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1.1. Background of the Study
A company is “a union or association of persons for carrying on a commercial or industrial enterprise.” Burke defines company as: “An association of persons formed for the purpose of some business or undertaking carried on in the name of the association, each member having the right of assigning his shares to any other person, subject to the regulations of the company”.2 It follows from the above definitions that a company has a separate legal personality. This personality is not automatic on formation of the company, but it is conferred on the company upon registration or incorporation.3
On incorporation, a company is vested with legal status which enables it to be treated as a person, though, an artificial person in the eyes of law.4 A company is a juristic person capable of bearing rights and duties equivalent to those of human beings. It can hold property, sue and be sued, and have perpetual succession.5 Thus, having been cloaked with legal personality, it is deemed a separate and distinct entity from its operators, whose liability is limited in the manner provided by the Companies and Allied Matters Act, 2004 (hereafter CAMA).6
The concept of the legal entity of a company distinct from its members became finally established at common law in the case of Salomon v. Salomon & Co. Ltd., where Lord Macnaughten stated the position as follows:
…the company is at law a different person altogether from the subscribers to the memorandum, and although it may be that after incorporation, the business is precisely the same person as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members pliable, in any shape or form, except to the extent and in the manner provided by the Act.
This separate legal entity of a company is also extended to the subsidiary of a corporation as well. In the case of Marina Nominees Ltd. v. Federal Board of Inland Revenue, the appellant sought to avoid its corporate liability by claiming to be an agent of another company. The Supreme Court of Nigeria, in rejecting the claim observed inter alia, that:
…the device of agency by using the incorporated company for the purpose of carrying on an assignment for another company or person must not overlook the fact that an incorporated company is a separate legal entity, which must fulfill its own obligations under the law.
The independent legal personality of the company is fundamental to the whole operations of business through companies. This legal concept affects its structures, existence, capacity, power, rights and liabilities. Although, a company is a legal entity, and has independent legal personality, it is, of course, an artificial person or entity. Therefore, all the operations have to be carried on by its organs and agents.
The principal organs of a company comprise the members in general meeting and the board of directors that share amongst themselves corporate functions. In the traditional corporate governance model, the shareholders or the members in general meeting stand as the highest authority. Fundamental matters relating to structural changes in the company are decided by the shareholders. Also, they decide on the distribution of dividends upon recommendation by the board of directors, and they reserve the right to appoint and remove the directors, with or without cause.
The primary duty of boards and managers is the efficient use of the company’s resources to create value and achieve the objectives of the company. The realization of the company’s objectives depends to a large extent on how well the company is governed. Efficient use of company’s assets coupled with good governance, invariably translates to higher probability of good returns on investments. Corporate governance impacts on the wellbeing of a company, its economic performance, and the ability to attract capital on a sustainable basis.
With the emergence of large corporations, and the separation of ownership and control, there appears to be an erosion of the traditional corporate governance in what is now known as the classical corporate governance. Under the latter, the board of directors has acquired more powers, and is not answerable to the members in general meeting when acting within the powers conferred upon it by CAMA or the
articles of association.
This modern trend led to arguments against shareholders’ participation in the decision making process. Easterbrook and Fischel argue that shareholders’ views are best expressed through buying or selling of shares, a method which they consider more effective than voting on board’s decision.
The above views notwithstanding, this dissertation proceeds on the premise that shareholder’s vote, despite the problems of inefficiency, is still a common management control measure. It is an effective way of disciplining the management. It assures shareholders’ supremacy over management, and affirms the philosophy of corporate structure.
It must be accentuated that a company is either private or public company. This division is commonly found in company laws of States. In Nigeria, section 20 of the CAMA stipulates that a private company is one which is stated in its memorandum to be private company. Consequently, every private company shall by its article restrict the transfer of its shares. The total number of members of a private company shall not exceed fifty, not including persons who are bona fide in the employment of the company, or were while in that employment and have continued after the determination of that employment to be, members of the company. On the other hand any company other than private company is a public company. Consequently, public company is free to sell shares to the public. It is manifest that the advocacy on corporate governance is more focused on public companies. Application to private company depends on the nature, size and importance of the company employing many people or operating in a critical sector of the economy, such private company will be strongly encouraged to apply strong corporate governance principles.
