Corporate governance is essential for Nigerian start-ups to ensure transparency, accountability, and sustainability. The recent cases with some top start-ups highlight the dangers of inadequate board oversight and management. Start-ups must embrace good corporate governance practices to improve their survivability and contribute to Nigeria’s economic growth. This article delves deeper into the topic.

Introduction

In September 2023, Techcabal, a Nigerian digital media company, reported that Favour Ori, the MD/CEO of Payday, a Pan-African FinTech company issuing global currency accounts to Africans, maintained a considerable salary of $15,000 monthly after the company raised $3 million in seed funding. In a series of tweets in response to the report, Mr Ori admitted that he received the pay, but only for less than three months before taking a pay cut. 

In June 2023, the Economic and Financial Crimes Commission (EFCC) declared the co-founders of Farmforte Agro-Allied Solutions Limited, Osayi Osazuwa and Uyi Osayimwense, wanted for “obtaining money by false pretence and fraudulent diversion of funds”. The Nation reported that the co-founders of the company lived opulently abroad on investors’ monies while workers’ salaries and dues to suppliers and builders were not paid. 

These occurrences, along with other similar events, bring to the fore the issue of corporate governance in the Nigerian start-up ecosystem.

What is Corporate Governance?

According to the Institute of Chartered Accountants in England and Wales (ICAEW), corporate governance is “the system by which companies are directed and controlled”. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the Board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business, and reporting to shareholders on their stewardship. The purpose of corporate governance is to facilitate effective, entrepreneurial, and prudent management that can deliver the long-term success of the company.”

What is a Start-up?

Start-ups are “young companies founded to develop a unique product or service, bring it to market and make it irresistible and irreplaceable for customers”, as reported in Forbes.

According to the Nigeria Start-up Act 2022 (Section 13), a company must satisfy the following requirements to be labelled a start-up:

1. It is registered as a limited liability company under the Companies and Allied Matters Act and has been in existence for a period not more than ten years from the date of incorporation;
2. Its objects are innovation, development, production, improvement, and commercialization of a digital technology innovative product or process;
3. It is a holder or repository of a product or process of digital technology or the owner or author of a registered software; 
4. It has at least one-third of local shareholding held by one or more Nigerians as founder or co-founder of the start-up and 
5. In the case of a sole proprietorship or partnership, it satisfies the conditions set out in paragraphs (b), (c) and (d).

Corporate Governance and Nigerian Start-ups

The Companies and Allied Matters Act (CAMA) 2020 codifies the acceptable corporate governance practices in Nigeria. 

According to Section 271 (1) of CAMA 2020, “Every company, not being a small company, shall have at least two directors”. 

Section 269 (1) of the CAMA 2020 further outlines the duties of a Director of a company registered under the Act to be “to direct and manage the business of the company”, and Section 294 (1) of the Act states that “a managing director (shall) receive such remuneration (whether by way of salary, commission, participation in profits, or partly in one way and in another) as the directors may determine”. 

Small companies, according to Section 394 (3) of CAMA 2020, are companies with an annual turnover of not more than ₦120 million and net asset value not exceeding ₦60 million. The most profitable start-up areas in Nigeria are Fintech, e-commerce, and agri-tech. Together, Fintech and e-commerce account for 48% of tech start-ups in Nigeria, according to Statista. The prominent start-ups in Nigeria operate in these sectors and meet the criteria for companies that are expected to appoint a Board to direct the affairs of the companies and determine the remuneration of the executives. 

Dr Ola Brown, the founder of Healthcap Africa, an African-focused investment firm, in her book titled “Journey to Series A”, lists the monthly revenue that a firm needs to have achieved to participate in seed funding raise to be between US$75,000 and US$200,000, with the company’s valuation being between $5 million and $12 million. Hence, Payday is not a “small company” and should have a competent Board of Directors in place to determine the CEO’s salary and provide strategic direction for the company.

As reported in BusinessDay, Nigeria’s start-up failure rate averaged 61% between 2010 and 2018, and according to Dele Alimi, the Director General of the Institute of Directors, poor corporate governance was largely responsible for this high mortality rate of start-ups in Nigeria.

The corporate governance issues in Nigerian Start-ups include:

• Inadequate Board Oversight: The Board of Directors of a company appoints the Chief Executive Officer (CEO), provides strategic leadership, determines executive compensation packages and approves salary adjustment for staff, institute the risk management mechanism, and establish the framework within which the company is managed, among others. Inadequate board oversight is obvious in the earlier cited examples of Payday, where the CEO paid himself a handsome salary after a seed capital raise, and Farmforte, where the founders lived largely on investors’ funds to the point where EFCC had to intervene.
   
• Ethical Concerns: Ethical considerations, such as transparency, diversity, regulatory compliance, whistleblower protection, disclosure, conflict of interest management, etc., help to establish responsible behaviour within businesses, including start-ups. For example, in an expose on Bento Africa by Tech Cabal, former employees accused the CEO of verbal abuse, arbitrary dismissal of staff, refusal to pay severance pay, etc. Properly instituted corporate governance would have anticipated and checked against these occurrences.
   

• Regulatory Compliance: Corporate entities in Nigeria are governed by extant laws that apply to their operations. For example, Section 18 of the Nigerian Labour Act provides for annual holidays with pay. However, in the earlier cited example of Bento Africa, many members of staff were reported to have been denied their annual leave by the company’s CEO, contrary to the provisions of the Nigerian Labour Act.
   
• Whistle-blowing: Whistle-blowing is a corporate governance tool which allows employees and other stakeholders to report unethical, illegitimate and illegal conduct to the Organisation or an external body for action. According to Olisa Agbakoba Legal, whistle-blowing is currently underutilized in Nigeria. The Central Bank of Nigeria (CBN), for example, mandates banks to have a whistle-blowing policy. Start-ups in Nigeria should embrace a similar policy, so that employees would be able to report misconduct to an independent body (like KPMG) or the Board, which they are unravelling.

Since its $3 million seed funding raise in March 2023, news reports indicate that Payday is now actively speaking with buyers. Ultimately, available information suggests that 61% of Nigerian start-ups fail, which could either be due to other inherent risks or corporate governance. However, corporate governance remains an issue to be dealt with. The oversight function of a functional and properly constituted Board allows it to check management arbitrariness, which is often inimical to business growth and sustainability.

Conclusion

Corporate governance is important for businesses, especially start-ups, as it promotes transparency and accountability, and enhances the survivability of businesses. Good corporate governance would help improve the poor 61% average failure rate for Nigerian start-ups – and ultimately contribute to Nigeria’s economic growth, boost employment, and improve the country’s economic resilience.