The twin principles of disclosure and transparency are fundamental to corporate governance. They constitute some defining essence of corporate governance. Unsurprisingly therefore, it is common practice for contemporary codes of corporate governance to ensure that these issues are adequately provided for. In view of the fact that those in charge of the business of a company (managers) are not necessarily the sole shareholders of the company (owners), it becomes necessary that the managers make sufficient disclosure to the owners of the company to enable them appreciate the state of affairs in the company so that they can make necessary decisions where things are not going according to plans and expectations. In making the disclosure, the managers are required to be sufficiently transparent. Not one fact which should be disclosed should be undisclosed; and in making the disclosure all facts must be clearly stated as they truly are. We shall establish what international best practice on disclosure and transparency is and evaluate the provisions of the Code of Corporate Governance in Nigeria 2011 (2011 SEC Code) on such matters.
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Disclosure and transparency constitute the twin cornerstones for protecting shareholders’ rights and interests in any organisation. Through full disclosure and transparent management practices, shareholders can be made to feel confident that the firm in which they have invested their resources is being managed with their best interests in mind. The criticality of disclosure and transparency in corporate governance is therefore incontestable. Disclosure and transparency facilitate informed decision-making by shareholders, stakeholders and potential investors in relation to allocation of capital, corporate transactions and performance monitoring. Also, adequate disclosure and transparency enhances public understanding of a company’s activities, policies and performance especially in relation to environmental and ethical issues and the relationship of the company with its stakeholders and the communities which are affected by its operations. The recent global financial crisis, perhaps, is a perfect illustration of how poor disclosure and transparency can occasion disastrous outcomes to individual investors, the companies concerned, the economy, and in fact the world in general.
Arguably, part of the lessons of the recent financial crisis is that all hands must be on deck to ensure that adequate and appropriate disclosure is made; and transparently too. Consequently, the strengthening of disclosure and transparency must necessarily involve actions by a wide range of market participants, such as boards of directors, gatekeepers, influencers and other stakeholders; and the processes involved range from verification, the determination of information for publication and communication of same.
There are some basic elements of disclosure and transparency to ensure that the desired purposes are accomplished. In the first place, truthfulness is fundamental to disclosure and transparency. Every disclosure must provide accurate information on the circumstances covered.
Secondly, there should be completeness in disclosure. Information must not only be given, but must be given in fullness to enable the right decisions to be made by those concerned. Incomplete or distorted information is as good as no information, if not worse.
Thirdly, the materiality of the information disclosed is also important. The disclosure must relate to relevant and useful materials and facts regarding the matter being disclosed. Great efforts should be invested in ensuring that the facts are communicated clearly and lucidly without distortions and masking.
Fourthly, as far as disclosure and transparency are concerned, time is of great essence. Timeliness in the communication of the information is critical. Relevant information communicated too late is as useless as the information not communicated at all because in both situations the receivers of the information are not placed in a position to quickly react to the information.
Fifthly, for the information to be of any benefits to those who are to receive it, it must be accessible. The cost, if any, of accessing the information must not be prohibitive to the recipient. The information should be made fairly freely available. Of what use is information communicated when those it is intended for cannot access it?
The Organisation for Economic Co-operation and Development (OECD) provides some guidance in this respect. Article V of the OECD Principles of Corporate Governance 2004 gives a good brief insight into what should be disclosed. Accordingly, it provides that “corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.” It further provides that disclosure should include, but not be limited to, material information on the financial and operating results of the company, the company’s objectives, its share ownership and voting rights, the remuneration policy for members of the board of directors and key executives, information about board members, such as their qualifications, the selection process, other company directorships and whether they are regarded as independent by the board of directors, related party transactions, foreseeable risk factors affecting or likely to affect the company, issues regarding employees and other stakeholders, the governance structures and policies of the company, in particular, the content of any corporate governance code or policy and the process by which it is implemented.
