 2011

Table III Selected barriers for corporate governance in Nigeria

S/N 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. Items Basic shareholders rights are not often protected Minority shareholders rights are often violated Preferential treatment is often given to large shareholders Aggrieved shareholders often do not have a recourse Weak monitoring and enforcement of corporate laws Board members are not committed to their responsibilities Rules and regulations are often violated Rules on independent board members are not followed Laws and rules on stock market listing are violated Lack of investigation on non-compliance with laws Lack of investigation about mismanagement Lack of investigation about of minority shareholders Lack of actions against auditors fraud Lack of equal access to information for all shareholders Insider trading laws, rules, and regulations are ignored Lack of autonomy on the part of the auditors Rules requiring equity ownership disclosure are not followed n Mean SD Percentage

296 296 296 296 296 296 296 296 296 296 296 296 296 296 296 296 296

3.53 2.37 3.66 2.26 2.06 2.20 3.55 3.20 3.52 2.43 2.36 2.41 2.36 2.36 2.47 2.51 2.62

0.45 0.52 0.56 0.54 0.35 0.42 0.32 0.42 0.65 0.43 0.45 0.57 0.48 0.46 0.58 0.62 0.48

88 91 98 84 98 95 93 95 95 95 92 90 89 94 95 86 87

B B

weak monitoring and enforcement of corporate governance laws (mean 2.06, SD 0.35); board members are not effectively committed to their responsibilities (mean 2.20, SD 0.42); rules and regulations regarding independent composition of board members are not followed (mean 3.20, SD 0.42); laws, stock market listing rules, stock market regulators and corporate codes of conduct are very often violated (mean 3.52, SD 0.65); lack of investigation on non-compliance with statutory requirements (mean 3.60, SD 0.75); lack of autonomy on the part of the auditors (mean 2.51, SD 0.62); lack of investigation about oppression of minority shareholders (mean 2.41, SD 0.57); insider trading laws, rules, and regulations are not followed (mean 2.47, SD 0.58); rules requiring equity ownership disclosure are not followed (mean 2.62, SD 0.48); lack of actions against auditors failure to report improper nancial records (mean 2.36, SD 0.48); and lack of equal access to information for all shareholders in the same class (mean 2.36, SD 0.46).

B B B B B

Table IV shows the item analysis of the respondents responses on the questionnaire. The rst research question was asked to nd out if minority shareholder rights are protected in Nigerian organizations. The survey contained seven questions on this topic. Of the respondents, 87 percent indicated that the basic shareholders rights are protected. The results also show that 89 percent of the respondents indicated that minority shareholders are

VOL. 11 NO. 2 2011 CORPORATE GOVERNANCE PAGE 193

Table IV Item analysis of the questionnaire

Items Shareholders rights Basic shareholders rights are not protected Minority shareholders rights are often violated Minority shareholders are often not allowed to express their views at meetings Preferential treatment is often given to large shareholders Chairpersons often ignore minority shareholders at meetings Aggrieved shareholders often do not have a recourse Responsibilities of the board Board members are not committed to guiding corporate strategy Board members often demonstrate a lack of concern as to the integrity of the corporations nancial reporting system Board members do not care about monitoring and enforcement Board members supervise the process of disclosure Board members are not effectively committed Regulatory framework Laws and stock market listing rules are abused and often ignored Rules and procedures for transactions are in place Laws and rules for appointing and removing auditors are violated Lack of government commitment for enforcement of laws Rules for disclosure and communications are not often followed Enforcement and monitoring Lack of investigation on non-compliance with laws/regulations Lack of investigation on the oppression of minority shareholders Lack of actions against corrupt auditors Ownership concentration Have large concentration of ownership Have different compositions of ownership Transparency and disclosure Lack of equal access to information for all shareholders Insider trading laws, rules, and regulations are not followed Lack of autonomy on the part of auditors Rules requiring equity ownership disclosure are not followed n Mean SD Percentage

