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CORPORATE GOVERNANCE FOR SMALL BUSINESSES IN NIGERIA

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In today's rapidly evolving business landscape, corporate governance has become a critical factor in the success of any organization. At its core, corporate governance refers to the systems, rules, and processes by which companies are directed and controlled. It encompasses both internal and external factors that influence the interests of a company's stakeholders, such as shareholders, management, customers, suppliers, and regulators. Although corporate governance is often associated with large corporations, its principles are equally important for smaller enterprises. This is especially true in Nigeria, where Small and Medium-sized Enterprises (SMEs) play a pivotal role in the economy. SMEs account for approximately 96% of businesses and provide about 84% of employment in the private sector. As Nigeria strives to diversify and expand its economy, small businesses are recognized as the engine for future economic growth. Therefore, adopting good corporate governance practices could be crucial to enhancing the resilience, growth, and sustainability of these small businesses.

DEFINITION OF SMALL BUSINESSES IN NIGERIA

The Companies and Allied Matters Act (CAMA) 2020 provides specific criteria for classifying a company as a small business. According to Section 394(3) of CAMA 2020, a company qualifies as a small company if it meets the following requirements:

  1. Its annual turnover is not more than N120 million.

  2. Its net assets are valued at no more than N60 million.

  3. It employs no more than 50 people.

  4. It has no foreign or government participation in its ownership.

  5. In the case of a company with share capital, the directors collectively hold at least 51% of its equity share capital.

These definitions emphasize that small businesses are distinguished not only by the number of employees but also by financial strength and asset value. Given their unique challenges, including limited access to capital and resources, small businesses in Nigeria require robust corporate governance frameworks to thrive.

CORPORATE GOVERNANCE FRAMEWORKS IN NIGERIA

Over the years, Nigeria's corporate governance landscape has seen significant development, with several frameworks guiding corporate governance practices. While some frameworks target large corporations, their principles can be adapted by small businesses to improve governance. Below are the key frameworks relevant to corporate governance in Nigeria:

  1. Nigerian Code of Corporate Governance (NCCG) 2018:

  2. Companies and Allied Matters Act (CAMA) 2020:

  3. SME Corporate Governance Guidelines 2024:

  4. Securities and Exchange Commission (SEC) Guidelines:

  5. International Best Practices such as the OECD Principles of Corporate Governance and guidelines from the International Finance Corporation (IFC).

    For the purpose of this article, our focus is primarily on the Companies and Allied Matters Act (CAMA) 2020, The Financial Reporting Council of Nigeria– Nigerian Code of Corporate Governance (NCCG)2018 and the more recent SME Corporate Governance Guidelines 2024.

THE IMPORTANCE OF CORPORATE GOVERNANCE FOR SMALL BUSINESSES

There is a common misconception that small businesses do not need formal corporate governance structures due to their size and informal management systems. Some business owners believe that corporate governance is too complex or costly for their operations, or that the close-knit nature of their teams renders formal governance unnecessary. Additionally, entrepreneurs often prioritize day-to-day operations over long-term strategic planning, assuming that governance is a concern only for larger corporations. However, the importance of corporate governance for businesses of all sizes is underscored by judicial decisions that illustrate the consequences of inadequate governance practices.

A pertinent example is the landmark case of Bernard Longe v. First Bank of Nigeria PLC (2010). This case, decided by the Supreme Court of Nigeria, revolved around the removal of a director under the Companies and Allied Matters Act (CAMA). Bernard Longe, the appellant, was appointed Managing Director/Chief Executive of the respondent bank in 2000 for a tenure of six years, subject to an annual performance assessment by the bank's board. However, in 2002, the appellant was accused of negligently authorizing an unauthorized facility for a London company to purchase NITEL, which resulted in significant losses for the bank. Consequently, the Board of Directors suspended him on April 22, 2002. While the suspension was in place, the Board convened a meeting on June 13, 2002, during which it resolved to revoke Longe's appointment. Notably, Longe was not present at this meeting, nor was he notified of it, in violation of Section 288 of CAMA, which mandates proper notification for board meetings where such significant decisions are made.

The appellant subsequently filed an action at the Federal High Court in Lagos, challenging the legitimacy of the board's actions and asserting that the failure to notify him rendered the revocation of his appointment null and void. The Supreme Court ultimately ruled in favor of Bernard Longe, emphasizing that adherence to statutory provisions is essential for upholding natural justice in corporate governance practices. This ruling serves as a strong reminder that governance principles are not just theoretical constructs but legal imperatives that protect the rights of individuals and the integrity of business operations. The court's decision highlighted the necessity for even established businesses to follow statutory procedures meticulously, ensuring that natural justice is upheld. For small businesses, this case is particularly instructive: it demonstrates that robust governance structures can prevent conflicts, safeguard against litigation, and support the transparent and fair management of the company. Adopting governance best practices ensures that, even in critical situations like the removal of a director, the business adheres to established procedures, aligning operations with statutory mandates and promoting justice.

