Introduction To Corporate Governance in Nigeria
Introduction To Corporate Governance in Nigeria
by CLRWC in Case Summary
Written by E. O OWOLABI
What is Corporate Governance?
Corporate Governance is a system of rules, policies, and practices that dictate how the affairs of an organization are managed and directed. It also helps oversee the operations of the organization.
Corporate Governance includes principles of transparency/accountability and security. Where an organization practice good corporate governance, it has been shown to yield a positive result on such organization and the aims and objectives of the organization achieved. Corporate Governance is the art of directing and controlling the organization by balancing the needs of various stakeholders. This often involves resolving conflicts of interest between the various stakeholders and ensuring that the organization is managed well, meaning that the processes, procedures and policies are implemented according to the principles of transparency and accountability.
It has to be borne in mind that the organizations have duties and responsibilities towards their stakeholders and hence they need to be governed in accordance with the law and keeping in mind the interests of the stakeholders and shareholders. In good corporate governance, the processes of disclosure and transparency are followed so as to provide regulators and shareholders as well as the general public with precise and accurate information about the financial operational and other aspects of the organization. An Organization that practices poor corporate governance are said to lack structure within the organization.
It has been established that there are different types of stakeholders in an organization i.e.
- Financial Stakeholders
- Other Stakeholders
Financial Stakeholders are stakeholders with a financial interest in the Company. These consist mainly of shareholders/investors and lenders. While other stakeholders might have other significant influence e.g. Board of Directors/Trustees of an organization, employees, government, major suppliers and the general public.
Key issues in Corporate Governance
There are key issues in Corporate Governance where they might be conflict of interest between Board of Directors, Shareholders and other stakeholders:
These are listed below as
- Financial reporting and auditing
- Director’s remuneration
- Company stakeholder relations
- Effective communication between the Directors and stakeholders.
- Ethical conduct and corporate social responsibility.
Concepts in Corporate Governance
Openness, honesty and transparency
Openness can be described as an organization willingness to provide information to individual and groups about the organization without giving out sensitive information either about the commercial or strategy of the organization in achieving its objectives. Shareholders, investors and stakeholders in a company need to know what the position of the organization is.
Honesty is a sign when an organization statement is believed which show that the stakeholders believe in such an organization and trust the information given by the organization.
Transparency refers to the ease with which an outsider is able to make a meaningful analysis of an organization and its action. It also refers to both information about the financial position of an organization and non-financial issues.
Independence refers to the extent to which procedures and structures are in place so as to minimize or avoid completely, potential conflicts of interest that could arise between an organizations Board of Directors/shareholders and other stakeholders.
Persons who make decisions in an organization and take actions on behalf of the organization on specific issues should be accountable for the decisions they make and the actions they took. Stakeholders should be able to access the actions of decision-makers of the organisation and have the opportunity to query them. Where there is an absence of accountability, the decision-makers of an organisation would care less about the impact of the organisation on other stakeholders so long their personal pockets benefit from the decision they make.
A Manager or decision-maker of an organisation who is responsible for his or her decisions and actions should be subject to corrective measures. Mismanagement should be penalized and managers of an organization should act responsibly. Also, a question arises as to who should have responsibility. Managers are responsible for the operations of an organisation.
Fairness is a term that implies that all stakeholders in respect to a company should be treated equally. In terms of government, all citizen and stakeholders irrespective of religion, tribes, sex and beliefs should have the opportunity to equal treatment.
Reputation and Reputational risk
An Organisation like an individual will be known widely by its reputation, defined as the character generally ascribed to that entity. A reputation may be good or bad. It could be an asset or a hindrance. A good reputation needs to be built up over many years and encompasses many facets of the activity of the entity. It will reflect the overall way in which an organisation is perceived by the stakeholders.
This can be influenced by code of ethics, corporate social responsibility, fair treatment of staff, attitudes to customers, community involvement or a willingness to obey the spirit as well as letter of the law. Although it takes some time to build a good reputation, however, it can be destroyed overnight by a badly handled catastrophe or negative publicity.
On the 15th of January 2019, the Federal Government of Nigeria disclosed the Nigerian Code of Corporate Governance 2018 (Code), which is aimed at introducing best practices in corporate governance in Nigeria in order to restore confidence in the Nigerian economy and create an environment for sustainable business operations.
IN THE PAST, THERE WERE FIVE SECTORAL CODES OF CONDUCT, NAMELY:
- Code of Corporate Governance for the Telecommunication Industry2016, issued by the Nigerian Communications Commission (replacing the 2014 Code).
- Code of Corporate Governance for Banks and Discount Houses in Nigeria 2014 issued by the Central Bank of Nigeria(replacing the 2006 Code).
- Code of Corporate Governance for Public Companies in Nigeria 2011 issued by the Securities and Exchange Commission (replacing the 2003 Code)
- Code of Good Corporate Governance for Insurance Industry in Nigeria 2009 issued by the National Insurance Commission;
- Code of Corporate Governance for Licensed Pension Fund Operators 2008 issued by the National Pension Commission.
Corporate Governance in Companies
There are about twenty-eight (28) broad principles laid down by the Code, sixteen (16) of which relate to the Board of Directors and Officers of the Board (addressing diverse board related issues including composition, key functions, meeting, induction, the delegation of duties, and evaluation); (4) concerning risk management, whistleblowing and audit processes (together titled Assurance); (3) on the relationship with shareholders (reiterating the importance of general meetings, communication with and equitable treatment of shareholders); (2) on the ethical conduct of business (which extol establishment of policies and mechanisms for monitoring insider trading, related party transactions, conflict of interest and other corrupt activities); (1) on sustainability (pushing for the adoption of environmental and socially sustainable business practices), and (2) on transparency (addressing stakeholders communication and disclosure of material information).
To ensure that companies do not lose sight of the goal of the governance principles, the Code requires, in certain circumstances, that companies adopt the “Comply or Explain” principle, which requires that companies not only apply the governance principles but also explain how their specific conducts fulfil the objectives of the governance principles.
Some of the major suggested practices under the Code and the expected implications are stated as follows:
Board Structure & Composition
As previously stated, the Code is now of general application to all types of organizations regardless of their size and sector or specialization. The implication is that all organization are bound by the provisions of the Code, thus there is an expectation of a fully structured board and organizational structure. In line with best corporate practice, the Code now recommends a mix of executive directors (EDs), non-executive directors (NEDs) and independent non-executive directors (INEDs) on the board of an organization. Companies can determine the size and composition of their board subject to the requirement of their sectoral codes.
Companies would need to adopt policies that allow for review of existing Board composition to ensure it reflects an appropriate balance of power on the board, independence and integrity.
It is the recommendation of the Code that the Chairman of the Company should provide leadership and not be involved in the day to day running of the Company. Thus, in line with best corporate practice, the position of the Chairman should be separated from the Executive Directors of the Company through the instrumentality of terms of reference which defines clearly the roles and responsibilities of the directors of the Company.
The Code discourages the transition of the Chairman of the Company to the position of Managing Director/Chief Executive Officer of the Company. It provides that a period of three years break from the Company should be allowed for a Chairman that transits to the position of MD/CEO. However, there will be the need for such incoming MD/CEO to be updated on relevant skills, knowledge and changes in the Company to ensure effective management of the Company upon assumption of the role.
The Code also prescribes criteria for establishing the independent status of an Independent Non-Executive Director (INED) in order to ensure the INEDs are independent in character and judgment to the deliberation of the board. In line with best corporate practice, the independence of the INEDs will be evaluated on the following criteria recommended by the Code that INEDs cannot:
- Have shareholdings in excess of 0.01% of the Company’s paid-up capital; although some sectoral requirement prohibits INEDs from holding shares of the company.
- Serve as employees of the company or its related companies within the preceding five years;
- Have a material relationship with the Company directly or indirectly within the preceding five years;
- Have a close family member who has served as a director, senior employee, creditor, supplier, customer and substantial shareholder of the company;
Role of Company Secretary
The role of the company secretary is to provide effective guidance and support to the Board of the company. The code requires that the company secretary should be empowered by the Board to effectively carry out its function. Although the company secretary should not be part of the Board, the appointment, removal and performance evaluation of the company secretary must be approved by the Board. Because the company secretary is acquainted with governance matters, the Company Secretary should be responsible for advising the board (through the board chairman) on Corporate governance matters as well as assist in providing induction and development of the board.
Role of Board Committee Structure
The code recommends the establishment of committees responsible for nomination and governance remuneration, risk management and audit whose members should be non-executive directors (NEDs). Committee reports on their deliberations are expected to be presented to the Board during quarterly meetings by the Chairman of each Committee. It follows that companies, especially banks and financial institutions whose Board Committee members are executive directors (EDs) will have to review the composition of the Board Committees in such a way that reflects skillsets in risk management, audit, etc. and are non-executive directors (NEDs) of the company.
Role of Internal Control
The code recommends additional responsibility for the audit committee which is to ensure the development of a comprehensive internal control framework and report annually in the audited financials on the design and operating effectiveness of the company’s internal controls over financial reporting.
The Code requires that there is a need to ensure that the internal control over financial reporting is adequately designed to substantially reduce the risk of misstatements and inaccuracies in the company’s financial statement.
Role of Information Technology
Enterprise data, including its availability, integrity, confidentiality and overall security is key to risk management and as such the code recommends that the risk management committee should be responsible for reviewing and updating the IT governance architecture of the company on an annual basis and report to the Board for approval. The key considerations of the review would be whether:
- adequate structures exist to implement the IT governance practice;
- measures are in place to ensure data availability, usability and accuracy to enhance decision making by management;
- data privacy, access control and information security controls are in place while ensuring compliance with existing regulatory, contractual or internal requirements for data.
- Data flows seamlessly as a result of the complex system integration at various levels of IT architectural layout.
