Corporate Governance is the key force behind corporate accountability and business prosperity. It is generally agreed that weak corporate governance is responsible for corporate failures in Nigeria and the world at large. A notable example is the pathetic case of the defunct Skye Bank which suffered a major setback as a result of corporate mismanagement. Hence, private and public sectors have recognised the need to imbibe good corporate governance policies.
In response to challenges and urgent need for a code of corporate governance, regulators acting as watchdog in specific sectors, have developed Codes of Corporate Governance for certain sector. Examples include Code of Corporate Governance for Banks and Discount Houses in Nigeria 2014 issued by the Central Bank of Nigeria (replaced 2006 CBN Code), Code of Corporate Governance for Public Companies in Nigeria 2011 issued by the Securities and Exchange Commission and the Code of Corporate Governance for other Financial Institutions issued 24th October,2018 and to become effective on 1st April, 2019.
In a bid to institutionalise corporate governance best practices in Nigerian Companies the Federal Government on 16th January 2019, formally unveiled the Nigerian Code of Corporate Governance 2018 (NCCG) issued by the Financial Reporting Council (FRC) and other relevant stakeholders.
Nigeria like many other nations now have a National Code of Corporate Governance which harmonises different sectors of the economy and is applicable to both private and public companies.
This write up seeks to analyse the new National Code of Corporate Governance vis-a-vis the existing Code of Corporate Governance for Public Companies in Nigeria and the Code of Corporate Governance for Banks and Discount Houses.
Overview of the Code
The aim of the NCCG is to promote public awareness of essential corporate values and ethical practices that will enhance the integrity of the business environment. Also, the institutionalising of high corporate governance standards, will rebuild public trust and confidence in the Nigerian economy, thus facilitating increased trade and investment.
The NCCG consist of 7 (Seven) parts and 28 (Twenty- Eight) principles together with practices recommended by the NCCG for the implementation of each principle. The principle covers matters on Board of Directors, Assurance, relationship with shareholders, Business conduct and Ethics, sustainability and transparency.
The NCCG applies to varying sizes and complexity across industries. The NCCG adopts a principle-based approach to allow for flexibility in the adoption of the code.
Companies are required to adopt the “Apply and Explain” approach in reporting on compliance with the NCCG. The ‘Apply and Explain’ approach assumes application of all principles and requires entities to explain how the principles are applied.
The implementation of the NCCG will be monitored by the FRC through the various sectoral regulators and registered exchanges empowered to impose appropriate sanctions based on the specific deviation noted and the company in question.
Highlights of the Code
- Board and Management
The NCCG provides for the recommended structure of the board so as to ensure the effective discharge of their responsibilities.
Principle 1 (One) of the NCCG provides that the Board is to exercise oversight and control to ensure that management acts in the best interest of the shareholders and other stakeholders while sustaining the prosperity of the Company.
The NCCG recommends that the Board should have a charter setting out its responsibilities. The recommendation for Board charter is relatively new. The Code of Corporate Governance for Public Companies, the Code of Corporate Governance for Bank and Discount Houses and Code of Corporate Governance for other Financial Institutions merely provides that the Board should define and document its strategic goals. Other commendable principles bothering on the board and management are as follows:
• The board should ensure the establishment and implementation of a succession plan, appointment process, training mechanism and remuneration structure for both the Board and senior management of the Company. This will ensure a smooth transition in the leadership of a company;
• The board establishing the Company’s risk management framework and monitoring its effectiveness, setting the Company’s risk appetite, receiving and reviewing risk reports. This is important for the identification, measurement, monitoring and control of the risks inherent in its operations;
• The board should provide an oversight over Information Technology governance;
• The board should oversee the effectiveness and adequacy of the internal control system;
Board structure and Composition
• Board composition should be an appropriate mix of Executive, Non-Executive and Independent Non-Executive members with the majority of the Board being Non-Executive Directors for the effective discharge of the board functions and responsibilities;
• The Board should promote diversity in its membership across a variety of attributes relevant for promoting better decision-making and effective governance;
• The positions of the Chairman of the Board and the Managing Director/Chief Executive Officer (MD/CEO) of the Company should be separate; The Chairman, the MD/CEO or an Executive Director should not serve as chairman of any Board committee.
