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Corporate Governance: the Law's Response to Agency Costs in Nigeria Dr Brooklyn Journal of International Law Volume 32 | Issue 2 Article 4 2007 Corporate Governance: The Law's Response to Agency Costs in Nigeria Dr. Ige Omotayo Bolodeoku Follow this and additional works at: https://brooklynworks.brooklaw.edu/bjil Recommended Citation Dr. Ige O. Bolodeoku, Corporate Governance: The Law's Response to Agency Costs in Nigeria, 32 Brook. J. Int'l L. (2007). Available at: https://brooklynworks.brooklaw.edu/bjil/vol32/iss2/4 This Article is brought to you for free and open access by the Law Journals at BrooklynWorks. It has been accepted for inclusion in Brooklyn Journal of International Law by an authorized editor of BrooklynWorks. CORPORATE GOVERNANCE: THE LAW’S RESPONSE TO AGENCY COSTS IN NIGERIA Dr. Ige Omotayo Bolodeoku* I. INTRODUCTION orporate failures are hardly a new story.1 Indeed, states and econo- C mies have failed in the past, and many more are failing. However, the magnitude of corporate failures and the extensiveness of their impact have made them part of the several issues hotly debated in contemporary corporate and political governance scholarship.2 This also helps to ex- plain why in the United States, a country with a federalized corporate law system, the federal government, following major corporate failures in 2001, introduced certain corporate governance safeguards that were once overlooked or considered unnecessary.3 What is interesting is that * Senior Lecturer, Dept. of Commercial & Industrial Law, University of Lagos. LL.B. (Hons) (Lagos State University, Ojo); LL.M (University of Lagos, Akoka); D.Jur. (Osgoode Hall Law School York University, Toronto, Canada). I dedicate this Article to my wife, Karlene, whose support has been invaluable, and to my children Olumayowa and Olorunfemi for all the fun they provided me in the course of working on this Article. The author may be contacted at [email protected]. 1. They led to the first corporate governance project chaired by Adrian Cadbury in 1992. See REPORT OF THE COMM. ON THE FIN. ASPECTS OF CORPORATE GOVERNANCE (Burgess Sci. Press 1992), available at http://www.ecgi.org/codes/ documents/cadbury.pdf [hereinafter CADBURY REPORT]. In Nigeria, the Failed Banks (Recovery of Debts) and Financial Malpractices in Banks Act, (2004) Cap. F2, Laws of the Federation of Nigeria, 2004, is the institutional response to the failure of financial institutions in the early 1990s. In 2003, Nigeria’s Corporate Affairs Commission and Securities and Exchange Commission launched the Code of Best Practices on Corporate Governance for publicly quoted corporations in Nigeria. In 2006, the Central Bank of Nigeria released a Code of Corporate Governance for Banks in Nigeria after the consoli- dation of Nigerian banks, to become effective from April 3, 2006. 2. See Jean Cartier-Bresson, The Causes and Consequences of Corruption: Eco- nomic Analyses and Lessons Learnt, in ORG. FOR ECON. CO-OPERATION AND DEV., NO LONGER BUSINESS AS USUAL: FIGHTING BRIBERY AND CORRUPTION 11, 12 (2000) (dis- cussing agency problems in the political governance context, the author said: “Opportuni- ties for corruption depend on the size of the rents in the control of public agents, the dis- cretion they have in allocating them, and their lack of a sense of accountability to soci- ety.”). 3. See Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002). Sar- banes-Oxley is essentially a response to the systemic problems in corporate governance, underscored by the collapse of Enron and other big corporations in the United States. Other institutional responses to corporate failures have come by way of reform of corpo- rate governance rules. See N.Y. STOCK EXCH. CORPORATE ACCOUNTABILITY AND LISTINGS STANDARDS COMM., REPORT (2002) [hereinafter NYSE REPORT]. For Nigeria’s approach, see SECURITIES AND EXCHANGE COMMISSION, CORPORATE GOVERNANCE CODE IN NIGERIA (2003). 468 BROOK. J. INT’L L. [Vol. 32:2 failures, be they of corporations or states, are traceable, in part, to a common source, that is, activities of the respective agents representing the institutions.4 Every representative system must confront the problem of agency costs, whether as an internal matter or one that informs policy considera- tions by the appropriate regulatory bodies of governance structures.5 To be sure, agency costs are inevitable in a representative system, be it a business corporation,6 government, or any other form of association, whose activities are, in the nature of things, conducted by human be- ings.7 In other words, agency problems are associated with the delega- tion of power, management, and control, and thus highlight the transac- tion costs of specialization, which undoubtedly create value and enhance efficiency.8 On a more positive note, however, agency costs may be con- ceptualized as the transaction costs which a representative system must incur in ensuring efficiency in the system. In this regard, the system’s success