Neither Principles Nor Rules: Making Corporate Governance Work in Sub-Saharan Africa

As indicated in “Appendix”, a generic category that emerged from the analysis, as a governance concern, relates to the belief system and moral principles of stakeholders—i.e. the societal collective moral consciousness and enlightenment. E7 noted that;

You know, the SEC code is driven by principles. I think this is where the problem lies. The use of principles will only work when the people are enlightened and display strong morals. But here in this country, most people are illiterate and poor, hence there is a lack of knowledge and a lack of awareness of corporate governance, and the capacity to remain morally upright is weak.

In addition, the challenge of corporate governance regulation in Nigeria is compounded by low literacy levels. As noted by E3;

The importance of corporate governance is not fully understood or well appreciated by the majority of stakeholders. I think this has also lead to a situation where people are not really interested in corporate governance. I actually know some people who believe that pursuing corporate governance could create additional burden on their organisational finances.

Adegbite et al. (2012) infer that owing to low literacy levels, many shareholders are generally ignorant of their rights hence they prefer to remain passive (see also Uche et al. 2016). This increases the possibility of governance breaches by executives as the market fails to respond appropriately to their infractions. Indeed, in countries such as Nigeria, information asymmetry remains a concern (see Okpara 2010; Oyadonghan and Ogiriki 2014). This consequently undermines the robustness of a principle-based regulatory approach which relies on the market, to react to observed governance infractions.

Despite these interpretations, one could argue that these are collective manifestations of ill-suited Anglo-American culture of short-termism prevalent in the Nigerian system. E7 alludes to it;

The business community and in the country as a whole, we are short-term oriented. We are always focused on short-term gains. If (stakeholders) know that they will be disadvantaged in the short term, they would not engage in (infractions).

In relation to E7’s comment above, R2, a regulator, added that;

I think the major problem of our regulation is that it bears the mark of our colonial masters. To be honest, when it comes to corporate governance, Nigerians perceive it differently compared to the British people. So, as long as these regulations largely resemble those of Britain, it is not likely to be effective for the people in this country.

Similar observations were noted by E3, E4, R5 and C3. Solomon (2013) argues that, from an institutional theory perspective, compliance with a code could be resisted, especially where the code originates from a foreign country with a different culture and environment. This resistance can result in ‘decoupling.’⁷ In essence, a code may not necessarily lack the capacity to address corporate governance concerns but institutional factors such as culture could undermine the functionality of the code. Rwegasira (2000) also emphasised that corporate governance, especially in African economies, will continue to experience challenges until measures are taken to adapt the governance model to acknowledge the peculiarities of specific economies. Indeed, comments from participants (E5, E8, R6, R7 and C4) indicate that some issues of governance in Nigeria border on the perception of corporate governance as a foreign concept. This concern emerges from the view that the codes are ‘imported’ from foreign countries, hence they lack the capacity to address, in particular, the cultural specificities of an ethnically diverse country such as Nigeria. E8 admits that;

… the problem of the codes is that they failed to integrate our own culture because it was imported from abroad. So people will not identify with it. These codes do not address our local cultural peculiarities.

Participants were unanimous in suggesting that the practice of corporate governance in Nigeria has been hampered by this development. In addition, morality and principles are also impacted by the dominant cultural affiliations of stakeholders. For instance, whereas C3 stated that “you cannot separate people from their culture”, E6 commented that;

Culture …plays a very significant role in all that we (Nigerians) do. Our culture determines how we accept and react to issues, even economic issues. I personally think our cultural values and affiliations bear the greatest impact on the actions of at least, the majority of Nigerians.

In corporate governance discourse, there is evidence (Haniffa and Cooke 2002; Licht et al. 2005) to suggest that corporate governance has been influenced by a dominant culture. Similar conclusions have been reported in Nigeria. Oghojafor et al. (2012), whilst describing the relationship between corporate governance and national culture as Siamese twins, noted that national culture plays a crucial role in the efficacy of corporate governance. Some other works (Ite 2004; Amaeshi et al. 2006) suggest that the implication of culture upon corporate governance practices in Nigeria is substantial. This view was alluded to by a majority of the participants, as they indicated that culture has strong implications for corporate governance in Nigeria. However, the majority of the participants opined that the dominant cultural values in contemporary Nigerian society are not consistent with the principles of corporate governance.