• The MD/CEO or an Executive Director (ED) should not go on to be the Chairman of the same Company.
• Where a former MD/CEO or an ED intends to become Chairman, a cool-off period of three years should be adopted.
• The code provides for the recommended practices for Executive Director, Non- Executive Directors (NED), Independent Non- Executive Directors (INED) and company.
• The NCCG encourages the board of directors to have access to independent professional advice necessary in the discharge of their responsibilities as Directors.
• The NCCG recommends that the Board should meet at least once every quarter.
2. Board Committee
• The NCCG encourage the establishment of board committees to ensure efficiency of the board. The code recommends the establishment of committees such as (i) nomination and governance (ii) remuneration; (iii) audit and risk management.
• The NCCG recommends that the chairmen of Board committees should be appointed by the Board. Also, the Company Secretary, or any other officer in the office of the Company Secretary, should be the secretary of all Board committees.
• The members of the nomination and governance and remuneration committee should be NEDs, and a majority of them should be INEDs where possible.
• The Nomination and Governance committee shall be responsible for reviewing the structure and the composition of the board, review the board charter and other policies, adopt a transparent process for the appointment to the Board etc.
• Remuneration committee is responsible for the development of a transparent framework for the company’s remuneration policies and procedures.
• The NCCG recommends the establishment of a statutory audit committee which is responsible for ascertaining whether the accounting and reporting policies of the Company are in accordance with legal requirements and agreed ethical practices.
• The NCCG also recommends the establishment of a Risk Management Committee which shall include EDs and NEDs, a majority of whom should be NEDs and which shall be responsible for review and recommend for approval of the Board, the risk management policies and framework.
• The Risk Management Committees is also required to review and recommend for approval of the Board, at least annually, the company’s information technology (IT) data governance. This is a new provision in all the code of corporate governance.
3. Board Evaluation
• The NCCG recommends that the Board establish a system to undertake a board and evaluation of its own performance, that of its committees, the Chairman and individual Directors and an annual Corporate Governance evaluation.
4. Internal Audit Function
The NCCG mandates that every company should establish an Internal Audit Function. The purpose, authority and responsibility of the internal audit function should be clearly defined in an internal audit charter approved by the Board. Where a company decides not to establish such a function sufficient reasons should be disclosed in the Company’s annual report with an explanation on the effectiveness of risk management and internal control without the IAF.
The NCCG also recommends that there should be an external assessment of the effectiveness of the internal audit function at least once every three years by a qualified independent reviewer to be appointed by the Board.
5. Whistle Blowing
The NCCG provide for the establishment of a whistle-blowing framework by every company to encourage stakeholders to bring unethical conduct and violations of laws and regulations to the attention of an internal and/or external authority.
The NCCG also provides that the Board should ensure the existence of a whistle-blowing mechanism that is reliable, accessible and guarantees the anonymity of the whistle-blower and that no whistle-blower should be subject to any detriment on the grounds of the disclosure made and that he may be compensated for the disclosure suffered.
The NCCG provides that every board of a company should appoint external auditors to provide an independent opinion on financial statements of the company.The NCCG states that an external auditor may provide to the company only such other services as are approved by the Board on the recommendation of the committee responsible for audit.
The NCCG provides that an external audit firm are to be retained as auditors of a company for a period not more than 10 (Ten) consecutive years with a cool off period of 7 (Seven) ears before re-engagement.
The NCCG also recommends that there should be a rotation of the audit engagement partner every five years.
7. General Meeting
The NCCG provides that the general meeting be conducted in an open manner for full and effective participation by shareholders particularly minority shareholders. The code also provides that the chairmen of all Board committees and of the Statutory Audit Committee should be present at General Meetings of the Company to respond to shareholders’ inquiries.
Shareholder’s Engagement and Protection of Shareholder’s Right
The NCCG provides that the Board should develop a policy that ensures appropriate engagement with shareholders and also to ensure that dealings of the Company with shareholder associations are always transparent and in the best interest of the Company.