In summary, therefore, the disclosures relevant as far as corporate governance is concerned are much more than the financial information of the company concerned. They include information regarding other matters that should give a good insight into how well the company is being managed by those entrusted with the task of managing the affairs of the company.
Disclosure could be made in several ways. It could take the nature of rendering the appropriate returns to the relevant regulators. It could also be by submitting the relevant reports to the stock exchange, in the case of listed companies, and the dispatch of relevant documents to shareholders and other stakeholders. In addition, information and communication technology can be exploited for this purpose. It is common practice these days for companies to have websites or investors portals. In fact, contemporary corporate governance codes mandate this. Such websites could be utilised in communicating corporate information and actions to investors and other stakeholders.
The 2011 SEC Code is sufficiently compliant with international best practices on disclosure and transparency. The disclosure requirements of the 2011 SEC Code are intended to, and actually do, extend “beyond the statutory requirements in the CAMA [Companies and Allied Matters Act, Cap. C20, Laws of the Federation of Nigeria 2004].” The 2011 SEC Code provides for certain items and matters that should henceforth be included in annual reports, such as the capital structure of a company, its corporate governance report, accounting and risk management issues, the chairman’s statement, director’s interests in contracts with the company, contracts with controlling shareholders, director’s current accounts or loans from the company, other related party transactions, the company’s remuneration policy and all material benefits and compensation paid to directors, audit committee report, a statement from the board with regards to the company’s degree of compliance with the provisions of the 2011 SEC Code, and where a company engaged a consultant to evaluate its compliance with the 2011 SEC Code, the name of the consultant and a summary of the report and conclusions of the consultant.
Furthermore, the 2011 SEC Code provides that the “Board should use its best judgment to disclose any matter even though not specifically required in [the 2011 SEC] Code to be disclosed if in the opinion of the Board such matter is capable of affecting in a significant form the financial condition of the company or its status as a going concern.” In addition, the 2011 SEC Code requires companies to own websites or investors portals where they could upload corporate information to be accessed by shareholders and other stakeholders.
In spite of the foregoing issues discussed, there are still a couple of things that could be done to further strengthen disclosure and transparency. Some areas that could be explored to enhance disclosure and transparency include the following:
- Companies should be made to own websites or investors portal and use same to disseminate corporate information, such as quarterly results, audited accounts, notice of meetings, corporate activities, etc. It is surprising to note that not all companies quoted on the Nigerian Stock Exchange own websites yet.
- The archiving of importance corporate documents, such as annual reports, corporate governance reports, quarterly results, etc on the websites of companies should be mandated and monitored.
- The Nigerian Stock Exchange should regularly update companies’ information filed with it on its websites. It is disheartening to observe, for example, that the list of directors of some companies displayed on the website of the Nigerian Stock Exchange is not current in some cases.
- The regulators should constantly and regularly evaluate the quality of the materials disclosed by companies to their shareholders and other stakeholders and appropriate measures put in place to prevent malpractices.
- The regulators should actively champion integrated reporting by companies.
- Perhaps, it is time to reconsider the submission period for quarterly and annual results by companies and other corporate actions to the regulators and the Nigerian Stock Exchange. In this age of enhanced technological advancement, awareness, presence and usage with its attendant improvement in the speed and accuracy of computation, rapid referencing of archived information, enhanced integration of operations, reliable networking of branches, and speedy communication, it seems quite logical to expect that reports can be issued by companies at a shorter period than presently permitted in the law and regulatory instruments which were prepared when technology was either not sufficiently existent or at a very low level. To be relevant, information must be timely. A reduction in the submission period enhances this much desired timeliness!
Next week, we shall appraise the extent to which the 2011 SEC Code is compliant with international best practice on another critical corporate governance issue. Meanwhile, should you have any comments on the issues raised concerning board performance evaluation discussed above, kindly share them using the comments area of this post below. If you are already a registered user, you will be required to log in to comment on this post; otherwise, you will have to register before posting your comment. Registration is simple and FREE.