Founder and Managing Partner of Imperial Law Office Afolake Lawal is one of Nigeria’s leading corporate governance experts. She sits on the board of many companies, including Eterna Plc, Champion Breweries Plc and Morison Industries Plc. With nearly three decades advising and growing companies with significant scale and complexity, Lawal, an alumnus of Harvard Business School, comes with a fine blend of vast legal knowledge, practical capital market know-how and cross-discipline knowledge. In this interview with Capital Market Editor, Taofik Salako, she speaks on Nigerian economic environment, corporate governance, legal imperative of economic development and capital market development, among others.
WHAT is your assessment of the corporate governance environment in Nigeria, especially in the capital market?
Our corporate governance environment can be described as one of steady implementation. You know that elements of corporate governance have always been a part of our corporate culture, and for as long as we have had companies. However, its recognition as a distinct and core element of institution building only became mainstream with the enactment of the Companies and Allied Matters Act 1990 (“Act”). Provisions like how and when you conduct meetings, quorum for meetings, the appointment of auditors, filing of corporate actions, powers of the board and appointment of independent directors, amongst others, are all features of any mature corporate governance system, and when you study the Act, you find that the drafters intended companies to have in place minimum governance framework and processes.
So while a number of companies have a semblance of the basic structure required by the Act, far more are attempting to attain greater maturity levels. In the case of companies which tapped the public markets to raise capital, they have mainly adopted the corporate governance requirements essential to foster trust between companies and the investing public. To a very large extent, the activities of the Securities and Exchange Commission (SEC) have been instrumental to this trust, such that the level of trust in our public companies is simply a reflection of their compliance with the various governance obligations. So, we are seeing transparency, accountability, risk management, internal controls, disclosures and reporting across board, notwithstanding varying levels of execution. And that’s a good thing for us.
The Financial Reporting Council (FRC) recently issued a new Code of Corporate Governance. Do you think this will sufficiently address the challenges of corporate governance?
It is often assumed that more laws or regulations necessarily translate to compliance and achievement of a mature corporate governance environment. However, if the incentives are not uniquely aligned, then the discussion of whether challenges have been sufficiently addressed becomes moot. Put it this way, what the FRC Code is trying to accomplish can be achieved within existing governance regulations, so it is more of a harmonisation attempt, rather than a substantive improvement on existing regulations.
The main challenges remain those of implementation, enforceability, uniformity of application and key-man risk. Since the FRC Code is a principles-based instrument, with the expectation that companies will simply comply before complaining or explaining their concerns, it provides guidance in dealing with these challenges. But in reality, its true test is yet to come. For example, how do you enforce or mitigate the effect of key-man risk when it comes to board decision-making? If in a board of five members, three are consistently voting in the same pattern, is that a violation of Rule 2.6 of the FRC Code? So, this and a few other areas simply indicate that the FRC Code may not have harmonised the incentives for all stakeholders, even if it has harmonised the various existing governance codes.
The Companies and Allied Matters Act has been undergoing review, in the light of current operating realities and economic needs. What are those major elements you think need to be reviewed to facilitate corporate development and ease of doing business?
I think any review of the Act must take into consideration the need for technology and digital transformation of existing processes and functions – be it those that are performed by the Corporate Affairs Commission (CAC) or those that will be performed by companies regulated by the Act. The time expended on operations like business registration, filings, document and information retrieval can be considerably lowered. At the moment, the CAC has deployed an online service platform, which should hopefully achieve the objectives of reducing bureaucracy, optimising time management, and the fast retrieval or access to information.
An important aspect of our law involves the distinction between a private and public company, and that distinction centres on the constitution of both types of companies. My view is that one reason why smaller businesses don’t take off stems from the limitation imposed on membership of a private company. The maximum number of shareholders a private company can have is 50 persons. What that does is inhibit how much equity capital company promoters can raise, especially if they intend to go into capital-intensive businesses. Removing that limit would facilitate the ease of doing business for companies since they are then likely to have greater runway by raising capital from a broader shareholder base. When you think about it, the average number of subscribers to initial public offers is in thousands. These two areas would readily bring about improvement in the ease of doing business.
As a capital market and corporate governance expert, will you say the legal and enforcement framework is sufficient for investors’ protection?
Yes, I believe the existing legal and enforcement framework has enough provisions to ensure investors’ protection. Let’s start with some of the provisions of the Act. The Act establishes that every company must hold an Annual General Meeting (AGM) once a year, except for the year of incorporation and at least not more than 16 months from the date of the last AGM. The AGM affords investors an opportunity to review the operations and financial performance of the company. The law also guarantees and protects the right of every shareholder to vote at general meetings, and shareholders typically do exercise those rights. In the event of an unlawful and oppressive conduct perpetuated by the directors of a company, the Act allows shareholders to bring an action against the company or its directors, and even minority shareholders enjoy similar rights of action.
