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Two core features of the corporate form underlie this model of corporate governance. The first is investor ownership which implies that shareholders, as residual claimants, have significant rights of control over their companies. These rights include, the right to alter the memorandum and articles of associations of their companies, the right to authorize an increase or reduction in its capital and the purchase or redemption of the company‘s shares, the right to call for the winding up of company and the right to sanction the payment of dividends (depending on the article of association).¹²¹

The second is delegated management, which implies that shareholders generally exercise this control indirectly, by participating in the selection or removal of directors or their closest equivalents in closed corporations.¹²² Shareholders also have a role in confirming transactions in which the directors have a conflicting interest.¹²³ In all, the major characteristics of outside based model include dispersed shareholder ownership and liquid capital market where ownership and control are traded frequently.

Thus, this shareholder based model depicts that the business of the company is conducted by the directors to maximize profit for shareholders, and that this principle is central to the

121J.E. Pakinson, op. cit, p. 163.

122R.R. Kraakmanet., al; The Anatomy of Corporate Law: A Comparative and Functional Approach, (Oxford:

Oxford University Press, 2004) p. 33.

123 J.E. Pakinson, op. cit., p. 163; Companies and Allied Matters Act, Cap. C20, LFN, 2004, s. 280.

46 viability of the corporate firm. The shareholders are however, only beneficiaries of the profit made by the company but the actual control of the company lies with the board of directors.¹²⁴The idea of fraud and mismanagement is premised on the failure of the shareholders to perform this control function.¹²⁵

Supporters of this Outsider Based model argue that corporate performance could be improved by expanding the range of issues for which shareholders consent is required, thereby limiting the ability of management to pursue non-profiting maximizing goals or self seeking transactions. They maintain that a procedural approach of this kind would certainly have greater potential than control by judicial review.¹²⁶ Here, shareholders appoint a board of directors who then appoint and monitor managers, and at the same time, managers operate the care function of the corporation and report back to the board of directors, who represent the shareholders.¹²⁷

Arising from the above is the fact that the Anglo-Saxon model operates under one tier board.

The one tier board is often composed of executive directors and non-executive directors with the number of the board members varying according to the regulation of the countries.¹²⁸ Moreover, in this model, apart from the control of shareholders through appointment and decision making rights, external market forces such as comparative factors in product market, capital market, and corporate control market act as further monitoring mechanisms for management. Competitive factors in the product market play an important monitoring role as the company‘s performance vis-à-vis its competitors illustrate whether managers are component and hardworking in their jobs.

124CAMA, Cap. C20, LFN, 2004, sections 63.

125 J.E. Parkinson, op. cit, p. 177.

126Ibid, p. 163.

127CAMA, Cap. C20, LFN, 2004, sections 37 and 64.

128 Review of Corporate Governance Models and its Implication on China available at:

www.business.otago.ac.nc.nz/mgmt/, accessed on 10/11/2013.

47 In a narrower sense, traditional legal understanding of corporate governance considered the company as a legal instrument whereby shareholders are able to maximize their wealth. This is what is called shareholders focused model of corporate governance or better still

‗shareholders value‘ model of corporate governance. Shareholder value is thus measured according to increasing returns on capital employed and rising share prices, adopted as an index of management success. According to Froud, this entails the financialisation of management goals and the logic of public market valuation of management performance.¹²⁹ In the words of H Gospel and A Pendleton:

The focus on shareholder value reinforces the controlling rights of shareholders in the corporation and the focus of regulatory invention is on the three-tiered hierarchical relationship between shareholders, the board of directors and seniors managers.¹³⁰

Advocates of shareholders primacy introduce corporate governance as the delegation of corporate control to directors and managers to run a company on behalf of all shareholders.

This raises a key issue that a set of regulatory or institutional arrangements can ensure that shareholders‘ interest are adequately protected and managers are rendered accountable;

regard being had to the fact that shareholders focused model of governance permits management to become a self-selecting oligarchy in effective control of most corporations, thus giving them ample scope for opportunism, shirking or self dealing.¹³¹

129J. Froud, ‗Shareholders Value and Financialisation: Consultancy Promises, Management Moves Economy and Society‘, 2000, p 29.