The most acceptable means of corporate monitor is through the general meeting. Although, the general meeting is not saddled with management powers explicitly, they still perform some supervisory role over the exercise of management powers by the board of directors. The reason is that the members in the general meeting are those that really have pecuniary interest in the company, as the success of such company enhances their earning, whereas the directors have nothing to lose in event of mismanagement, except where they are also members of the company.
The inexpensive resort to the Corporate Affairs Commission to investigate the affairs of a company is rarely followed. This work is a critical appraisal of the extent of supervisory powers of general meeting over the board of directors given the scenario painted above.
1.2. Statement of the Problem
Corporate governance is not just about how a company is governed or controlled, but also how to make the controllers responsible to their companies and shareholders. The aspect of making the directors responsible necessarily involves the shareholders in corporate governance, as for instance in putting the board in place, and to act as checks to the power of the board. Thus, corporate governance examines the relationship amongst the various constituents of a company, including all the identifiable stakeholders. A central issue arising there from is accountability. Thus, there must be some safeguards which will ensure that directors are accountable, not only to the shareholders, but also to creditors and other stakeholders.
The corporate governance issues and debates transcend the exercise of power of control by the board, but also the powers of the shareholders, and limitations imposed by law, including legal frameworks and regulatory institutions such as the Corporate Affairs Commission, Securities and Exchange Commission, Central Bank of Nigeria etc.
The problem that this research sets out to address is the effectiveness, or otherwise of the laws, and institutional frameworks charged with management and control of corporate governance between the shareholders or members in general meeting and the board of directors or management with particular reference to public companies.
There seem to be some controversy as to whether the shareholders can effectively supervise their directors. Based on this position, the question is whether the Corporate Affairs Commission and the use of courts as a means of checkmating the board of directors by the general meeting is actually efficient and prompt?
Sections 314 and 315 of the CAMA stipulate that “the Commission may appoint one or more competent inspector to investigate the affairs of a company and report on them in such manner as it may direct”.
But it is opinion of this writer that where the commission, in exercising its powers, discover that the affairs of the company are being managed fraudulently or prejudicially to some of its members, or that the company was formed for any unlawful purpose, the commission or the general meeting should possess the express powers to punish the board of directors without any recourse to courts.
It is trite that delay defeats equity. The Nigerian Courts remain slow, inefficient and expensive. In the case of Rossek v. African Continental Bank Ltd.,21 the then Chief Justice of Nigeria, Hon. Justice Mohammed Bello, expressed dissatisfaction over a case which lasted for 18 years and was being sent back to the
trial court for retrial.
Shareholders are hesitant to invoke the powers under sections 314 and 315 of CAMA as well as explore judicial remedies due to delay, and as a result, the directors rule and dominate the corporate governance with impunity.
By section 63 (4) of CAMA, unless the Articles of Association otherwise provide, the board of directors, when acting within their powers, shall not be bound to obey the directions or instructions of the members in general meeting, provided that the directors’ acted in good faith and with due diligence. The implication of this provision is that the directors’ power cannot be controlled by an ordinary resolution of the general meeting. This provision preserves the incident of management in corporate governance in favour of the directors.
The ways the general meeting can control the directors are by giving direction, alteration of the articles of association, removal of the directors and ratification of director’s acts,23 but no alteration shall invalidate any prior act of the directors which would have been valid if that alteration has not been made. The question is who determines what is “acted in good faith and due diligence” by the directors? Supposing that the directors actions were done in good faith and with due diligence, but it is obvious that the act is detrimental and adversely injurious to the interests, growth or survival of the company? In the opinion of the writer, the phrases “due diligence” and “act in good faith” are vague. The directors might use it as a sword rather than as a shield and hide under it as a cover up even when their actions are detrimental to the company. It would amount to great error in the opinion of the writer. The phrases “with due diligence” and “act in good faith” are not clearly defined. They are not only vague but also nebulous.
