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Corporate Governance For Unlisted Private Companies

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Over the last decade, the world has placed more emphasis on Corporate Governance much more for companies which are listed on the various Securities Exchange Markets.

Whilst researching and reading up documents in view of trying to create a Governance Framework for the company I work for; my mentor on Corporate Governance whom I will simply refer to as “Prof” referred me to this document “Corporate Governance Guidance and Principles for Unlisted Companies in Europe” which is an initiative of the European Confederation of Directors’ Association (ecoDa) that clearly highlighted 14 major principles of governance for unlisted and private companies.

A more detailed reading of the document clearly highlighted to me that there are no major differences in the structure of private and/or unlisted businesses in Europe and that in Africa. As much as possible, I am using this opportunity to share with you these principles in order to help private businesses prepare for growth and expansion and subsequently the opportunity of listing these companies on the Stock Exchanges.

It is quite obvious in the business world, yesterday, today and in the future that, “unlisted companies make a major contribution to economic growth and employment in all of Nigeria and Africa as a whole. However, the Corporate Governance needs of unlisted companies have, to-date, been relatively neglected by Governance Experts as well as by Policy-makers. In particular, most officially-endorsed Corporate Governance codes relate to listed with little or no emphasis on unlisted enterprises.

All over the world, many unlisted enterprises are owned and controlled by single individuals or families. Good Corporate Governance in this context is not primarily concerned with the relationship between Company’s Boards and External Shareholders (as in listed companies) nor with a focus on compliance with formal rules and regulations. Rather, it is about establishing a framework of Entity’s processes and attitudes that add value to the business, help build its reputation and ensure its long-term continuity and success.

Good Corporate Governance is particularly important to the shareholders of unlisted companies. In most cases, such shareholders have limited ability to sell their ownership stakes, and are therefore committed to staying with the company for the medium to long term. This increases their dependence on good governance.

An effective Corporate Governance framework defines roles, responsibilities and an agreed distribution of power amongst shareholders, the board, management and other stakeholders. Especially in smaller companies, it is important to recognize that the company is not an extension of the personal property of the owner.

A key step in the development of unlisted company Corporate Governance is the decision to invite external/independent directors onto the Board. Its effect on boardroom behavior and culture should not be underestimated.

The principles (under-listed) provide a Corporate Governance roadmap for family owners or founder-entrepreneurs as they plan the development of their companies over the corporate life cycle. These principles may be relevant for subsidiary companies and joint ventures as well. Even state-owned companies or social or non-profit organizations can be inspired by the best practices laid down below.

The set of principles are divided into two stages vis-à-vis

  1. Corporate Governance Principles Applicable to all Companies
  2. Corporate Governance Principles Applicable to large and/or more complex unlisted companies

Corporate Governance Principles Applicable to all Companies[i]

Principle 1: Shareholders should establish an appropriate constitutional and governance framework for the company.

Principle 2: Every company should strive to establish an effective board, which is collectively responsible for the long-term success of the company, including the definition of the corporate strategy. However, an interim step on the road to an effective (and independent) board may be the creation of an advisory board.

Principle 3: The size and composition of the board should reflect the scale and complexity of the company’s activities.

Principle 4: The board should meet sufficiently regularly to discharge its duties, and be supplied in a timely manner with appropriate information.

Principle 5: Levels of remuneration should be sufficient to attract, retain, and motivate executives and nonexecutives of the quality required running the company successfully.

Principle 6: The board is responsible for risk oversight and should maintain a sound system of internal control to safeguard shareholders’ investment and the company’s assets.

Principle 7: There should be a dialogue between the board and the shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place. The board should not forget that all shareholders have to be treated equally.

Principle 8: All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge.

Principle 9: Family-controlled companies should establish family governance mechanisms that promote coordination and mutual understanding amongst family members, as well as organize the relationship between family governance and Corporate Governance.

Corporate Governance Principles Applicable to large and/or more complex unlisted companies

Principle 10: There should be a clear division of responsibilities at the head of the company between the running of the board and the running of the company’s business. No one individual should have unfettered powers of decision.

Principle 11: Board structures vary according to national regulatory requirements and business norms.

However, all boards should contain directors with a sufficient mix of competencies and experiences. No single person (or small group of individuals) should dominate the board’s decision-making.

Principle 12: The board should establish appropriate board committees in order to allow a more effective discharge of its duties.

Principle 13: The board should undertake a periodic appraisal of its own performance and that of each individual director.

Principle 14: The board should present a balanced and understandable assessment of the company’s position and prospects for external stakeholders, and establish a suitable programme of stakeholder engagement

In conclusion, looking at the quote by Fianna Jesover, Senior Policy Manager, Corporate Affairs Division, OECD, Paris, it becomes pertinent that more focus should be placed on the issue of Corporate Governance structure and application, in order to ensure that we do not lose business that provide greatly to the economy in the way of wealth creation.

“While the drive for good Corporate Governance standards and practices is generally directed towards publicly listed companies, a more challenging prospect is the governance of unlisted companies. These companies, comprising not just small and medium-sized businesses, can sometimes constitute very large enterprises. Unlisted companies remain a very significant and important component of both developed markets and emerging economies, often serving as the engine for economic growth given their entrepreneurial nature. The guidance and principles advocated by ecoDa for unlisted companies is an important contribution to a critical part of any economy, providing a roadmap for profitable and sustainable economic enterprise, that applies not only to unlisted companies in Europe but globally.”

[i] Corporate Governance Guidance and Principles for Unlisted Companies in Europe – An initiative of ecoDa

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