296 296 296 296 296 296

3.53 2.37 2.48 3.66 3.75 2.26

0.45 0.52 0.64 0.56 0.62 0.54

88 91 89 98 87 84

296 296 296 296 296

2.44 2.38 2.06 2.26 2.20

0.55 0.50 0.35 0.54 0.42

91 95 98 96 95

296 296 296 296 296

3.52 3.33 3.35 3.26 3.46

0.65 0.53 0.56 0.52 0.44

95 92 95 91 90

296 296 296

2.43 2.41 2.36

0.43 0.57 0.48

95 90 89

296 296

3.33 3.56

0.41 0.48

85 90

296 296 296 296

2.36 2.47 2.51 2.62

0.46 0.58 0.62 0.48

94 95 86 87

often not allowed to express their views at general meetings. More than 85 percent of all those surveyed indicated that special treatment is often given to large shareholders, and that aggrieved shareholders seldom have recourse. Interview responses Interview questions 1, 2 and 3 were asked in reference to the board of directors functions, commitment and responsibilities. The interview data revealed that more than half of the interviewees stated that board of directors are not effectively fullling their responsibilities in terms of the strategic guidance of the company, the effective monitoring of management by the board, and the boards accountability to the company and the shareholders. However, some of the interviewees indicated that some board members understand their responsibilities and are committed the organizations mission and goals. In general, the results were similar to the questionnaire survey. When asked about how the basic shareholders rights including minority shareholders rights are protected, 16 out of the 20 interviewees indicated that minority shareholders are abused by top management and the board. A typical comment by a respondent is:
A minority shareholder may not be allowed to express his/her views in a company general meeting if their views are contrary to the views of the management or the board.

PAGE 194 CORPORATE GOVERNANCE VOL. 11 NO. 2 2011

Another interviewee put it this way:

A minority shareholder who wishes to speak in companys general meetings is often allowed to speak only if he or she is known to side with the board of directors.

In terms of independence of the auditors an overwhelming majority of the interviewees, 18 out of 20 indicated that auditors are not independent. An interviewee stated:
Auditors are cronies of the board and management; they are handpicked by the management with the blessing of the board. At least in my company they are the puppets, they do whatever the board asks them to do or they are out of the door.

With regard to kind of mechanism in place to ensure that laws and stock market rules listing rules are not violated, more than half of the interview respondents 15 out of 20 indicated that rules and procedures for stock market transactions are in place. However, stock market laws and stock market listing rules are abused and often ignored. A typical comment by a senior manager is:
For example, there is a law against insider trading, but this has not prevented insider trading. I have witnessed board members and senior managers giving information to friends and relatives and asking them to buy stocks.

These ndings are in line with the ndings from the survey data. Overall, there were similarities between the responses to the interview questions and the survey questionnaires.

Discussion
This exploratory study investigated barriers, issues, and challenges inhibiting the development and implementation of effective corporate governance in Nigeria. The common barriers and challenges identied from our survey are as follows:
B B B B B

protection of shareholders rights; lack of commitment and responsibilities of boards of directors; regulatory framework, enforcement and monitoring; ownership concentration; and transparency and disclosure.

With regard to shareholders rights, the majority of the respondents indicated that the basic rights of shareholders are protected. This is consistent with previous studies (Oyejide and Soyibo, 2001; Nganga et al., 2003). Although rules exist in many jurisdictions to protect minority shareholders or for shareholder derivative suits, these are rarely used. Listed companies in Nigeria must comply with Company and Allied Matters Decree (2009). The majority of those we surveyed for this study indicated that minority shareholders are often not protected. For instance, minority shareholders are often not allowed to express their views or are ignored by the chairperson at general meetings. Special treatment is often accorded to large shareholders, aggrieved shareholders seldom have recourse, and shareholders who wish to speak at company general meetings are only allowed to speak if they are known to side with the board of directors. Based on these ndings, one may surmise that while there are laws that protect shareholders rights, minority shareholders rights tend to be frequently violated and not respected. Of the respondents, 90 percent reported that board members are not fullling their responsibilities to the companies and shareholders. This is consistent with the ndings of Oyejide and Soyibo (2001), who learned that most respondents in Nigeria believe that the idea of an independent board is gaining acceptance, but there is little evidence of this in practice, meaning that there is little evidence that these independent boards are discharging their function adequately. The reason for this could be that most board members do not have the necessary qualications to be on the board. Lack of commitment on the part of board members was also reported as a key challenge for corporate governance development. The reason for this may be that they do not want to be involved in