The foregoing contributes to the general apathy of stakeholders towards regulations. Participants indicated that problems bordering on compliance and enforcement of regulations, the regulatory power of regulators, political influence, corruption levels and the ability to manipulate the legal system by influential stakeholders have heightened the apathy and indifference of operators towards regulations. E1 highlighted the challenge that emerges when stakeholders show apathy towards regulations. This challenge was noted in Ahunwan (2002). C1 explained that;

From my experience, it is widely known that many so-called operators have never really sat down to look at the SEC code even the 2003 version. As a result, they don’t even know what is expected of them and cannot perform.

Furthermore, there are inherent challenges at the micro-level, especially with reference to the ability of individuals and firms to undermine compliance and enforcement through corrupt practices. R1 explained that;

It is far too easy to avoid compliance in this country as long as the individual or organisation is willing to offer gratification. You know, same thing also applies to the enforcement strategies for corporate governance. Generally, enforcement of the regulation is weak and there is no accountability. There are actually cases where regulators also help to facilitate these problems.

Emenyonu (2007) traced the emergence of the issues raised by C1 and R1 to micro-institutional deficiencies which have subsequently given rise to a growing number of Nigerians who are able to ignore the provisions of the country’s laws to perpetrate corporate corruption. As the foregoing perception suggests that Nigerians display apathy towards regulations, Adegbite (2012) added that the weaknesses in regulatory institutions have been exploited by individuals and firms to create this attitude. Okpara (2011) agreed that a strict enforcement regime is likely to force compliance. This is consistent with the view of R6;

The code should be made mandatory (with the) introduction of stronger enforcement mechanisms, (fortified) with (tougher) sanctions.

Thus, whilst the use of regulations has appeared ineffectual, it is possible that a sound regulatory regime, strengthened with commensurate enforcement strategies, could change the attitude of Nigerians at the micro-level towards regulatory policies. Thus, a rule-based system with an appropriate sanction strategy might generate better results, as it minimises the possibility for misinterpretation and misunderstanding (Sama and Shoaf 2005) at the micro-level.

Furthermore, the desire to circumvent regulations and pursue economic alternatives that would yield financial benefits for operators reflects a desire to achieve, but only in the short term. The adoption of a principle-based approach could accelerate short-termism, as it allows firms to seek voluntary compliance to corporate governance codes (Adegbite 2012).

A participant (E4) also noted the prevalence of ‘technical compliance’ rather than substantive compliance amongst Nigerian organisations, observing that;

You can always secure technical compliance with corporate governance by satisfying the (requirements) but there is still a long way to go in adopting the underlying values and principles which drives corporate governance. For instance, it is easier to find a director who satisfies the definition of “independent” but is he really independent?

Technical compliance suggests an adherence to the letter of the code but as Sama and Shoaf (2005) observe, technical compliance inadvertently undermines the promotion of the very spirit of the code—a classic case of regulatory avoidance. Consequently, in such environments, adherence to ‘soft laws’ (Black 2008) is bound to experience challenges. This was supported by C2;

I do not see a principle-based regulation working in this country. At least not now. The behaviour of many Nigerians will not allow the use of principles-based regulation to succeed. A strict sanction strategy, which you may liken to rules, will be more (appropriate). In my opinion, that is what we need.

These concerns provide the rationale for exploring the rule-based and the principle-based approaches to regulation in the context of Nigeria.

From the two generic categories discussed above, there is a need to modify the regulatory mechanism for corporate governance in Nigeria. Though the Anglo-American system has influenced the regulation of corporate governance in Nigeria, the model appears to be specifically suited to systems where institutional frameworks are robust enough to check the behaviour of economic actors. As previously noted, the control of corporations is influenced by social relations and existing institutional arrangements (Aguilera and Jackson 2003). Thus, the institutional environment must be accounted for prior to and during the establishment of corporate governance systems in developing economies (Rwegasira 2000).