Some of the benefits of good corporate governance practices for small businesses include:

  1. Fostering Accountability: Implementing corporate governance establishes clear roles and responsibilities, ensuring that everyone within the business understands their duties. This reduces the risk of mismanagement or unethical practices. Studies have shown that organizations with strong governance practices experience fewer instances of internal corruption and financial mismanagement.

  2. Enhancing Access to Capital: Good corporate governance improves a company's credibility with investors and financial institutions. Businesses that demonstrate transparency and ethical behavior are more likely to attract investment. Research indicates that organizations with solid governance frameworks can access capital more easily, a vital factor for growth and sustainability.

  3. Improved Decision-Making: A structured governance framework provides clear processes for evaluating business options and assessing risks, leading to better strategic planning and operational efficiency. This ultimately improves business performance.

  4. Employee Satisfaction: Good governance creates a work environment that values transparency and accountability. This fosters a positive workplace culture, leading to higher employee morale and retention rates.

 In Nigeria, CAMA 2020 introduces flexibility that benefits small businesses, such as the option to register companies with a sole shareholder and appoint a minimum of one director. This flexibility, while advantageous, could pose challenges to effective governance in small companies, making it essential to adopt practical governance solutions.

 KEY PROVISIONS FOR SMALL COMPANIES UNDER CAMA 2020

CAMA 2020 provides several exemptions that simplify governance requirements for small businesses. These include:

  1. Annual General Meetings (AGM): Small companies are not required to hold AGMs under Section 237(1).

  2. Audit Requirements: Under Section 402(1), small companies are exempt from mandatory financial audits and the appointment of auditors.

  3. Filing of Annual Returns: Small companies can file abridged annual returns containing less detailed information (Section 419).

  4. Company Secretary: Small companies are not required to appoint a qualified company secretary (Section 330(1)),

.In recognition of the challenges small businesses could face in implementing corporate governance, the SME Corporate Governance Guidelines 2024, introduced by the Financial Reporting Council, provides a simplified yet robust framework tailored specifically for small businesses, making it easier for them to adopt good governance practices. These guidelines outline 11 principles across six key areas, including Corporate Governance Policies and Procedures, Board of Directors, Control Environment, Stakeholder Relations, Family Governance, and Environmental, Social, and Governance (ESG) Considerations. By drawing from the Nigerian Code of Corporate Governance (NCCG) 2018 and international best practices, the guidelines are designed to meet the unique needs of small and medium-sized enterprises (SMEs) in Nigeria. This ensures that even businesses with limited resources can establish systems promoting accountability, transparency, and long-term sustainability. By adhering to these regulations, small companies can strengthen their operations, enhance their credibility with stakeholders, and improve their prospects for growth.

The SME Corporate Governance Guidelines 2024, introduced by the Financial Reporting Council, outline 11 principles across six key areas: The SME-CGG enjoins MSMEs to put in place the following:

  1.  Governance Framework: MSMEs are encouraged to prepare and adopt a formal corporate governance framework outlining the roles of key governance stakeholders such as partners, shareholders, board of directors and management. The governance framework should be closely related to the MSMEs’ mission, vision and values and the expectations of its owners and key stakeholders. The framework is expected to outline the roles and responsibilities of shareholders, directors and managers. The framework should also contain plans for orderly succession and appointments to the board and to senior management as a way to maintain an appropriate balance of skills and experience within the entity.

  2. Board of Directors: MSMEs should establish a formal Board of Directors with a clear mandate. Smaller businesses can opt for an advisory board offering guidance without decision-making power; two to three members are sufficient. Medium-sized entities are encouraged to have a board of five to ten directors for full governance, not just advisory roles. Boards should include a mix of independent non-executive, non-executive, and executive directors. Medium-sized entities should separate the roles of Chairman and CEO, though this may not be feasible for smaller businesses.

  3. Control Environment: MSMEs should maintain accurate financial records per FRC guidelines, with medium-sized entities undergoing independent audits. An IT Governance framework is essential for managing technology risks. MSMEs should have an Internal Control Framework and review risks regularly with mitigation plans. Establishing an internal audit function and a risk management committee is recommended for effective oversight.