VOL. 11 NO. 2 2011 CORPORATE GOVERNANCE PAGE 195

the day-to-day management of the company. They want to entrust the day-to-day running of the company to professional managers. In terms of regulatory framework, our respondents stated that there are laws and regulations for corporate governance. They also indicated that the regulatory framework is ineffective because of weak monitoring and enforcement. As a result, laws designed to protect shareholders rights are often violated. These results are also consistent with Oyejide and Soyibos (2001) ndings which indicated that there seems to be evidence of abuse of laws, rules, and regulations by a number of corporations. One may speculate that the reason some boards of directors can get away with not being as independent as the law mandates is that they have political connections. Effective enforcement of existing laws and regulations constitutes a major challenge for the development and implementation of corporate governance. Meeting this challenge requires recognition that the structure and capacity of regulatory and judicial frameworks are integral parts of the corporate governance environment. As indicated by the respondents, Nigeria has adequate laws that are designed to ensure good corporate governance. However, these laws are frequently disobeyed with impunity, such as one example where the 21-day notice rule is disregarded in the instances where a number of companies do not give annual general meeting notices on time. More than 88 percent indicated that lack of disclosure and enforcement are impediments to the development and effective implementation of corporate governance. Respondents indicated that there is a lack of investigations or actions taken on non-compliance with statutory requirements, complaints by shareholders about mismanagement, oppression of minority shareholders, and auditors failure to report improper accounting and nancial records. It appears that the regulatory agencies are ineffective. Reasons for this may include a shortage of qualied personnel or corruption. In terms of ownership concentration, we nd a high level of ownership concentration in most corporations. This presents a problem as these large stockholders are reported to have special privileges compared to minority shareholders.

Conclusions, recommendations, and limitations

Constraints identied in this study that hinder the implementation and promotion of corporate governance in Nigeria include weak or non-existent law enforcement mechanisms, abuse of shareholders rights, lack of commitment on the part of boards of directors to their responsibilities, lack of adherence to the regulatory framework, weak enforcement and monitoring systems, and lack of transparency and disclosure. Nigeria has ample laws that are designed to protect shareholders rights and ensure good corporate governance, but effective enforcement of existing laws and regulations constitutes a major challenge for the development and implementation of corporate governance. In sum, the strict rights and entitlements that come with the ownership of shares in listed companies are not fully exploited by shareholders and abused by top management and boards of directors. This is largely because shareholders especially minority shareholders are generally unaware of the rights that they have as a shareholder. The ndings reveal that there are a number of barriers facing the development and of effective corporate governance in Nigeria. Based on these, we recommend an overhaul of both the enforcement machinery and the composition of audit committees, whose members should be more observant of their responsibilities. Auditors must:
B B B B

ensure strict compliance with codes of conduct; ensure the commitment and vigilance of directors; see to the need for a high level of disclosure and transparence; improve the regulatory framework by making the laws available to all shareholders and to the public; devise active mechanisms for law enforcement; strengthen enforcement mechanisms (by providing logistics, training, and equipment); adopt alternative dispute resolution mechanisms;

B B B

PAGE 196 CORPORATE GOVERNANCE VOL. 11 NO. 2 2011

B B

create an enabling environment by maintaining the political will to implement policies; and create an independent and courageous judiciary.

This is a study to determine corporate governance constraints in Nigeria, so the ndings do not apply to other African countries. In addition, the sample does not represent all the corporations in Nigeria, so the results cannot be generalized to corporations that were not part of this study. Future research may be strengthened by using a sample comprising a more diverse set of businesses (small and large). Future research should collect data on a longitudinal basis to help draw causal inferences and to validate the ndings of this research.