130 Richard M. et al, ‗Shareholder Value and Employee Interest: Intersections between Corporate Governance, Corporate Law and Labour Law‘, op cit, p.8.

131 A. Berle and G. Means, ‗The Modern Corporation and Private Property‘, (New York: Macmillan, 1932).

48 Manne¹³² was one of the earliest respondents to this growing concern. According to him, the shareholders focused model of corporate governance calls for no concern at all; in that shareholders readiness to exit corporation underpinned the liquidity necessary for a functioning market in corporate control. In other words, the dispersed, uncommitted nature of shareholders was a virtue rather than a vice. After all, managers were not as unaccountable as they seemed, but were in fact subject to quite strong market disciplines – or, ideally were subject to such disciplines provided managerialists did not have their way in promoting a radically altered form of economy in which the ideal of the market as a resource allocator was abandoned.

The shareholders model reinstates the maximization of shareholder value as the appropriate goal of management, and this is prompted by demands of efficiency in the running of the enterprise. Managers should thus be running the company to maximize shareholder wealth.

Since the shareholders‘ focused model of governance (focusing on profit and wealth maximization for shareholders) is consistent with the key features of the American practice, we shall use the U.S. model to further illustrate our position here. In line with this, we submit that what drives the U.S. corporate governance ‗model‘ sometimes referred to as Aglo-American‘ governance model, since many elements are similar in U.K. and U.S., are as follows:¹³³

i. The separation of ownership from business control; the rise of equity financing via New York and London Stock Exchanges in 20^th century (and the attendant global importance of these markets) led to development of corporate governance principles focused on shareholders‘ rights. Exchange related regulation brought greater transparency and disclosure obligations for corporate issuers.

132 H. Manne, ―The ‗Higher‘ Criticism of the Modern Corporation‖, Columbia Law Review, Vol. 62 (1962) p.

399.

133 L. A. Burnhill, ‗Overview: The U.S. Governance Model‘, being CFI Governance Working Group Presentation, January 30, 2013 pp. 1-13.

49 ii. At inception, corporate governance principles and market requirements focused on individual investors. In recent decades, institutional investors have become more prevalent, which has influenced the evolution of governance practices. In UK, 62% of shares were owned by institutions in 1981, rising to 86% in 2004. Also in US, institutions owned 34% of shares in 1980, rising to 77% in 2006.

However, the shareholder focused model of governance in contrast to stakeholders‘

governance model spares little thought for the role of the company in modern society and thereby placed little emphasis on the social or environmental impact of corporate decisions.

As we have noted, in the U.S., U.K., shareholders model of governance is concerned with ensuring that the firm is run in the interests of shareholders and its objective is to create wealth for them. Underlining this view is Adam Smith‘s notion of the invisible hand of the market as laid out in his seminal book¹³⁴ and which proclaims that if firms maximize the wealth of their shareholders and individuals pursue their own interests, then the allocation of resources is efficient in the sense that nobody can be better off without making somebody else worse off. In Nigeria, firms are run to promote the business or object for which the company is formed. This presupposes that managers have a fiduciary duty to act in the interests of the company.¹³⁵ This system can lead to an efficient allocation of resources provided, among other things, that market and institutions are well developed and competitive.¹³⁶ This underscores the fact that provided stock prices contain enough information about the anticipated future profitability of the firm; fairly, effective, automatic and incentive systems to ensure managers maximize shareholders wealth can in theory be designed. More broadly, some industrial relations scholars have observed a coincidence

134 A. Smith, An Inquiry into the Nature and Causes of Wealth of Nations, (Dublin: Whiteston, 1776).

135CAMA, Cap. C20, LFN, 2004, section 279, .

136 A. Franklin and Z. Mengxin, The Corporate Governance of Japan: Shareholders are not Rulers, (University of Pennsylvania and Bentley College, 2007) p. 12.

50 between the growing dominance of the corporate law system intent on delivering ‗share value‘ and more fragmented labour market, especially as regards job security, work intensification and investment in training and skills.¹³⁷

Much as the shareholder focused model of governance appears very enticing, it is not devoid of weaknesses. On the other hand, we argue that couplet problem generated by the shareholder model, particularly in its modern variant known as ‗agency theory‘ means that directors in the joint stock company could not be expected to be as vigilant and careful with other people‘s money as with their own.¹³⁸ There is therefore the risk that managers and directors will look after their own interests at the expense of shareholders.¹³⁹ On the other hand, we also argue that the shareholders focused model confers enormous powers on the CEOs (equivalent to managing directors in Nigeria). By this, it is meant that where the company‘s CEO serves as Board Chairman, a great deal of power is vested in that individual.