  4. Effective Stakeholder Engagement Plan: MSMEs should recognize that various stakeholders, including customers, regulators, employees, and the community, are invested in their operations. Policies should be formulated to manage these relationships, with key performance indicators set and monitored. Effective communication with investors and stakeholders is essential. Annual reports should provide clear information on governance, policies, practices, environmental/social risks and opportunities, related party transactions, and conflicts of interest.

  5. Constitution for Family Participation: The SME-CGG acknowledges the unique challenges of family-owned MSMEs, including succession planning, managing diverging family interests, conflicts with non-family executives, narrow perspectives in competitive markets, and financing difficulties. As the family and business grow more complex, establishing a “family council” is recommended to foster cooperation and act as a bridge between the family and the business. MSMEs should adopt a Constitution or Charter outlining the family's relationship with the business, procedures for communication, coordination, and defining the council’s role. This document should detail the vision, values, and policies governing the family-business dynamic.

  6. ESG Considerations: MSMEs are encouraged to be sensitive to the effect of their business on the environment that they operate in as well as how they engage and influence a wide range of stakeholders from diverse backgrounds within their communities. SMEs should align their activities to be environmentally friendly by reducing, reusing, and recycling to promote efficiency and reduce waste. They are required to ensure compliance with applicable laws or regulations and align their strategies and activities to be socially conscious and responsible; for example, showing appreciation towards the community and stakeholders to cultivate good relationships. They should also commit to the best practices in the use of natural and human resources.

TIPS FOR FOR ESTABLISHING AND MAINTAINING CORPORATE GOVERNANCE FOR SMALL COMPANIES

Now that we have examined the SME Corporate Governance Guidelines, it is important to explore some practical tips that can help small companies establish and maintain effective corporate governance structures;

  1. Role of the Sole Director: In companies where the sole owner is the only director, understanding the role's responsibilities is crucial. The director should commit to continuous learning through business courses, training, and networking for informed leadership and decision-making.

  2. Corporate Governance Policies: Even small companies should have clear policies, such as a Code of Conduct, Risk Management Policy, and Compliance Policy, to guide operations, ensure legal compliance, and foster integrity.

  3. Structured Organization: Establish clear roles and reporting lines to promote accountability and efficiency, supported by performance management systems to track employee progress.

  4. Regular Meetings and Documentation: Hold regular meetings with key personnel to discuss strategy and operations. Document decisions to maintain transparency, ensure legal compliance, and provide a record of the decision-making process.

  5. Engaging Competent Personnel: Hire skilled individuals to support informed decision-making and effective business management.

  6. External Support: Seek expert advice in key areas such as legal compliance and financial auditing to manage risks effectively and maintain compliance without overburdening internal resources.

  7. Technology and Templates: Use affordable tools and templates for record-keeping and compliance tracking to maintain governance standards efficiently with limited resources.

In conclusion, effective corporate governance is not exclusive to large corporations; it is a cornerstone for sustainable growth and operational efficiency in small companies as well. By implementing sound governance principles, such as clearly defined roles, structured decision-making processes, regular meetings, and thorough record-keeping, small businesses can set a strong foundation for long-term success. Leveraging technology and, where necessary, engaging external expertise for critical areas can help fill knowledge gaps while maintaining efficiency and cost-effectiveness. Ultimately, adhering to these governance practices empowers small companies to remain adaptable, resilient, and well-prepared to navigate both opportunities and challenges, instilling confidence in stakeholders and positioning the business for continued growth.

 REFERENCES

  1. Companies and Allied Matters Act 2020, Federal Republic of Nigeria.

  2. FRCN SME Code of Corporate Governance 2024, Federal Republic of Nigeria.

  3. Financial Reporting Council of Nigeria, Nigerian Code of Corporate Governance 2018, Federal Republic of Nigeria.

  4. Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), Federal Republic of Nigeria National Policy on Micro, Small and Medium Enterprises, p. 12.

  5. United Nations Department of Economic and Social Affairs (UNDESA), Micro, Small and Medium-Sized Enterprises (MSMEs) and Their Role in Achieving the Sustainable Development Goals, pp. 1–42.

  6. Eugster, N., Kowalewski, O., & Śpiewanowski, P. (2024). Internal Governance Mechanisms and Corporate Misconduct. International Review of Financial Analysis, 92, 103109.

  7. Adejugbe, B. T. (2024). Corporate Governance Framework for Micro, Small, and Medium Scale Enterprises in Nigeria: A Necessity? University of Ibadan Law Journal, Vol. 12.

  8. Pepple, G. (2024, August 26). Practical Corporate Governance for Small Companies. LinkedIn Post.