Introduction

The Nigerian Corporate Governance Rating System (CGRS) is a joint initiative between the Nigeria Stock Exchange (NSE) and the Convention on Business Integrity in Nigeria (CBI). The system rates all listed companies in Nigeria on their corporate governance and integrity practices. Qualifying companies that clear certain market capitalization and liquidity criteria become part of a Premium Board on the NSE. The NSE also plans to rate all listed companies and place them in a tradable basket – The Corporate Governance Index.

Corporate governance (CG) is defined   as involving “a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring,” in the Preamble to the global best practice benchmark for corporate governance, the 2004 OECD Principles, focusing more on the economic interest of investors, two prominent academics put forward a more succinct definition. Corporate governance deals “with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment.” [1]

Corporate governance matters both on the company level to enable access to external finance and on the country level, to foster transparency in business culture and overall trust in the financial system. A good corporate governance framework is essential for the efficient allocation of capital.  Through enhanced disclosure and transparency, a sound framework provides market confidence, attracts long- term capital and supports market discipline.  It thereby also reduces the costs of issuing capital for companies. Consequently, many countries have made improving corporate governance a priority, with two principal pathways.  Aside from the legal and regulatory pathway for policy makers and regulators, the second principal pathway to externally influence the governance practices of corporations, is to create incentives for companies to meet the market governance demands by investors.

One of the most straightforward options to incentivize companies and communicate with investors is corporate governance ratings and the indices that result from such ratings. If done right, they can be an effective tool to enhance the legal and regulatory framework. They also offer companies an opportunity to differentiate themselves from the negative perception their host jurisdiction may have.  Following this logic, since 2001, eight stock exchanges have launched corporate governance indices (CGIs), sometimes as part of broader environmental, social and governance (ESG) indices.

 

Corporate Governance Indices and Rating Systems Worldwide

As of January 2014, the following stock exchange CGIs exist around the world. Many more are in the planning stages such as Russia’s Novy Ryknok and Chile’s Sustainability index. Some of the best practice characteristics of existing CGIs will be referenced in the analysis of the CGRS below.

From the background of the launch of the CGRS, this report advances the principal features of the CGRS and where applicable, relates them to index structures and best practices found around the world.

 

[1] Shleifer, A., R.W. Vishny, 1997, A survey of corporate governance. The Journal of Finance 52, 737-783