The excessive levels and growth rates of CEO pay are viewed as highly correlated to this phenomenon. Similarly, there is also the risk of sudden loss of independence. By this, it is meant that although notionally, the presence of independent (non-executive) directors serves as a control on management ambition, in practice, they are subject to the influence of the CEO/Chairman and the knowledge that their actions are transparent vis-à-vis executive directors. It is seemingly very hard a decision to vote against an increase in executive compensation when the potential beneficiaries of that vote will continue to sit next to you at Board meeting.¹⁴⁰

137 H. Benneth and B. Barry The Great U-Turn: Corporate Restructuring and the Polarizing of America, (New York: Basic Books Books, 1990).

138 A. Smith, ‗The Wealth of Nations, Book V, Chapter 1, Part 3, 1776.

139 Advocates of shareholder value may debate the exact metric to use in evaluating performance, and various consultancy firms and their principals have developed proprietary concepts to measure management performance, such as ‗Economic Value Added‘ and ‗Market Value Added‘, (Stern Stewart); ‗Shareholder Value Added‘ (LEK/Alcar Consulting group); ‗Total Shareholder Return‘ (Boston Consulting group); ‗Economic Profit‘ (Mckinsey) and so on.

140 Advocates of the shareholder focused model may again debate that Board functions permit the separation of decision management from decision control. In other words, management frames the strategy debate, but

51 Thus, the new realities of corporate governance show that no entity or agents is immune from fraudulent practices¹⁴¹ and have altered the way companies operate; they have re-defined the baseline for what is considered prudent conduct for business and executives.¹⁴² In the face of corporate scandals arising from fraudulent accounting and other illegal practices such as companies exhibition of corporate governance risks predicated on conflicts of interest, inexperienced directors, overly lucrative compensation and unequal share voting rights, there has been a renewed emphasis on corporate governance.

In essence, corporate governance covers a large number of distinct concepts and phenomenon. This can be from the definition given by Organization for Economic Cooperation and Development (OECD) thus:

Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, manager, shareholders and other stakeholders and spells out the rules and procedures for making decisions in corporate affairs. By doing this, it also provides the structure through which the company objectives are set and the means of attaining those objectives and monitoring performance¹⁴³

The above expatiation of the nuances of corporate governance presupposed that corporate governance includes the relationship of a company to its shareholders and to society; the

Board‘s approval is needed to finalize strategic decisions. Again, both executive and non-executive directors participate in setting strategy and managing risk, theoretically ensuring a balance between knowledge of the company‘s strengths, weaknesses and competitors with broader insight on the economy and operating environment overall. Further still, significant disclosure requirements provide transparency with regard to corporate operations and performance.

141 For example Marshall Cogan (The founder, controlling shareholder, CEO and chairman of the board of directors of Trace Holdings International) over a period of 15 years, took 40 million U.S dollars from the company through a number of self dealing transactions while the officers and directors stood by idly. In an action brought against Cogan and the Trace officers and directors by the trustee, the court held for the trustee, citing the directors utter failure to exercise their legal duties to act on behalf of Trace‘s shareholders and creditors, and went so far as to impose liability on Trace officers who were part of the board, but who had the authority to preempt Cogan‘s misappropriations. This was cited in P. Dandino, ‗Corporate Governance:

Something for Everyone‘, Franchising World, 36 (1), 2004 p. 41.

142 P. Dandino, ‗Corporate Governance: Something for Everyone, op cit.

143 OECD April, 1999 Available at http://www.encycogov.com what is CorpGov.asp visited August 18, 2013 at about 8: 44pm

52 promotion of fairness, transparency and accountability, reference to mechanisms that are used to govern manager and to ensure that the actions taken are consistent with the interests of key shareholders. The mechanisms referred to above as has been noted already, is twofold to wit:

legal compliance mechanism and ethical compliance mechanism. The duo is hereunder discussed: