Introduction

A common challenge most Nigerian startups face is maintaining the balance of business growth with a good governance structure. Nigeria is a major player in the African startup industry, with most thriving startups founded and run by Nigerians¹.

This was evidenced by the value of funding; Nigerian startups attracted between the years 2021 and 2022. However, a worrying trend from the year 2023 was failure and closure of startup entities due to allegations of mismanagement and poor governance practices, all of which can be traced to a gap in governance structure ².

There is a common misconception amongst startup founders that setting up a corporate governance structure only applies to large or developed corporate entities, and this informs the push back from startups and small-scale entities in setting up a corporate governance system. Also, the fear of losing autonomy, assumed bureaucracy, the exposure to a structured decision-making process and increased transparency are some of the reasons why founders are seemingly not keen to embrace governance or instill governance frameworks. Some startup founders perceive corporate governance as an irrelevant tool for business growth, however, in reality, poor corporate governance or a lack thereof, breeds mismanagement, problems with internal control and a gap in board oversight leading to the premature failures of these businesses.

In most governance discussions, the role of the Board, i.e. the Chairman and Non-executive Directors has been in the spotlight as the key focus of corporate governance, but the fact is that the ignition for a good corporate governance structure in any company is the Managing Director (also known as MD/CEO). Likened to a chess game, where the King makes a wrong move, the Queen is automatically in danger. The Managing Director sits at the top of business operations to drive strategy, governance and performance to ensure the overall growth of the Company, thus, the role of the Managing Director is very strategic to ensure the organizational goals are achieved, particularly driving profitability.

Due to the prevalence of corporate governance gaps in the Nigerian Startup ecosystem, it is important to highlight the key failings for startups, as well as the role the Managing Director (MD)/ Chief Executive Officer (CEO) plays while mapping where the liability for governance failure lies.

‍Key Governance Gaps in the Nigerian Startup Industry

There are a number of governance gaps that startups in Nigeria fail to recognize, and this has contributed to the early failures and mismanagement crisis we see. Only recently, the MD of a start-up announced his resignation amidst allegations of financial mismanagement, giving up ownership stake in the Company. Before this, a YC-backed female-led Nigerian digital bank shut down due to unresolved founder conflict. Also, a teenage entrepreneur-owned company shut down operations in 2023 due to alleged failure to secure additional funding, amongst rumors of financial mismanagement and questionable governance practices. These are just a few examples in the pool of many startup failures due to poor or zero governance systems. The governance gaps are highlighted below:

1.    Lack of a Governance Structure

The absence of a governance structure in any corporate or business entity is a major recipe for failure. An established corporate governance framework or structure speaks to the core of the business in ensuring that the strategies and objectives of the organization are well articulated, regulatory compliant, monitored and achieved within the proposed timelines. Simply put, good corporate governance equals good business structure. Thus, the lack of a governance structure can lead to several negative consequences that impact its efficiency, stability, and long-term sustainability.

Without clear hierarchy and defined roles, decision-making becomes inconsistent and ineffective, thereby affecting the level of accountability and probably resulting in conflicts. A company without a governance structure may face the challenge of inconsistent or miscommunicated objectives, making it difficult to achieve the set out growth strategies or attract investors and stakeholders in the short term. This is evident because it takes more than a great business idea to attract investment and partnership, factors like clear leadership and accountability are indicators for growth, which investors and partners look out for in startup entities today.

To address the concerns of most startup founders, it is important to note that governance structures are particular to the business need of every entity. This means that there is no universal structure that fits all in terms of corporate governance, thus getting the right system to match the business is very important. Also, implementing good corporate governance helps to establish a sustainable business and ultimately sets it up for long-term growth. It is not a tool for interference or disruption of business as some perceive it to be but rather exposes the business to strategic partnerships with board members in a symbiosis that profits the business and its investors.

2.    Lack of Internal Control

Lack of internal control is an indication of an absence of processes and procedures that prevent errors, financial misstatements and fraud. This is evident in companies that lack internal audit functions and have little or no board oversight over executive management. This ultimately leads to an increased risk of fraud, errors in financial reporting, misuse of assets, regulatory compliance infractions, process breakdown, increased costs, loss of stakeholder trust, low credit rating and eventually business failures.

This also occurs in business entities that have blurred the lines between their executive management and founders. It is important to note that the responsibilities of a founder and an executive director are different even though they can both be attributed to an individual. Implementing an internal control system will help put the managers of a company in check to ensure that unrestrained powers are not residing with only one individual. The Managing Director of a company, even as a shareholder/founder, is still answerable to the Board, members of Staff, investors, regulators and other relevant stakeholders, thus the lack of internal control represents a governance gap that must be checked.

3.    Lack of succession planning

Succession planning is a strategy that ensures business continuity. It is the process of identifying and developing internal or external talent to occupy key positions in a company. Succession planning applies to both the Board and the management structure. Building a lasting business requires that a structure for leadership transitions be in place. A lot of startups and small-scale entities suffer from the misconception that succession planning will interfere with set goals and vision for the business, which is not the case, rather it ensures the continuity of such articulated objectives.

Other than ensuring business continuity, succession planning ensures that there is leadership development within the organization by nurturing high-potential employees within the organization. It also promotes growth and expansion and ensures key man risk management.

4.    Lack of transparency and accountability

Good governance is emphasized through transparency and accountability. The Nigerian Startup Act, 2022 supports good governance practices in startups and highlights key provisions on transparency and accountability. The Act ³ provides for an annual reporting filing to ensure transparency regarding a company’s operations and financial status, reporting on incentive utilization, notification of structural changes and compliance with data protection laws.⁴ Although the Act is yet to come to full implementation, by instituting these provisions, startups can foster a culture of transparency and accountability, thereby enhancing investor confidence and promoting sustainable growth within the ecosystem.

Transparency is a key governance measure that aids the good decision-making process and provides safe channels for whistleblowing within the organization.

5.    Lack of Compliance

Compliance ensures that a company is aligned to the regulatory structure of the industry which it primarily operates in. For most entities, compliance begins generally with the Companies and Allied Matters Act 2020(“CAMA”) and extends to tax regulations and other federal or state specific laws. Arguably, the Compliance structure in Nigeria may be stringent and somewhat rigid with regulators introducing new policies every day, but it is important to be on top of these rules to align accordingly.

Most startups face the challenge of balancing effective compliance measures with their business plans. Their focus is mostly on gaining wider market coverage and profit, thus keeping Compliance at the back seat, which often leads to clashes with the regulators. Compliance is the business of every officer within an organization and should be a priority from Day one.

6.    Lack of Stakeholder Engagement

Stakeholder engagement is a process of actively carrying along individuals or organizations(“stakeholders”) in the company’s decisions and activities and performance. Stakeholder engagement may be carried out in different forms as best suits or is required for each engagement forum. These could be meetings, consultations, corporate communication, surveys or corporate social responsibility (CSR)initiatives. The stakeholders in this instance will include shareholders, employees, analysts, creditors, customers, regulators, vendors, host community, non-governmental organizations and government ⁵

Building on the need for transparency and accountability, stakeholder engagement requires that the stakeholders of a business are carried along with every change and development that the company experiences.  The responsibility for ensuring stakeholder engagement is not limited to organizational size or industry and applies to every entity that intends to build a sustainable business. Effective stakeholder engagement ensures that a company builds a good reputation and trust and identifying stakeholder concerns helps to address potential risks before they escalate to major issues. The lack of stakeholder engagement is a governance gap that has been identified in Startups, and rather than hold off till the stakeholder size increases, the simple steps of engagement is a useful strategy to bridge that gap.

‍The Role of the Managing Director in driving Corporate Governance within a company

As earlier noted, the Managing Director is the most senior executive of a Company who leads the management team and is responsible for monitoring the everyday operations of the Company. The Managing Director, like other non-executive Directors, has a fiduciary duty to the company and is responsible for ensuring the efficient management of the company’s resources and finances.

In addressing the role of the Managing Director in driving Corporate Governance in a company, Principle 4 of the Nigerian Code of Corporate Governance, 2018⁶ states that “The Managing Director/Chief Executive Officer is the head of management delegated by the Board to run the affairs of the Company to achieve its strategic objectives for sustainable corporate performance”.  Whilst the board designs the vision, mission and strategic objectives of the Company, the MD/CEO is accountable for the execution. The key pillars of corporate governance that the MD necessarily upholds are accountability, integrity and transparency, and this entails setting up a functional structure in place. It involves:⁷

1.    Monitoring financial performance in accordance with the approved budget.

2.    Ensuring accurate and timely reporting.

3.    Identifying potential risks, reporting on audit assessments, and implementing mitigation strategies.

4.    Facilitating a channel of communication with the board, management team and other stakeholders providing timely updates on operational issues and structural changes.

5.    Encouraging ethical decision-making and promoting a corporate culture that aligns with the company’s values.

6.    Facilitating talent management by recruiting and retaining suitable employees to support the company’s strategic objectives and ultimately drive growth.

7.    Implementing robust internal controls channels.

In one of the examples cited above, the abrupt resignation of a MD without following regulatory procedure, potentially raises questions about a Company’s system, process and procedure which is a factor to determine if such a Company would have a future and the type of future (if any), especially in instances of alleged fraud, mismanagement of resources or unethical conduct. One of the effects is that there is a vacuum in leadership which will disrupt the operations of the business and reduce investor confidence. Also, this may result in decreased employee morale and staff productivity. The onus on every Board is to ensure there is business continuity by having a good succession structure and an effective Board oversight in monitoring this process.

‍Liability for Governance

The liability for corporate governance is collective. This means that not just one player is accountable for enforcing governance within a corporate entity. The structure for good governance practice is built and monitored by multiple players ranging from the Investors who must demand and hold the Board accountable to acceptable governance practices, to the Regulators who must ensure such practices adopted are compliant and sustainable for business growth, to the Chairman of the Board who must implement the acceptable practices and the Company Secretary who is a gatekeeper for these good governance practices within the Company. Everyone has a role to play in leveraging best governance practices to build a sustainable institution. When there is a failure in governance, all the parties involved are liable.

For the Board, there is a fiduciary duty accompanying this position and every Director has a duty as an officer of the company, to act Bonafide for the benefit of the company, to exercise power for proper use and not to conflict duty and interest. A director who has been saddled with the responsibility of protecting the interest of the shareholders/investors and steering a business to profitability should be accountable for his/her actions in any eventuality, positive or negative. Whereas breakdown in the structure occurs and there is a need to identify culpable persons, the principle of lifting the corporate veil will apply, separating the corporate personality of a company from its officers. This will address the responsibility of its officers, especially in instances of investigation, reduction of a company’s membership below the statutory minimum, tax invasion, or fraud.

The Chairman of the Board is charged with the responsibility of ensuring board oversight over the business activities of the Company. The Chairman’s role is very important to ensure no lapse leads to corporate governance failure, thereby jeopardizing a company’s financial health, reputation, and long-term sustainability. The Chairman directs the Board of Directors who serve as the ultimate guardians of corporate integrity, ensuring that the executives act in the best interests of shareholders and other stakeholders. Without effective oversight, companies become vulnerable to financial mismanagement, fraud, ethical lapses, and strategic missteps.  

Contrary to popular perception, investors also have a liability for governance in startups. Beyond providing a source of funding, investors have a duty of safeguarding their investment by demanding an efficient governance framework to ensure the company operates maximally. Investors participate in shareholders' meetings where they appoint directors, determine executive compensation as well as other major policy changes. They also promote transparency and accountability by demanding clear financial reporting, monitoring key strategic goals. Investors are key stakeholders who shape a company's governance structure. Their active involvement helps maintain ethical leadership, risk management, and long-term corporate success, and a passive attitude could lead to a business failure for which they will also have liability for.