All the directors need to do is to rely on these phrases and claim that they acted in good faith and with due diligence as a canopy or protection over their injurious and non-beneficial actions. The only option available to the members in general meeting are to invoke their power under sections 314 and 315 of CAMA for investigations by the Corporate Affairs Commission, which will eventually end up in court for adjudication, the same court the writer has already discussed above of its inefficiency, expensiveness and time wasting. Maybe by the time the courts deliver its judgment to determine “due diligence” and “in good faith”, the consequences of the delay would either be that most members may have died out of frustration or that the company might have been wound up due to directors mismanagement.
Who determines the time and venue of the general meeting? The directors only are charged with the powers to determine when to fix the meeting, where it would hold, the agenda of the meeting and notices to the members about the meeting. It means that the members have no power to convene the meeting except through the court or when the directors are deadlocked, or refused to do so. The directors may deliberately refuse to include in the agenda of the meeting any matter which may adversely affect their interests, whether the company suffers or not, provided that their interest are protected.
The directors may deliberately fix the date for the meeting when it will not be convenient for the majority of the members to attend, such as during Christmas, Easter and Sallah periods in Nigeria, knowing well that majority will be celebrating the anniversary in preference to attending the meeting. The directors may select the venue for the meeting at a place very far away from the majority of the members, and even the minority who dared to attend despite all odds will pay heavily to get to the venue.
Moreso, unless the shareholders acted unanimously, they would not be able to direct the directors on what to do, if the directors refused, advertently or inadvertently, to include some issues or topics in the agenda for the meeting.
In the United States with regards to corporate governance, the mechanism for shareholders participation in management is through express provision in the articles of incorporation, but it has been observed that this is hardly done by companies.
O’Kelly and Thompson observed that the original articles of incorporation can give shareholders right to control or participate in control of ordinary business matters, but this is not often done.
UK Corporate Governance Code (formerly the Combined Code) sets out standards of good practice in relation to board leadership and effectiveness, remuneration, accountability and relations with shareholders. All companies with a Premium Listing of equity shares in the UK are required under the Listing Rules to report on how they have applied the Code in their annual report and accounts. The Code contains broad principles and more specific provisions. Listed companies are required to report on how they have applied the main principles of the Code, and either to confirm that they have complied with the Code's provisions or - where they have not - to provide an explanation. Some of the provisions of the Code require disclosures to be made in order to comply with them.26
Where shareholders in a corporation that has not made advance provision for direct shareholder management in the articles of association, become disillusioned with some corporate policies or practices, how would they attempt to change corporate policies or affect the ordinary business decisions of the corporation? One obvious rule will be to amend the articles of incorporation to give shareholders the right to make business decisions, or to prescribe directly whatever change desired. Apart from the difficulty of the shareholders in gaining the necessary votes, the shareholders still run head on into the normal corporate law rule that an amendment to the articles may be initiated by the directors.
What happens if the directors are not willing to initiate an amendment that will curb or restrain their own powers? Even where the articles allow the shareholders to amend the articles, they may not do so to make ordinary business decision or to establish corporate policy. That power belongs to the directors and can only be taken away from them by contrary provision in the articles of incorporation.
Directors’ management authority extends to chairing and controlling the agenda of shareholders meetings. The day-to-day management operations are delegated to the corporations’ officers and other agents. No direct management role is left to the shareholders.
Under the American system, where the shareholders did not make advance provision in the articles of incorporation for certain direct rights to control or participate in control of ordinary business matter, they have shot themselves in their foot and should lick their wounds, because no matter how the shepherds yell and shout they cannot scare a lion from the animal it has killed. Only the ability of the shepherd determines the security of the sheep. If they continue to sleep, the board will continue to milk them even to winding up of their company.
There is a need here to emphasize more on the rivalry between the board and shareholders in general meeting. Their interests may not necessarily be the same. The directors may have different agenda from the shareholders. Where the directors are not constrained, they may only be interested in expanding the firm, thus, holding back profit, as against declaration of dividends in order to enhance and boost their career. Unlike the shareholders who are more interested in profit maximisation.
The employees also align with the goal of the management, as they always want their firm enlarged, not to be downsized, because of the promotion opportunities and enhancement of career. Therefore, there is always a tension built between these corporate entities, and as a result of the diversified interests militating against the stakeholders, the shareholders in general meeting would not exercise a result oriented supervisory control over the board of directors.
1.3. Literature Review
Quite a number of previous authors, even those writing introductory textbooks on company law, have said a couple of things relating to corporate governance. Some other authors have examined the organs of corporate governance. They have considered the roles and powers of the general meeting and those of the board of directors. It appears that no literature exists specifically appraising the supervisory role of the general meeting over the board of directors in modern corporate governance in Nigeria.
The Cadbury Report29 defined corporate governance as “the system by which companies are directed and controlled”. Whilst management processes have been widely studied, relatively little attention has been paid to the processes by which companies are governed. It is clear that good corporate governance practice adopted by board of directors is reflected in the value it adds to its operations and insulates generally the company from corporate failures. The failure of big corporate organizations all over the world without any prior sign or indications ultimately points to loose and fraudulent practices which ordinarily would have been detected by the regulators where a good corporate governance practice had been in force. Aina explains that corporate governance is not about the day to day operational management of the company by the managers and executives, but is concerned with the overall strategic plan to move the company forward. Good corporate governance enhances the value of the company and attracts investment to the company. It enables the company to meet its objectives and contributes to its growth and profits. On a national scale, countries that adopt good corporate governance models attract more direct foreign investments than those that ignore its principles. The root cause of most corporate failures can be attributed to failure of corporate governance. Due to the importance of some of these big companies to the economy of the nation and stability of the economy, the governments of developing countries like Nigeria have now taken the issue of corporate governance more seriously.
Barnes33 addresses the issue of corporate governance under the rubric “management”. The learned author asserts that the general meeting of the company−whether statutory, annual, extraordinary or court-directed−is a vital organ of the company. He adds that the general meeting provides an occasion for shareholders to air their views on company matters and take effective action, within their powers, if they are dissatisfied with company policies, practices, or its officers.
Barnes notes that previously the decisions of shareholders in general meeting were regarded as the acts of the company itself. The board of directors was regarded merely as agent of shareholders in general meeting. According to Barnes, it is well established that the ultimate control of the company lies with the general meeting. As one organ of the company, it shares power with the board of directors as the other organ. Barnes considers Automatic Self-Cleansing Filter Syndicate Co. v. Cunningham the progenitor of the established division of powers between these two organs. In this case, the Court of Appeal held that where powers had been vested in the board of directors, the general meeting could not interfere with their existence. With the established division of powers comes rivalry between the general meeting and the board. Barnes notes that the reality of the division of powers between the board of directors and the shareholders in general meeting is that the: “Power to call general meetings vested in the board of directors gives it practically dictatorial power to decide whether a meeting shall be held or not, and if it is held what its agenda will be”. This directors’ control over the day-to-day affair of the company gives them practical control over corporate governance. This situation daunts the shareholders in general meeting, who react by finding ways of reducing the directors’ control and indeed playing supervisory control over the board of directors.
Oshisanya insists that the main agent who deals with company management and business is the board of directors normally elected by the members and the officers are normally appointed by the board. From Oshisanya’s standpoint, it appears that the members by appointing the board have mortgaged their powers to the board and resigned themselves to supervision of the exercise of these powers. Where the board becomes overbearing in handling of its responsibilities, the remedy available to the members may be to refrain from reelecting the board. Oshisanya’s postulations appear to tally with Davies’ elucidations. According to Davies: “Although the Act requires all companies to have directors, it leaves the determination of the functions of the board very largely to the company’s constitution, which is of course under the control of the shareholders”.42 Consequently, the shareholders are responsible for packaging the responsibilities of the company. Davies further elucidates that there are always limits on the extent to which the articles may authorize the board to proceed solely on its own initiative. They probably reflect the view that shareholders’ interests are potentially involved in such decisions, that the shareholders are probably as well equipped to take the decisions as the board, and that they are not decisions which occur frequently in the life of
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