The code recommends that the tenure of the INEDs should be limited to three terms of three years to enable periodic refreshing of the Board. Therefore, the policy or Board charter should define the tenure of EDs and INEDs with provision for the evaluation that takes into account performance, the existing succession planning mechanism, continuity of the Board and the need for continuous refreshing of the Board. There is also the requirement by the Code that the duration of appointment of external audit firms should not exceed ten (10) years and if it does such should come to an end at the next general meeting of the company from the date the Code becomes effective.
The Code requires the Board and Board Committees and management performance and the implementation of the governance evaluation to be conducted annually with the use of independent consultants However, companies that choose to conduct the evaluation internally would have to develop rigorous objective processes to achieve an objective and credible result. The Code requires that the summary of the report of the evaluation should be included in the annual report of the company and investors report.
The Code requires companies to not just disclose the remuneration of directors but to disclose the policy of the remuneration package, such that it can be seen as justified and supportive of the underlying and strategic objectives of the company while aligning the interest of the directors with the Shareholders.
Remuneration Claw Back/ Exempted payment
The Code requires companies to review the remuneration structure to discontinue the practice of providing sitting allowances for Boards and Board Committees and giving undeserved rewards to directors and senior employees. The Code recommends a clawback policy to recover the undeserved payments to directors and senior employees of companies.
External Audit Firm/ Audit Partner Rotation
The Code requires that the external auditors and partners’ tenure must be limited to ten (10) years after which a new set of partners and external auditors are appointed. It follows that the audit committee of a company has an obligation to monitor the tenure of external auditors in order to ensure compliance with the code. The Code requires that in order to preserve the independence of the engagement partner, there should be a rotation of the audit engagement partner every five years and at least a period of three years between retirement from the audit firm and appointment to the Board of the company. Similarly, a member of the audit team would be required to have a cooling-off period before joining the staff of the company.
Risk Management And Whistleblowing Policy
The Code requires that companies should have a clear risk management policy that defines the risk management framework of the company and the extent of risk appetite the company may tolerate and ways of safeguarding shareholders’ assets. The Code also requires companies to have a whistleblowing policy to support the disclosure of corrupt and related unethical conducts in order to minimize the company’s exposure to reputational risk. The Code requires the anonymity of the whistleblower to be protected otherwise such would be entitled to compensation.
Relationship With Shareholders and Stakeholders Engagement.
The Code underscores the need for robust shareholders relationship with the Board of the company through the platform of General Meetings, in order to facilitate a greater understanding of the company’s business, governance and performance standards while enabling them to exercise their ownership rights and express their views to the Board on any areas of interest.
The Code reinforces the concern for engagement with shareholders through regular dialogue to balance their interest and expectation with the objectives of the company. For this purpose, the best corporate practice requires that the Board formulates policies that will endanger such regular dialogue. Ideally, such policies should be developed to reflect a balanced understanding of shareholders’ issues and should be hosted on the company’s website.
Protection Of Shareholders Rights
This principle reiterates a critical corporate governance requirement of treating shareholders fairly and equitably, particularly with regards to protecting minority shareholders from the abusive actions of the controlling shareholders of a company.
Thus, the Code mandates directors to act in good faith and with integrity in the best interest of all shareholders while providing adequate information to shareholders to enable them to make informed investment decisions
Business Conduct And Ethical Culture
This principle as espoused by the Code reiterates the imperative of protecting the reputation of companies through good conduct in order to enhance investor confidence. The principle, therefore, enjoins the Board of companies to formulate a Code of Business Conduct and Ethics in order to model a top-down commitment to professional business and ethical standards, from Board and management level to employees, contractors, suppliers, etc. to drive professional and ethical behaviours in their dealings with the company.
The Code requires that ethical policies should be formulated to monitor conflict of interest situations in order to prevent corrupt practices in companies. The Code, therefore, requires that transactions between related parties that are likely to result in a conflict of interest with the company must be disclosed, prior to the execution of the transaction. The principle underpinning the Code further mandates that no person appointed at the directorate level of a regulatory institution should be appointed as Director or top management staff of a company or institution that is under the supervision of the relevant regulatory institution, until after three years of disengagement of the person from the relevant institution.
Sustainability And Communication Policy
This principle underscores the need for the Board of companies to give adequate attention to sustainability issues such as Environmental Social and Governance (ESG) responsibilities/activities. It requires globally reporting standards to be followed in reporting such activities, as this will effectively reflect the company as a responsible entity while safeguarding the reputation of the company.
Companies are also required to have a communication policy to engage with stakeholders and have a duty of disclosure of any relevant information to the stakeholders of the company.
In conclusion, it is an established fact with international recognition that Corporate Governance is a structure which when properly implemented helps an organization achieve its aims and objectives while also placing the organization on a stable scale for its long-term goals. The practice of Corporate Governance creates transparency in an organization and organization that are said to diligently practice Corporate Governance to achieve better results.
The Jurisdiction of the Federal High court In Cases Pertaining To Passing Off Arising From An Unregistered Trademark.