In addition, Mangena et al. (2012) demonstrate that the performance of a corporate board, for example, is dependent on the firm’s environment. A firm’s environment tends to reflect the dominant national culture. This suggests that the search for a suitable corporate governance system must integrate cultural distinctiveness. Thus, in countries such as Nigeria, the regulation of corporate governance must be established and implemented based not only on an understanding that such regulatory interventions must not only recognise the peculiarities of the institutional environments but also its main cultural influences.

Consequently, such regulatory intervention must not only have the capacity to tackle the concerns identified in the sub-categories (see “Appendix”), but must be robust and enduring, in order to address corporate governance concerns over the long term. Ofo (2010) traced the origin of the governance problem in Nigeria to the lack of a distinct regulatory system. In the SEC Code (2011), Ofo (2011) noted that the inability of regulators to clearly position the code either as a rule-based or principles-based regulation creates misunderstanding and confusion in the application of the code by stakeholders. While the SEC Code (2011) notes that it aims to ensure that its provisions are enforceable, it further indicates that;

The code is not intended as a rigid set of rules. It is expected to be viewed and understood as a guide to facilitate sound corporate practices and behaviour (Section 1.3a).

It can be claimed that the view above is significantly indicative of a substantial leaning towards a principles-based approach. One can therefore argue that even as the SEC Code has a preference for a principles-based regulation, there is an understanding that this may not lead to desired compliance and governance standard. Schwarcz (2009) posits that principle-based regulation is thought to more closely achieve normative goals than rules, but added that the extent to which this occurs depends on the enforcement strategy. In Nigeria, Adegbite (2012) noted that regulation and enforcement are at variance. This position is consistent with the views of the majority of participants.

We previously highlighted the problem with a principle-based regulatory approach, stressing that the prevalent low levels of morality and literacy as well as high poverty levels have meant that issues of ethics and morality are constantly challenged, especially in view of its normative nature and intangibility. These issues informed R8’s comment;

Principle-based (regulation) may not work in Nigeria. The institutional environment does not support it. It is difficult to do business (in Nigeria) based on principles.

This suggests that principle-based regulation may lack the capacity to foster the entrenchment of a robust corporate governance system thus compelling the development of an alternative regulatory strategy. An alternative will be rule-based strategy or the stick approach (Arjoon 2005). There is a consensus among stakeholders noting that corporate governance compliance and enforcement in the Nigerian banking sector have been commendable, owing substantially to the CBN’s regulatory approach. Indeed, whereas E7 noted that ‘sectors such as the banking sector have a higher level of compliance,’ the reason for this development, as observed by E5 is connected to the fact that corporate governance regulation in the banking industry is mandatory. C1 reinforces this view;

We can argue that the banks in Nigeria have the best corporate governance practices because of the CBN code of 2006 which is essentially rule-based.

E2 also commended the CBN for the improvement of corporate governance among banks in Nigeria, agreeing that the banking sector in the country is where the benefit of effective corporate governance is most evident. Section 1.7 of the CBN Code (2006) stipulates that:

Compliance with the provisions of this Code is mandatory.

Clearly, the CBN Code, unlike its SEC counterpart, adopts a rule-based regulatory strategy. The relative success recorded in the banking sector with respect to corporate governance (see Odeleye 2014) suggests that Nigerian firms and stakeholders are more responsive to rules than principles. In addition, the economic importance of the banking system, which demands a stringent oversight and intervention by the government, may have informed the relative achievements with regard to the CBN code.

In view of the above, it is proposed that corporate governance regulation must substantially reflect a rule-based approach. In other words, substantial elements of the existing code should be updated to exhibit a rule-based mechanism. There are benefits of pursuing this alternative. First, if urgent steps must be taken to address the significant governance challenges in the country, a rule-based regulatory system has been acknowledged to offer an attractive reform strategy, especially in the short-term (Benston et al. 2006; Kim and Saito 2009). Thus, a rule-based approach can be engaged as a “quick fix” to reposition governance practices, in order to enhance its capacity to earn the benefits of good corporate governance. This recommendation is linked with the need to increase awareness of corporate governance and to communicate a strong signal that regulations are to be adhered to. As was the case with the introduction of the CBN Code (2006), a substantially rule-based regulation can drive corporate governance awareness as operators increasingly desire to avoid exposure to stiffer penalties.