may be measured both in terms of the magnitude of the costs 4. To be sure, the agency relationship is pivotal to the existence and operations of business corporations. See Eric W. Orts, Shirking and Sharking: A Legal Theory of the Firm, 16 YALE L. & POL’Y REV. 265, 274 (1998) (“Legal agency relationships are one foundation of business organizations. Without legal agency, business firms of any com- plexity are impossible.”). Note also that both law and reality supports the use of agency for the company’s activities because of the company’s peculiar nature as a legal entity. For example, sections 63 and 64 of the Companies and Allied Matters Act (CAMA) au- thorize a company to act through both institutional agents, such as the board of directors and the members in general meetings, and any agent or officer appointed by those two organs. Companies and Allied Matters Act (CAMA), (1990) Cap. C20, §§ 63, 64 (Nige- ria). Even at the board level, the law permits a board of directors to delegate all its pow- ers to an individual, called the managing director. See id. § 64(b). 5. For a discussion of agency concepts and costs, see Stephen A. Ross, The Eco- nomic Theory of Agency: The Principal’s Problem, 63 AM. ECON. REV. 134 (1973). 6. It is important to note Orts’ caution regarding the nexus between agency costs and the firm. See Orts, supra note 4, at 278 (“Although agency costs help to explain the eco- nomic dynamics of firms, they are not sufficient to explain the existence of firms and their boundaries.”). 7. Orts argued that, “agency costs provide one important theoretical explanation for limitations on the size of firms.” See Orts, supra note 4, at 275. In fact, the primacy of agency relationships to societal development may be better understood from the perspec- tive of division of labor. For works describing the value of agency to development, see ADAM SMITH, AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS, (Kathryn Sutherland ed., Oxford Univ. Press 1993) (1776) [hereinafter SMITH, WEALTH OF NATIONS]; EMILE DURKHEIM, THE DIVISION OF LABOR IN SOCIETY, 11–30 (1997); Mi- chael Jensen & William H. Meckling, Specific and General Knowledge, and Organiza- tional Structure, in CONTRACT ECONOMICS 251 (Lars Werin & Hans Wijkander eds., 1992) [hereinafter Jensen & Meckling, Specific and General Knowledge]. 8. See discussion supra note 7. 2007] CORPORATE GOVERNANCE 469 incurred relative to the benefits produced and by how well the costs are controlled or managed. On the whole, however, the inevitability of agency costs reinforces the need to design effective strategies for their management.9 In a corporate law context, the complexity of agency problems and costs is shaped, among other things, by both organizational size and ownership structure.10 A big organization with a large membership size (or diffused membership) will likely face graver agency problems requir- ing special contrivances for control than one that is small and has man- ageable and concentrated membership.11 While agency costs usually emanate directly from the conduct of those entrusted with the manage- ment responsibility of a given system, their persistence may depend on, and sometimes be exacerbated by, certain exogenous factors such as cul- ture,12 perception, and the existence or lack of alternative control or in- tervention systems. Effective agency costs management will thus require that control systems are designed around the internal setting of the sys- tem; however the possibility that internal structures may weaken inter- nal-oriented control mechanisms should serve as a reminder of the need to have alternative intervention systems.13 This Article will examine whether the response of the 1990 Companies and Allied Matters Act (CAMA or Act) and other allied legislation to 9. See Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. FIN. ECON. 305, 308 (1976) [here- inafter Jensen & Meckling, Theory of the Firm]. 10. See James S. Ang, Rebel A. Cole & James Wuh Lin, Agency Costs and Owner- ship Structure, 55 J. FIN. 81, 87 (2000) (finding that agency costs (1) are higher when an outsider rather than an insider manages the firm, and (2) are inversely related to the man- ager’s ownership share). 11. One needs only to remember the analysis of Berle and Means about shareholders’ size and its impact on management behavior and agency costs. See ADOLF A. BERLE, JR. & GARDINER C. MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY (1933). 12. See Mark J. Roe, Can Culture Constrain the Economic Model of Corporate Law?, 69 U. CHI. L. REV. 1251, 1262 (2002) (“The key point is not that one society or another is better off, but that culture would affect how the three-player contractarian corporate model played out.”). Roe contrasted the reaction of the Swedish to the retirement com- pensation of Percy Barnevik. See David Woodruff & Almar Latour, Barnevik Gets Harsh Verdict in Court of Public Opinion: Former ABB Chief Is Disgraced in Pension Plan, WALL ST.
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