The NCCG also provides that the company should ensure that all shareholders are treated fairly and equitably and that minority shareholders are adequately protected from abusive actions by controlling shareholders.
8. Business Conduct and Ethics
The NCCG provides that companies should formulate professional and business and ethical standards applicable to the Company, its Board, senior management, employees, contractors and suppliers of the company.
The NCCG furthers recommends the establishment of policies on insider trading, related party transactions and conflict of interest.
Regulation on the Adoption and Compliance with the Nigerian Code of Corporate Governance 2018
Upon the introduction of the NCCG, the NCCG have been faulted for not addressing some of the issues raised in the darft code of corporate governance 2016. The NCCG did not solve the challenge of multiple codes in different Sectors which is still applicable; Also, the NCCG omitted to declare the effective date of the code and also an effective mechanism for enforceability and compliance with the code.
In response to these issues the Minister of Trade and Investment in exercise of its powers under the Financial Reporting Council of Nigeria Act, 2011 made a regulation dated 15th January, 2019 and published in the National dailies on 18th February, 2019. The regulation is cited as the “Regulation on the Adoption and Compliance with Nigerian Code of Corporate Governance 2018”.
The regulation provides that from the commencement of the Regulation the NCCG shall be adopted by:
i. All public Companies (whether a listed company or not);
ii. All private companies that are holding companies of public companies or other regulated entities;
iii. All concessioned or privatised companies; and
iv. All regulated private companies being private companies that file returns to any regulatory authority other than the Federal Inland Revenue Service (FIRS) and the Corporate Affairs Commission (CAC).
The implication of the above is that the NCCG is applicable to all types of companies except private companies that are not holding companies of public companies and private companies that do not file annual returns to other regulatory bodies apart from FIRS and CAC. Consequently, the code applies to all companies with sector specific code of corporate governance.
The effect of this is that there might be conflict with respect to the NCCG and the provisions of sector specific codes. The NCCG and the Regulation is however silent on the Code that will apply where there is a conflict between the NCCG and the provisions of any sector specific codes.
Section 2 of the Regulation provides with respect to the enforceability and compliance with the NCCG, that entities shall report on the application of the NCCG in their annual reports for financial years ending after January 1, 2020 in the form and manner prescribed by the Financial Reporting Council of Nigeria.
The regulation is however silent on sanctions that would be meted out to any company that fails to report on the application of the NCCG in their annual reports for a financial year. This might affect the enforceability of the NCCG in the long run.
The Nigerian Code of Corporate Governance 2018 is a right step in the right direction with respect to corporate governance in Nigeria. It is particularly unique in that it gives companies room to establish corporate governance policies which are suitable for their operation. Also, the code is also commendable in that it has a wider application as it is applicable to both public and private sectors.
The code however, has not specifically addressed the issue of which code will supersede the other where there is a conflict between the NCCG and the provisions of sector specific codes.
The code as well as the Regulation has also failed to make provision for sanctions on companies that fail to report on the application of the NCCG in their annual reports. The code of corporate Governance for Banks and Discount Houses is much effective because of the provisions for sanctions for any Company that fails to comply with the Code. Hence, the need for a provision for sanction in other to improve the implementation mechanism of the NCCG.
Abimbola is a Law graduate of Lagos State University and a First class graduate of the Nigerian Law school. She has a strong bias for Corporate commercial law practice and Commercial Dispute Resolution.
Abimbola is an Associate at Probitas Partners LLP a corporate commercial practice and dispute resolution law firm in Lagos, Nigeria. Abimbola is part of the Dispute Resolution, Corporate Commercial and Power practice group of the Firm with extensive experience in corporate commercial practice where she provides general legal advisory on law and policy affecting operation of businesses, corporate finance, due diligence for investments, corporate governance and compliance.
Abimbola is a public speaker, a budding writer and an advocate for the rights of the girl child. She is also passionate about education and youth development hence her involvement in several social projects which focus on active youth participation in propelling growth in Nigeria and Africa.
She is a member of the Nigerian Institute of Management, impact fellows, the YALI Regional Leadership Conference West Africa and an alumnus of the Covenant Christian Centre Youth Boot camp.