Achieving Stakeholder Objectives: Governance Codes, Listing Rules and Reward Schemes

If managers sometimes serve their own interests, owners need ways of making them serve the owners. There are three broad answers. The first is structure: a board that is organised so that no one person can dominate it, with independent directors who watch the executives.

The second is rules from outside: the stock exchange and the regulator require listed companies to report regularly and to explain themselves, and penalise those that do not. The third is reward: pay the managers in a way that makes their wealth rise and fall with the shareholders’.

This topic covers all three, the elements of corporate governance, the steps governance takes to reduce the agency problem, the stock exchange requirements, the typical remuneration package and the share award and option schemes, with numbers, and the limits of each. The next topic covers how the achievement of corporate objectives is evaluated.

The topic is examined through scenarios in which a company has weak governance or a poorly designed pay scheme and you are asked to advise. Read agency theory first.

Corporate governance

Corporate governance describes the way a company is managed on behalf of its owners by the board of directors. It is a wider approach to reducing the agency problem and to making sure companies are governed in the best interests of shareholders.

Its elements are:

• the board of directors, its responsibilities and composition
• the remuneration of directors
• internal control and risk management
• external auditors, financial reporting and independence
• communication with shareholders and the rights and responsibilities of shareholders

How governance reduces the agency problem

• Board responsibilities. Decisions on major strategic investments are reserved for the whole board, so that they are not taken by executive management alone.
• Board composition. The chairman and the chief executive should not be the same person, to avoid excessive influence by one individual. The board should have a strong element of independent non-executive directors, who have no executive role, are not full-time employees and have no conflict of interest, so they can act in the shareholders’ interests. The Nigerian Code of Corporate Governance 2018 issued by the Financial Reporting Council recommends a mix of executive, non-executive and independent non-executive directors with a majority of non-executive directors and, among them, a majority who are independent, and it applies on an “apply and explain” basis.
• Board committees. A nominations committee to appoint directors, an audit committee to liaise with the external auditors, and a remuneration committee to set the pay of individual directors, each with a strong non-executive element. Independent directors take decisions where executives have a conflict of interest, such as their own pay.
• External auditors. The audit committee recommends the audit fee and reviews the auditor’s performance, which reduces the influence of the executive directors on the auditors.

Stock exchange listing requirements

The rules of the stock exchange help to ensure that public companies are managed in the best interests of shareholders. Listed companies in Nigeria must submit financial statements regularly: quarterly and annual reports that update shareholders on performance, within the required time, or face penalties. The Nigerian Exchange’s continuing obligations also require immediate disclosure of price-sensitive information, and listed companies must certify their compliance with governance standards each year.

Publicly traded companies are also regulated by the Securities and Exchange Commission under the Investments and Securities Act 2025 and its own corporate governance guidelines. These rules help shareholders watch the managers: reports make performance visible, and penalties and disclosure make concealment costly.

Management reward schemes

Managers can be encouraged to work for the company’s owners if their pay is linked to profit, earnings, share price or total shareholder return. Most large listed companies have such schemes for executive directors and senior managers, so that the managers’ personal interests become similar to the shareholders’. A package usually has at least three elements:

• Basic salary (with pension entitlements), high enough to attract and keep people with the skills required.
• Annual performance incentives, usually a cash bonus for achieving or exceeding targets stated as profit or earnings growth, earnings per share (EPS) growth or total shareholder return, and sometimes non-financial targets.
• Long-term incentives, linked to share price growth or total shareholder return over a longer period, in practice usually three years, in the form of share awards or share options.

For example, a chief executive has a salary of ₦60m and a bonus of up to 50% of salary if EPS growth is at least 10%. EPS grows from 80 kobo to 90 kobo, a rise of 12.5%, so the bonus of ₦30m is earned and total cash pay is ₦90m.

Share awards and share options

Under a share award scheme the company buys a quantity of its own shares and gives them to executives if long-term financial targets, typically over three years, are met. A share option is the right to buy new shares at a fixed exercise price, set at the market price when the option was awarded, from a specified date, typically three years later.

The holder gains if the price rises above the exercise price and so has a direct interest in a rising share price. For example, 1,000,000 options are granted at ₦6.00. Three years later the price is ₦9.50. The executive buys 1,000,000 shares at ₦6.00 and the gain is 1,000,000 × ₦3.50 = ₦3.5m. If the price had fallen to ₦5.00 the options would simply lapse, costing the executive nothing.

Problems with reward schemes

• Short-termism. An annual bonus on profit or EPS may encourage managers to boost this year’s figure at the expense of the long term.
• Manipulation. Targets such as EPS can be met by accounting choices or by borrowing to buy back shares, as in the earlier topic on objectives.
• One-way risk. Options reward a rise in the share price but do not penalise a fall, which may encourage excessive risk.
• Share price outside management’s control. A general market rise can make options valuable even if the manager did nothing. A market fall can make them worthless despite good work.
• Cost and dilution. The gain on options is a cost to the shareholders, through new shares issued below the market price.

The ideas in more depth

Why independence matters

An executive director who sits on the committee that sets his own pay has a conflict of interest. Non-executive directors who are independent of management do not. Giving them the key tasks of appointing directors, setting pay and overseeing the audit puts the decisions where the conflicts are smallest.

Why governance and reward schemes work together

An incentive scheme with weak oversight can be designed by the managers for the managers. A governance structure without incentives relies on supervision alone. The combination puts independent people in charge of designing pay that rewards what shareholders value, and the exchange rules make the results visible.

Sources and references

• The Nigerian Code of Corporate Governance 2018 (Financial Reporting Council of Nigeria); the Investments and Securities Act 2025; the Companies and Allied Matters Act 2020 on audit committees of public companies; the Nigerian Exchange rules on continuing obligations.

These points are stated as at 5 November 2026.

Worked examples

1. Growth.
   90 ÷ 80 − 1 = 12.5%, above 10%.
2. Pay.
   Bonus 50% × ₦60m = ₦30m; total ₦90m.

1. Gain.
   1,000,000 × (₦9.50 − ₦6.00) = ₦3.5m.

1. Gain. Nil: the option is not exercised, and the executive loses nothing, unlike a shareholder.

How to answer in the exam

• Link each measure to the agency conflict it addresses (for example independent directors for executive pay conflicts).
• Cover the three routes: structure, external rules and reward.
• For a pay scheme, state the three elements and test it for short-termism and manipulation.
• Calculate bonuses and option gains where figures are given.

Common mistakes in the exam

• Describing governance as only the audit.
• Saying that one person should be both chairman and chief executive for efficiency.
• Forgetting that executives should not set their own pay.
• Calling share options a cost-free incentive.
• Ignoring the stock exchange as a monitoring mechanism.
• Linking an incentive only to short-term profit.

Quick revision

• Governance: reserved decisions, separate chairman and chief executive, independent non-executives, nominations, audit and remuneration committees.
• Listing: quarterly and annual reports on time, penalties, price-sensitive disclosure.
• Pay: salary, annual bonus, long-term share awards or options.
• Options: gain if the price rises above the exercise price; nothing is lost if it falls.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

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