Shareholders’roles in embedding corporate governance

The hypothesis as to the subsistence of an inexorable tension as between the board and shareholders of listed private limited companies, is largely inescapable notwithstanding their generic focus on return on investm- ents. That is because they tend to hold conflicting objectives on a variety of issues concerning the firm’s strategic goals and operational management. 

Boards typically set the strategic agenda, and vicariously run the companies, through its management, typically, with a CEO/Managing Director atop, whilst the shareholders own companies, by virtue of their majority or minority stakes and proprietary rights over the equities therein.

Unhealthy tension between boards and shareholders can lead to suboptimal board effectiveness; muddled strategic goals; ineffective financial stewardship; defeasible statutory compliance; belligerent organisational culture; low morale; fundamental misunderstandings as to the proper functions of the board, management, institutional and retail shareholders of the company. Unified, those issues are emblematic of weak corporate governance.

On the flip side, healthy tensions, manifesting in robust debates, between the board and shareholders, could, ultimately, stimulate innovation as it appertains to research and development, technology, market segmentation, targeting and positioning strategies, entering emerging markets and other pivotal sources of competitive advantage.

The distilled synthesis from both propositions is that the tension between boards and shareholders, is not inherently defective if the corollary is sharper board effectiveness, market leading services and product offerings, enhanced corporate governance and regulatory compliance, ditto consistently positive return on investments.

Essentially, shareholders are natural or unnatural persons like companies, institutions, that own at least one share of a company’s stock or within mutual funds. These are special purpose vehicles of pooled assets including bonds, gilts, equities, money market instruments, commercial papers etc. Section 105 (3) of the Companies and Allied Matters Act (CAMA) 2020, Nigeria, establishes that “in the case of a company having a share capital, each member is a shareholder of the company and shall hold at least one share, except in relation to a company that has only one shareholder.”

There is privity of contract between shareholders and boards not least because it is the shareholders who typically appoint directors, set their remunerations and can remove them at Annual General Meetings or, as the occasion justifies, Extra -Ordinary General meetings.

The privity of contract as between boards and shareholders is anchored upon the articles of association or other agreed resolutions, which define the minutiae of that dynamic relationship and, the inherently necessary corporate governance which is the effective, efficient and qualitative manner that company is run; the mechanism by which reassurance is demonstrated; and accountability given; to deliver value for shareholders; and optimally meet desirable and or regulatory environmental, social and governance (ESG) obligations to stakeholders and society.

Stakeholders, in this context, are simply those with a legitimate interest in the company’s affairs; and it includes those directly or indirectly impacted by a corporate institution’s activities. For example, credit reference agencies, ethical investors, law enforcement organisations, lenders, prospective investors, regulators, tax authorities etc. To that extent, there is a nexus intersecting the shareholders, stakeholders and corporate governance.  

For shareholders, because they own the business, they have an enduring interest in corporate governance from the perspectives of return on investments, profit optimisation and due diligence. Shareholders’ rationale for effective corporate governance invokes reassurance for safeguarding equity holders’ funds; enhancing corporate reputation and market confidence; tackling recumbent board effectiveness and dereliction in developing and executing corporate strategy.

The rationale extends to corporate resilience in adapting to the dynamic vicissitudes of the political, economic, social, technological, legal and environmental terrain; ditto, market volatilities, uncertainties, complexities and ambiguities.

Deeper insights are distilled from extant Nigerian statutory and regulatory frameworks. For instance, section 47 (1), (e), (i); of the Investment and Securities Act (ISA) 2007, empowers shareholders to request a special investigation by the Securities and Exchange Commission into the books of capital market operators. 

The combined effects of sections 94, 129 (1), 129 (2), 130 (i), (ii), (iii), (iv) afford, inter alia, shareholders huge powers to challenge fraudulent allotments and misstatements of shares in prospectuses; acquire shares of target firms; protection in the reasonably resisting “hostile” acquisitions; and to be given notice and particulars of takeover bids and related amendments by offeror companies.  