Drawing from the foregoing, it is crucial to note that the success of a rule-based mechanism is enhanced by the extent to which sanctions are enforceable (Sama and Shoaf 2005). Thus, this study also proposes “certainty of enforcement”. Regulators must desist from setting aside the enforcement mechanism for governance infractions perpetrated by operators. The inability and lack of capacity (on the part of regulators) to punish offenders have been consistently highlighted as a major setback for corporate governance regulation in many developing economies. Therefore, legal loopholes which can be exploited by operators must be identified and addressed to minimise the potential of “exit” from prosecution. Certainty of enforcement will also promote deterrence (Becker 1974). In an institutional context with limited regard for principles, sanctions must be severe enough to discourage infractions and unethical practices (Akers 1990; Ellis 2003). Black (2008) explained that with deterrence-based approaches, tough and formal enforcement actions become the norm. Therefore, sanctions must be designed such that the benefits gained by engaging in governance infractions cannot compensate for the penalty (Ellis 2003). Many operators indeed undertake “cost-benefit analysis” before reaching a decision to engage in ethical (or unethical) practices. As such, the penalties need to be substantial in order to encourage compliance.

However, we argue that it is difficult to realise the long-term objectives of a robust corporate governance system relying on a single approach. Despite the preference for a rule-based regulation, this study recommends that the new regulatory model must incorporate elements of the principle-based approach, thereby integrating relevant elements of both approaches in a regulatory framework. This proposition is to enable it take advantage of the benefits inherent in a principles-based regulation which include allowing for social sanctions to act as deterrents to unethical conduct (Sama and Shoaf 2005), the broadening of the legal boundaries to issues not addressed by law (Arjoon 2006) and the emphasis on substantive compliance and less on box-ticking or working out how to avoid rule in substance (creative compliance) (Black 2008). This is crucial because rule-based, as proposed, is intended to offer a short-term impact. The pursuit of good corporate governance is a “journey” (Madhani 2007) and the objective must be to achieve good corporate governance in the long-term. Arjoon (2005) stated that legal compliance, which is the basis of a rule-based approach encourages letter of the law which may not inspire excellence, but ethical compliance which underlies principles-based approach promotes the spirit of the law. Arjoon (2006) added that principles-based regulation tends to be value-driven, focuses on prevention and develops over the longer term.

Further reasons why an integrated framework is suggested is that the nature of a rule-based system cannot account for every possible infraction. A system centred on principles possesses the mechanism to manage more seemingly silent activities of humans as it relies on morality, ethics and value. Whereas Trevino and Nelson (2010) acknowledge this point, Sama and Shoaf (2005) note that principles such as impartiality, transparency, accountability, responsibility, truthfulness and respect for rights are broader than the law, and hence may not be accounted for in a rule-based system. The principles noted in Sama and Shoaf (2005) are critical to an enduring corporate governance system, hence a principle-based approach must necessarily be incorporated in any corporate governance regulatory framework. Therefore, whilst noting that the institutional environment in Nigeria does not support complete dependence on the principles-based or rule-based approaches, an appropriate mix of both approaches can generate better outcomes. C4 noted as follows:

I see rule-based as a quick fix. Principles-based are the best and more sustainable but it takes a long time for its results to lead to real change in behaviour. Maybe policy makers should be considering how to use both (approaches).

C1 further highlights the complementarity of both approaches;

… You know rules cannot (address) every issue. Rules will only be able to attend to simple issues, but with principles you can attend to all issues whether complex or simple. (which is only possible when stakeholders) have internalized the (principles).

In line with the foregoing, we proceed to discuss the implementation strategies of the integrated regulatory approach on the basis of a multi-stakeholder co-regulation framework.

In this paper, we propose a shift from the present principle-based regulatory structure of corporate governance in Nigeria to a substantially rule-based approach. However, this must follow a precise implementation pattern represented in Fig. 2, which reveals three phases towards the establishment of an integrated regulatory approach. The first phase proposes an entirely rule-based regulatory framework whereas in the second phase, core elements of principle-based regulation are gradually incorporated into the existing regulatory framework. In the final phase, the regulation increasingly reflects a principles-based regulation.