References
Aguilera, R.V. (2005), Corporate governance and director accountability: an institutional comparative perspective, British Journal of Management, Vol. 16, pp. S39-S53. Botha, J.H. (2001), Corporate governance in state-owned enterprises: a developmental perspective, paper presented at the Pan African Consultative Forum on Corporate Governance, Johannesburg, July 16-18, available at: https://dbs.uni- leipzig.de/le/aumueller05wiksar.pdf (accessed January 10, 2009). BrabnersChaffeStreet (2003), Shareholder rights, available at: www.shareholderrights.co.uk/rights_ nf.htm (accessed January 10, 2009). Cadbury Report (1992), Report of the Committee on the Financial Aspects of Corporate Governance, Gee and Co., London. Central Bank of Nigeria (2006), Code of Corporate Governance for Banks in Nigeria Post Consolidation, available at: www.cenbank.org/out/publications/bsd2006/corpgovpostconso.PDF (accessed March 12, 2009). CIPE/IEA (2001), West Africa Conference on Corporate Governance: Corporate Governance for Sustainable Growth, Accra, January 29-30, available at: www.cipe.org/about/news/conferences/africa/ ghana/pdf/ghana.pdf (accessed January 6, 2009). Company and Allied Matters Decree (2009), Company and Allied Matters Decree 1990, available at: www.babalakinandco.com/resources/lawsnigeria/LAWS/cama255-268.htm (accessed January 12, 2009). Crabtree, B.F. and Miller, W.L. (1992), A template approach to textual analysis: developing and using codebooks, in Crabtree, B.F. and Miller, W.L. (Eds), Doing Qualitative Research, Sage Publications, Newbury Park, CA. Healy, P. and Papelu, K.G. (2000), A review of the empirical disclosure literature, JAE Rochester Conference, available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id 258513 Hopt, K. (2002), Modern company and capital market problems improving European corporate governance after Enron, ECGI Law Working Paper No. 5, European Corporate Governance Institute, Brussels. Hopt, K. and Leyens, P.C. (2004), Board models in Europe. Recent developments of internal corporate governance structures in Germany, the United Kingdom, France and Italy, ECGI Law Working Paper No. 18, European Corporate Governance Institute, Brussels. Hussey, R. (1999), The familiarity threat and auditor independence, Corporate Governance: An International Review, Vol. 7 No. 2, pp. 190-7. Ibeh, K. and Young, S. (2001), Exporting as an entrepreneurial act: an empirical study of Nigerian rms, European Journal of Marketing, Vol. 35 Nos 5/6, pp. 566-86. ICC (2009), Corporate governance: a basic guide for business practitioners everywhere, available at: www.iccwbo.org/corporate-governance/id3075/index.html (accessed August 3, 2009). Jiraporn, P. and Davidson, W. (2009), Regulation, shareholder rights and corporate governance: an empirical note, Applied Economics Letters, London, Vol. 16 No. 10, pp. 977-88. Johnson, S., La Porta, R., Lopez-de-Silanes, F. and Shleifer, A. (2000), Tunneling, American Economic Review, Vol. 90, pp. 22-7.