Similarly, the Nigerian Code of Corporate Governance (NCCG) 2018 establishes inter alia that the board must act in the best interest of shareholders. Section 16 thereof empowers, shareholders to approve the remuneration of Non-Executive Directors. Section 21, Principle 21, reinforces the criticality of General Meetings for board engagement with shareholders to sharpen corporate governance and performance.

Section 22, Principle 21, entitles shareholders to regular dialogue with the company. Section 23 Principle 23 and Principle 23 (1.4) protects majority and minority shareholders’ statutory and general rights in promoting corporate governance; as well as affording shareholders access to documentary evidence concerning company structures and ownership.

Importantly, section 107 of CAMA, entitles fully paid-up shareholders to attend and vote at any general meeting of the company and to speak and vote on any resolution before the meeting, whilst section 139 empowers shareholders to freely transfer their equities. Additional protection is granted to shareholders via the right of first refusal enunciated in section142 (1) therein viz: a private company shall not in any event allot newly issued shares unless they are first offered to all existing shareholders of the class being issued proportionately to their existing holdings.

Section 168 (1) entitles preference shareholders to more than one vote per share in limited circumstances during periods when: preferential dividends are outstanding; of variation to the rights attached to preference shares; it concerns the removal and appointment of auditors; and for the extant or prospective winding up of the company.

Plus, section 248 (1) CAMA, as amended by the provisions of the Business Facilitation (Miscellaneous Provisions) Act 2023, empowers shareholders (members) to vote by a show of hands or electronic voting at Annual General Meetings including the power to appoint and remove directors of companies in Nigeria. 

Section 288 (1) CAMA entitles shareholders to remove a director before the expiration of his term, by a vote on an ordinary resolution. Furthermore, in section 712 (1) therein is a subsisting right to notice from a transferee company of its intention to acquire the shares of a dissenting shareholder of the transferor company.

Pivotal guidance is equally distilled from the Rulebook of the Nigerian Stock Exchange Rules for de-listing of Equity Securities from the Daily Official List of the Exchange. Section 1.11 thereof provides that “the share price at which the dissenting shareholders’ interests shall be bought, shall not be less than the highest price at which the Issuer traded over the six (6) months immediately preceding the date on which the notice of the AGM/ EGM at which the resolution to de-list the Issuer was issued.”

But why do these frameworks exist in the first place? The simple answer is to mitigate systemic risks to the financial order; protect investors’ funds ensure legal and regulatory compliance; enhance investor and public confidence; and ensure economic stability. Again, that has a striking context given significant examples of supine corporate governance and malfeasance in companies around world from 2000 to date.

These include, but are by no means limited to, Volkswagen’s “diesel gate” scandal which erupted in 2015 costing the organisation approximately £193 million in compensation; the Enron scandal 2001, where financial improprieties resulted in shareholders losing $74 billion with the inescapably corollary of bankruptcy; Silicon Valley Bank, which was shut down in March 2023 by the California Department of Financial Protection and Innovation, upon significant share value depreciation and investors withdrawing vast investments et al.

The foregoing demonstrably illustrates shareholders’ enormous rights and protections in regulatory and statutory guidance. And with rights, come enormous responsibilities! Therefore, shareholders, as it relates to effective corporate governance, have a pertinent responsibility to be proactive, to act with integrity, to put their own house in order, to engage the Board as and when due, to read, interrogate and critically digest annual reports and related documentation from the companies in which they own equities.

However, this does not mean that shareholders can veto the effective running of companies. They are empowered to act within legal and regulatory limits but no more! 

Nevertheless, it may be prudent for shareholders to establish, if none exists, or there is massive fragmentation, a critical mass and seek to pool resources in order to methodically engage boards; and to access professional services, where required.

The latter is important to analyse complex company reports because they provide vital information which may constitute the basis for the firm’s competitive advantage, or conversely, if they take their eyes off the ball, it may contain materially significant information with the potential to cripple the organisation.

Afterall, even with the best will in the world, practical resource constraints imperil regulators from being all things, to all people, all the time!

Ojumu is the Principal Partner at Balliol Myers LP, a firm of Lagos-based legal practitioners and author of The Dynamic Intersections of Economics, Foreign Relations, Jurisprudence and National Development.