Business & Corporate Law Practice

THE NEED FOR CORPORATE STRUCTURES

Mary Adefolaju
| August 29th, 2024

The Companies and Allied Matters Act 2020 makes provision for the incorporation of a company, and for a company to function well, it needs to have a corporate structure which is well regulated by the Code of Corporate Governance 2018. 

 

There are different codes of Corporate Governance which have been released by different regulatory agencies to ensure good corporate governance in Nigerian Companies. 

 

We have the 

 

  1. Code of Corporate Governance for Public Companies 2011 by SEC
  2. Code of Corporate Governance for Pension Operators 2008 by PENCOM
  3. Code of Corporate Governance for Telecommunication Companies.
  4. Code of Corporate Governance for Banks, Discount Houses and other

Financial Institutions 2014 by CBN

  1. Code of Corporate Governance for Insurance Industries
  2. OECD Code of Corporate Governance

The two main Codes of Corporate Governance 2018 with relevant provisions are:

a. Nigerian Code of Corporate governance

b. Code of Corporate Governance for Discount houses , Banks and other Financial Institutions. 

 

These Code made provisions for the formation of the Board of Directors and Officers of the Board, which brings us to What is a Corporate Structure? 

Corporate structure refers to how a business is formed to accomplish its objectives. It further determines the ownership, control , and authority of the organization refers to how a business is organized to accomplish its objectives. The Corporate Structure determines the ownership, control, and authority of the organization.. In a corporation, these characteristics are represented by three groups: shareholders, directors, and officers. Ownership belongs to the shareholders. Control is exercised by the board of directors on behalf of the shareholders, while authority over the day-to-day operations is vested in the officers.

 

Shareholders 

 

In a corporation, a group of shareholders have shared ownership, represented by holding shares of common stock. Most business corporations are established with the goal of providing a return for its shareholders in the form of profits. Shareholders have the right to share in the profits of the business but are not personally liable for the company's debts. This concept is known as limited liability and is one of the main advantages of the corporation as a form of doing business. 

 

When investing, you decided to do so in a few shares of your favorite clothing company, but it doesn’t give you the right to show up at the corporate headquarters, just because you are a shareholder. In other to achieve your aim, you need to elect a board of directors who would oversee the management of the Cooperation.

If you decide to invest in a few shares of your favorite fast food company, does that give you the right as a shareholder to show up at corporate headquarters and start making decisions? Generally not. Instead, shareholders elect a board of directors who oversee the management of the corporation. 

 

 

Board of Directors. 

The board of directors is responsible for overseeing and directing the business of the corporation in the best interest of the shareholders. Its purpose is to oversee operations, approve major plans, and monitor financial performance. 

The board generally performs the following functions: 

  • Select, evaluate, fix the compensation for, and, when necessary, replace the company's chief executive officer 
  • Oversee the business operations to evaluate whether the business is being properly managed 
  • Review and approve major corporate plans, financial objectives, annual budgets, and strategies 
  • Review the adequacy of financial accounting, auditing, and other systems to comply with applicable law

 

Authority for these responsibilities is typically derived from each state's corporate statutes, which delegate to the board the duty to manage the business of the corporation. The board doesn't have total control, though. Some important decisions affecting the corporation require a shareholder vote. The statutes specify the matters that must be acted upon by the shareholders, including amendments to the certificate of incorporation or bylaws, the election of directors, the sale of all or substantially all of the corporation's assets, and the merger or consolidation of the corporation. 

The board of directors is generally comprised of three types of people. The chairman of the board is technically the leader of the corporation, responsible for running the board effectively. The chairman is usually elected from the board of directors. The chairman's duties include maintaining strong relationships and open communication with the chief executive officer and other executives, formulating business strategy, and representing the company's management and board to the general public and shareholders. 

Other board members may be Directors provided for under 269 of the companies and allied matters act. who are either major shareholders, high-level managers from within the company, also known as executive directors, or someone else with a direct connection to the business.  directors can offer the board a perspective on the business from the inside. There are different kinds of Directors to oversee the company, we have the Shadow Director, provided for under S270 of Companies and Allied Matters Act, Non-executive Director, Independent Director provided for under S275(3) of CAMA, and Life Director provided for under S281 of CAMA. With these Board of Directors overseeing the affairs of the company, it is sure to run smoothly. 

 

Pros of Addressing Corporate Structure

Benchmark your company’s historical growth, offerings, customer segments and geographic spread against those of your competitors, to identify areas of growth and improvement

Improve transparency by outlining business relationships and roles and responsibilities of your company’s key divisions and executives

Ensure sound decision-making by defining policies, processes and procedures followed by your company

Improve business performance by evaluating your company’s goals, capabilities, and opportunities

Provide clarity on employee roles and map performance metrics

Cons of Not Addressing Corporate Structure

  • Limited growth potential with an inadequate understanding of the market and customer segments
  • Disruption in operations with undefined roles and responsibilities
  • Slow decision making with inadequate understanding of relationships with subsidiaries and the degree of control required.

In conclusion, every corporation needs a corporate structure to function exceedingly well. 

 


Mary Adefolaju
Author

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