VOL. 11 NO. 2 2011 CORPORATE GOVERNANCE PAGE 197

Keenan, J. (2004), Corporate governance in the UK/USA boardrooms, Corporate Governance, Vol. 12 No. 2, pp. 172-6. Khemani, R.S. and Leechor, C. (1999), Competition boosts corporate governance, The World Bank, available at: https://planningcommission.gov.in/aboutus/committee/wrkgrp11/wg11_cpolicy.pdf Khurana, R. (2002), Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs, Princeton University Press, Princeton, NJ. Kirkbride, J., Letza, S. and Smallman, C. (2009), Minority shareholders and corporate governance; reections on the derivative action in the UK, the USA and in China, International Journal of Law and Management, Vol. 51 No. 4, pp. 206-14. La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R. (1999), Corporate ownership around the world, Journal of Finance, Vol. 54, pp. 471-517. La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R. (2000), Investor protection and corporate governance, Journal of Financial Economics, Vol. 58, pp. 141-86. Lorsch, J.W. and MacIver, E. (1989), Pawns or Potentates: The Reality of Americas Corporate Boards, Harvard Business School Press, Boston, MA. Lundholm, R. and van Winkle, M. (2006), Motives for disclosure and non-disclosure: a framework and review of the evidence, Accounting and Business Research, International Accounting Policy Forum, pp. 43-8. Mace, M.L. (1971), Directors, Myth and Reality, Harvard Business School Press, Boston, MA. Morck, R., Yueng, B. and Yu, W. (2000), The information content of stock market: why do emerging markets have synchronous stock price movement?, Journal of Financial Economics, Vol. 58, pp. 215-20. Nganga, S., Jain, V. and Artivor, M. (2003), Corporate governance in Africa: a survey of publicly listed companies, London Business School, London, available at: www.africaplc.com/typetool/uploads/ main_news/docs/CGiA%20Final%20Report.pdf (accessed June 10, 2008). Okeahalam, C.C., Oludele, A. and Akinboade, O.A. (2003), A review of corporate governance in Africa: literature, issues and challenges, paper presented at The Global Corporate Governance Forum, June 15, available at: www.ifc.org/ifcext/cgf.nsf/AttachmentsByTitle/Pan_Africa_2003_Review_of_ CGOkeahalam/$FILE/Charles Okehalam - Corporate-Governance ver 4 Jul 2003.pdf (accessed May 12, 2008). Okpara, J.O. and Wynn, P. (2008), Human resource management practices in a transition economy: challenges and prospects, Management Research News, Vol. 31 No. 1, pp. 57-76. Organisation for Economic Co-operation and Development (2004), OECD Principles of Corporate Governance, available at: www.oecd.org/dataoecd/32/18/31557724.pdf (accessed August 5, 2009). Otobo, E.E. (1997), Regulatory reform in support of privatization: patterns and progress in Africa, African Journal of Public Administration and Management, Vol. 8/9 No. 2, pp. 25-50. Oyejide, T.A. and Soyibo, A. (2001), Corporate governance in Nigeria, paper presented at the Conference on Corporate Governance, Accra, available at: www.cipe.org/about/news/conferences/ africa/ghana/pdf/ghana.pdf (accessed April 8, 2008). Riana, R.S. (2008), Role of board of directors in strategy, Management & Change, Vol. 12 No. 1, pp. 12-22. Shleifer, A. and Vishny, R. (1997), A survey of corporate governance, Journal of Finance, Vol. 52, pp. 737-77. Stiles, P. and Taylor, B. (2001), Boards at Work. How Directors View their Roles and Responsibilities, Oxford University Press, Oxford. Vance, S. (1983), Corporate Leadership: Boards, Directors, and Strategy, McGraw-Hill, New York, NY. World Bank (2003), Minority shareholders: what works to protect shareholder rights?, available at: https://rru.worldbank.org/documents/publicpolicyjournal/265Capau-082003.pdf (accessed August 13, 2009).

PAGE 198 CORPORATE GOVERNANCE VOL. 11 NO. 2 2011

Zahra, S.A. and Pearce, J.A. (1989), Boards of directors and corporate nancial performance: a review and integrative model, Journal of Management, Vol. 15, pp. 291-334. Zingales, L. (1998), Corporate governance, in Newman, P. (Ed.), The New Palgrave Dictionary of Economics and the Law, Macmillan, London, pp. 497-502.

Further reading
Cadbury, A. (2000), The corporate governance agenda, Corporate Governance, Vol. 8 No. 1, pp. 7-15. Estrin, S. (2002), Corporate governance and privatization: lessons from transition economies, Journal of African Economies, Vol. 11 No. 1, pp. 68-104. Mwapachu, J. (2001), Corporate governance: Tanzanias experiences and challenges, paper presented at the Pan African Consultative Forum on Corporate Governance, Johannesburg, July 16-18. Okeahalam, C.C. (2004), Corporate governance and disclosure in Africa: issues and challenges, Journal of Financial Regulation and Compliance, Vol. 12 No. 4, pp. 59-72. Shleifer, A. and Vishny, R.W. (1986), Large shareholders and corporate control, Journal of Political Economy, Vol. 94 No. 3, pp. 461-88.

Corresponding author
John O. Okpara can be contacted at: [email protected]

To purchase reprints of this article please e-mail: [email protected] Or visit our web site for further details: www.emeraldinsight.com/reprints

VOL. 11 NO. 2 2011 CORPORATE GOVERNANCE PAGE 199