In relation to the above, Black (2008) agreed that adopting a principles-based or rule-based approach as an extreme position is a suboptimal strategy to implement. But Apampa (2014) questioned if a hybrid (a mix of principles-based and rule-based) model is deemed appropriate, and where along the spectrum should the optimal strategy lie? This is an important query which implies that regulators should first seek to negotiate with operators towards a consensual optimal strategy (Black 2008). However, if this strategy does not yield expected compliance levels, regulators should gradually move up the enforcement pyramid whilst applying sanctions of increasing severity (Black 2008). This process must continue until compliance levels are acceptable. It might then be appropriate at this stage to embark on the second phase (see “Appendix”) which will entail the introduction of more sustainable, principles-based regulatory approach. This procedure signifies that the existing regulatory approach will continue to change positions on the spectrum until the desired outcomes are visible.

In the third phase in Fig. 2, the regulatory system will gradually move from being a substantially rule-based mechanism to a considerably principles-based regulation. This strategy is proposed considering that principles-based regulation not only emphasises a long-term view but also possesses the capacity to address issues which lie beyond the boundaries of a rule-based regulatory system (Sama and Shoaf 2005; Arjoon 2006). The movement from one phase to another must be the outcome of an assessment of corporate governance by relevant stakeholders at different points in time.

The Netherlands and South African corporate governance systems offer evidence of the potential of an integrated regulatory approach. In South Africa especially, the Kings Report III opted for an ‘apply or explain’ regime (Institute of Directors SA 2009) rather than the conventional ‘comply or explain’ system. This is because the ‘apply or explain’ system acknowledges that it is not a case of whether to comply or not, but emphasises how the principles can be applied. Notably, the Institute of Directors SA (2009) admitted that in an ‘apply or explain’ regime, principles override specific recommended practices but added that some principles have been legislated which compels compliance with the letter of the law and removes the incidence of subjective interpretations. Thus, whereas the foregoing offers evidence that the ‘apply or explain’ approach integrates the elements of rule-based and principles-based approaches, it crucially gives some power to corporate boards. For instance, where a board believes it is in the best interest of the company, it can adopt a practice different from that recommended by King III but the practice must be explained. According to the Institute of Directors SA (2009), the change became necessary to address peculiarities of the South African business environment. This reinforces the view that countries should pursue policies which serve their best interest. Hence, it is proposed that a rule-based system be established in the Nigerian code, in the short term. Subsequently, a principles-based regulatory regime must be gradually integrated into the framework. In this study, the regulatory framework integrating elements of the principles-based and rule-based approaches is regarded as the integrated approach to corporate governance regulation.

Having recommended a regulatory approach for corporate governance in Nigeria, it is necessary to offer further insights that would enhance the functionality of the proposed integrated regulatory framework. Generally, regulations, according to Adegbite (2012), are produced by agencies with the commensurate power and authority to induce compliance by operators. As a result, regulations could be viewed by operators as unfair owing substantially to their coercive nature. This perception tends to have consequences for compliance. This challenge is more pronounced in a country like Nigeria where the government has been repeatedly accused of not abiding by the provisions of existing regulations, thus providing a rationale for corporations to also seek ways (albeit illegitimate) to evade compliance. The nature of this challenge in the Nigerian business environment dictates that an alternative strategy be proposed for the integrated regulatory approach to achieve desired objectives.

Co-regulation involves a system wherein government and firms share responsibility for drafting and enforcing regulatory standards (Hirsch 2011). Co-regulation is neither purely a government regulation nor purely an industry self-regulation, but a hybrid of both (Hirsch 2011). Kirkbride and Letza (2004) suggested that corporate governance regulation has taken a significant new direction. They explained that the boundaries of regulation are no longer determined by the choice between market-based (self) regulation and state-based (statutory) regulation but by a process of collibration.⁸ The benefit of this approach, according to Hirsch (2011), is that it ensures collaboration between government and businesses, leading to improved government-industry relationships, making both units problem-solvers.

However, the general view of co-regulation focuses mainly on cooperation between companies and government. Whilst this form of co-regulation is termed ‘co-governance’ or ‘collaborative governance’ (Hirsch 2011), this paper proposes a multi-stakeholder form of co-regulation, which implies the relationship between business and its stakeholders in developing corporate governance regulation (Albareda 2008). This expands the frontier of corporate governance regulation beyond businesses and government. The main rationale for the proposed regulatory strategy is informed by concerns regarding the industry-government relationship which occurs beyond the public view. This could yield one-sided outcomes which fail to protect other stakeholders (Hirsch 2011).

We present our model to frame co-regulation for corporate governance in Nigeria in Fig. 3. The model indicates that dialogue between businesses and stakeholders generates a negotiated regulation which is consistent with the expectations of the parties involved. This ensures joint responsibility amongst stakeholders in administering and enforcing corporate governance regulations.

We make two main contributions. The first proposes an alternative integrated approach for regulating corporate governance in Nigeria. The engagement of an alternative regulatory system for corporate governance not only highlights the variations in institutional environments, but also necessitates a review of the fundamental positions of institutional theory of corporate governance. In Judge et al. (2008), institutions are expected to regulate economic behaviours, as a strategy for building durable corporate governance systems. This framework has been severally adopted to examine the relationship between institutions and corporate governance (Aguilera and Jackson 2003; Filatotchev et al. 2013).

Unfortunately, this framework might not yield desired outcomes in environments where influential actors in the political and social domains can leverage their resources to create new institutions or transform/influence the functionality of existing ones (Maguire et al. 2004). While this concern is acknowledged in Nigeria, it offers further justification for the need to craft an alternative regulatory regime for corporate governance in the country that has the potential to check the activities of stakeholders in the corporate governance environment. Therefore, despite the view that there is a relationship between weak institutional environments and poor corporate governance regulation (Gourevitch 2003; Estache and Wren-Lewis 2009; Siddiqui 2010), evidence from this paper, taking into account the implementation of the rule-based CBN Code (2006), presents a different outcome.

In essence, there are sparks of good corporate governance practices in regions where this is unexpected. This deserves more attention in future research. Our study takes account of peculiar institutional factors and limitations, and engages the macro- and micro-level issues identified by participants to propose a hybrid framework for corporate governance regulation, inculcating both principles and rules. In doing this, we acknowledge that Nigeria presently lacks the necessary institutional capacity to adopt either a principles-based or a rule-based approach to corporate governance. These approaches are intended to be reinforcing, to enable the corporate governance system in Nigeria to take advantage of both regulatory mechanisms.

Our second contribution recommends co-regulation involving the government and corporations in the country’s corporate governance system. The insights we share regarding these are useful in understanding corporate governance regulation in different institutional contexts and help augment the nascent literature on corporate governance in Sub-Saharan Africa. This hybrid co-regulation strategy, involving the state and firms, will aid the accomplishment of a more effective integrated regulation. As a largely government-sector driven economy, regulations have consistently remained the sole preserve of government. This paper demonstrates that increased involvement of organisations in the regulatory development is crucial to improved corporate governance in Nigeria.

In generating our findings, it is necessary to highlight a methodological limitation of this study. We note that data respondents were not drawn from all sectors of the Nigerian economy as classified by the NSE, thereby limiting the extent to which we can generalise the outcomes of this study. However, participants also included consultants who have undertaken various corporate governance-related roles in the economic sectors not represented by participants. As a result, the findings of this study offer significant analytic generalisability (see Yin 2013) in understanding the determinants of corporate governance regulation in different institutional contexts (Adegbite 2015). Nonetheless, future research can rely on a more extensive and representative sample. Finally, it is worth mentioning that governance practices amongst state-owned enterprises (SOEs) have been generally neglected in studies on corporate governance in developing countries, such as Nigeria. This is particularly worrisome as SOEs in Nigeria, for instance, are central to the present state of corporate governance practices (Okike 2007; Kajola 2008). Consequently, future studies may evaluate the regulatory dynamics of corporate governance in SOEs and how it influences the practice of corporate governance in Sub-Saharan Africa.