The regulators also have a liability to ensure good corporate governance structures are implemented across corporate entities, SMEs or otherwise. Their role is to establish a regulatory framework, enforce compliance and also protect stakeholders' interests. This involves defining financial reporting requirements, board composition rules, and ethical business practices. Their role also extends to encouraging corporate social responsibility by driving the adoption of sustainability and ethical business practices. Where they fail to oversee corporate activities to ensure compliance with governance standards, there will be a lapse in detecting fraudulent practices, mismanagement, or unethical conduct early on to prevent a total business breakdown.

Lastly, the Company Secretary isa key player in driving good governance in any corporate entity. As established under judicial precedence, the role of the Company Secretary has advanced beyond administrative support to the Board of Directors to being an officer of the Company tasked with the duty of monitoring and implementing good governance practice. The company Secretary acts as the bridge between the board, management, and stakeholders to ensure a good synergy is maintained for business growth. As custodians of corporate governance, they also provide guidance to the board of directors and relevant stakeholders on corporate governance best practices, ethical decision-making, and legal responsibilities to minimize risks. Thus, where there are gaps or evident failures, especially in startups, it can be attributed to the lack of oversight by the Company Secretary or due to the absence of one.

‍Conclusion: The Way Forward

To prevent governance failure, boards must actively engage in strategic decision-making, ensure compliance with regulatory requirements, and foster a culture of transparency and ethical leadership. Implementing strong governance frameworks, monitoring regular audits, and establishing clear accountability mechanisms are also essential to mitigating risks associated with poor oversight.  When a board fails in its duty to provide rigorous checks and balances, executives may operate without accountability, leading to unchecked risk-taking, conflicts of interest, and decisions driven by short-term gains rather than sustainable growth. This negligence can erode investor confidence, invite regulatory scrutiny, and, in severe cases, lead to corporate collapse. High-profile corporate scandals, such as Enron and Lehman Brothers, illustrate how weak board oversight can result in devastating financial and legal consequences.  

The importance of maintaining a good governance structure for Startups, especially, cannot be overemphasized. However, it is not all woes for a Company when governance gaps occur. The foundation for mitigating this situation is implementing an effective internal control system. Where necessary, it may be important to restructure leadership and implement risk management frameworks as well as governance policies such as a clear succession planning policy, a business continuity policy, a crisis management and communications policy to address the loopholes that exist. This will help to not only strengthen a company’s governance structure but ensure the sustainability of the business venture, especially for Founders that set out to proffer transgenerational solutions as their core objective.

Furthermore, it is important to invest in the Director’s training and development as an important resource. Most Startup founders have no prior Board experience, making it difficult for them to navigate the world of corporate governance or even appreciate the value of its implementation to their business. A lack of governance orientation allows misconceptions and bad governance practices to thrive.

Ultimately, governance practice is not just a legal obligation but a strategic necessity for corporate resilience. Companies that prioritize robust and effective governance structures are better positioned to navigate challenges, protect stakeholder interests, and sustain long-term success. Without it, governance failure becomes not just a possibility, but an inevitability.  

References

[1] Adekunle Agbetiloye, 10 Most Valuable African Startups, Business Insider Africa Publication (2024)

https://africa.businessinsider.com/local/markets/10-most-valuable-african-startups/b4ddx8mAccessed February 2025.

[2] Haute and Peers Law Practice, Maintaining Investor Confidence: The Corporate Governance Imperatives for Startups, Businesss day Nigeria Publication (2024)

https://businessday.ng/opinion/article/maintaining-investor-confidence-the-corporate-governance-imperative-for-nigerian-startups/?amp

[3] The Nigerian Startup Act,2022

[4] Section 16 and Section 43, Nigerian Startup Act,2022

[5] Part G, Section 29 (29.1.24), Nigerian Code of Corporate Governance, 2018

[6] Regulation on the Adoption and Compliance with Nigerian Code of Corporate Governance 2018. (“NCCG”).

[7] Principle 4, NCCG,2018 ibid

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