In protecting investors, the SEC is empowered to investigate any complaint filed by an aggrieved investor either against a capital market operator (CMO) or a company. On various occasions, the courts and SEC have revoked licenses of CMOs, recommended and taken over control of others, sacked directors of companies, and have imposed other punitive sanctions to discourage unethical practices. Don’t forget that the Investment and Securities Tribunal (IST) also plays a role in checkmating transgressions relating to securities, such as insider trading. There are also various rules in place that are actively enforced by SEC to protect investors, such as the requirement to file quarterly returns. Also, the Investors Protection Fund (IPF) exists to compensate aggrieved investors for certain pecuniary losses.
There is this perception in some quarters that Nigerian companies are bogged down by many conflicting and duplicated laws. Are we really being over regulated?
It is safe to assume so. Our problem is not a paucity of laws, but that of weak institutions that don’t always enforce legislations. There is a plethora of laws that seek to regulate the capital market alone: you have the Act, the Investments and Securities Act (ISA) and extant SEC Rules, and more recently, the Federal Competition and Consumer Protection Act (FCCPA) amongst others. This should not be the case, as sometimes these laws duplicate themselves. The FCCPA now regulates mergers and acquisitions; however you still have to refer to the ISA for the mere fact that the former does not specify thresholds for the types of mergers, unlike the latter. So you will find that those planning merger and acquisition would still have to refer to two laws and two bodies, even though the FCCPA is now supposed to regulate mergers. It can actually be argued that merger and acquisition under the ISA only applies to public companies, so that the FCCPA applies broadly to public and private companies. Notwithstanding, this makes for cumbersome legal work.
In the United Kingdom, the Financial Securities Act solely regulates their capital market. Consequently, it might be helpful to harmonise most of these legislations to remove this element of overregulation.
What are the remedies available to investors in the case of market abuse or corporate governance failure?
If they suspect insider trading and other instances of market abuse, investors can inform the regulators who are bound to investigate such complaints. Also, where CMOs are found liable, there are heavy sanctions for various forms of offences, including revocation of licenses, fines, and SEC can also mandate an operator to refund funds that have been lost. The Investor Protection Fund (IPF) also allows investors to be compensated for pecuniary losses arising from the insolvency or negligence of a CMO.
In the case of the companies in which these investors are shareholders, there are provisions to remedy abuse of corporate power. You can institute an action to restrain a company from further carrying on unlawful acts or to perform certain lawful acts which have been omitted by the company. They can sue for damages or for compensation; and obviously, investors can always vote to remove members of the board of directors. Between the provisions of the Act and the ISA, I would argue that investors are well protected.
In the global competition for foreign investments, what could be done to make Nigeria an investment destination of choice?
This is a challenge that should be addressed at the macroeconomic level. Reduce taxes, increase productivity by improving the ease of doing business, fix insecurity and infrastructural issues in the country.
Respect for the rule of law is absolutely essential as investors are reluctant where they feel that Nigerian entities can disregard the law in their dealings with them. Easy and quick dispensation of justice against investment disputes will also foster the confidence of investors that their interests are protected.
Admittedly, there are laws that encourage investors such as tax incentives, pioneer status, export tariffs, concessions and waivers but these are offset by political instability and policy confusion. Legal and political certainties are incredibly crucial. Insecurity and an atmosphere of uncertainty hamper foreign investments.Government needs to understand the key role of having clear cut and consistent economic policies to convince investors about the direction of the economy.
Given the role as the chief executive for the reform of the Nigerian capital market, what will be your priorities?
My reforms would be geared towards improving the ease of participation in the capital markets by reducing the costs and time involved in some of its processes. For example, processes for registration of shares and floating of shares on the exchange can be greatly improved upon. Another major priority of mine would be to increase the financial awareness and financial literacy of the public through financial literacy programmes. We need a lot more of our populace to be part of the investor base in our market. Also, there is need to encourage the introduction of products that can deepen the level of activity in the market, for example, risk-sharing transactions. At any rate, this sort of transactions requires a certain level of sophistication that comes through financial literacy.
Low domestic investment base has been one of the causes of extreme volatility in the Nigerian investment market, how do we address this?
As said earlier, I think educating the populace on the investment possibilities in the markets can help in this regard. Fundamentally, there is a lack of trust in the system that is repellent to the average Nigerian when it comes to investing in the stock market, and also because we are relatively a consumption economy and a larger bracket of people fall into the lower earning class, most people are not thinking of investing in that sense, they are primarily saving to spend. I think the only way out is to grow the economy. There has to be a manifest commitment from the government to implement policies that encourage both business activities as well as private wealth increase. That way, you create economic opportunities for all, so that where the average investor witnesses favourable economic conditions, both personally and systemically, they become keen on participating in the market.
In terms of cost and accessibility, how accessible and affordable are specialised investment services like yours to the ordinary minority retail investors?
There is still a misconception that investing is only for the “rich” who have lots of disposable income to play with. The fact is that, there are different products and services for different financial capacities. Our firm’s wealth management and trust service for example is one of the most affordable when you compare it with those of other top firms. Our legal and financial advisory are tailored to enable our clients obtain the best advisory service on a plan suitable to their present status. And we are constantly building partnerships with other institutions that typically serve our clients, in order to have leverage and bring our services closer to retail investors. Investment is a mindset and you can always start from where you are if you are determined to.