AN OVERVIEW OF THE NIGERIAN CODE OF CORPORATE GOVERNANCE 2018
Corporate Governance is a key driver of corporate accountability and business prosperity. The Nigerian Code of Corporate Governance (NCCG) 2018 (“the Code”) seeks to institutionalize corporate governance best practices in Nigerian companies. The Code is also to promote public awareness of essential corporate values and ethical practices that will enhance the integrity of the business environment. By institutionalizing high corporate governance standards, the Code will rebuild public trust and confidence in the Nigerian economy, thus facilitating increased trade and investment.
Companies with effective boards and competent management that act with integrity and that are engaged with shareholders and other stakeholders are better placed to achieve their business goals and contribute positively to society. In such well managed organizations, the interests of the Board and Management are aligned with those of the shareholders and other stakeholders.
By adhering to the principles articulated in the Code, companies will demonstrate a commitment to good governance practices and increase their levels of transparency, trust and integrity, and create an environment for sustainable business operations.
The Code is aimed at companies of varying sizes and complexities across industries. Consequently, flexibility – the ability to apply the Code in a wide range of circumstances, and scalability – the ability to apply to companies of differing sizes, are of utmost importance for successful implementation. Accordingly, the Code adopts a principle-based approach in specifying minimum standards of practice that companies should adopt.
HIGHLIGHTS OF THE CODE
While doing a thorough review of the Code, the following stood out;
1) CODE PHILOSOPHY – Companies are required to adopt the 'Apply and Explain' approach in implementing and monitoring compliance with the Code. The Apply and Explain approach assumes that all principles have been applied and, therefore, requires companies to demonstrate how the specific activities they have undertaken best achieve the outcomes intended by the corporate governance principles specified in the Code.
2) STRUCTURES OF THE BOARD - Principle 2 of the Code empowers its users to determine the size and composition of their boards taking into account the scale and complexity of their operations; the need for sufficient members to serve on its committees; the need to secure quorum at meetings; as well as ensuring diversity. The Code also recommends an appropriate mix of Executive Directors (EDs), Non-Executive Directors (NEDs) and Independent Non-Executive Directors, (INEDS) with a majority of Non-Executive Directors. However, the Code does not specify the number of INEDs required on boards but recommends that majority of the NEDs be INEDs.
3) CHAIRMAN OF THE BOARD - Principle 3 of the Code articulates the responsibilities of the Board chairman in providing overall leadership to the company and driving effective Board operations. It also recommends that the Chairman be not involved in the day-to-day operations of the company. Notable in this section is the requirement for the Chairman to periodically interact with non-executive Directors.
4) TRANSITION TO CHAIRMANSHIP - The Code discourages the transition of MD/CEOs or EDs to the role of Chairman, and mandates a three-year cooling off period where this is the case.
This requirement implies that retiring or retired MD/CEOs or EDs who aspire to be a Chairman in the same company would need to wait for the required three year cooling-period before they can be considered. This will assist to minimize potential conflicts of interests. During the cooling off period, it is advisable that such directors continuously update their skills, knowledge and experience, remain informed on key changes in their industry and regulatory landscape to ensure that they remain relevant.
5) INDEPENDENT DIRECTORS - All directors are expected to exhibit a degree of independence of mind and appearance. The Code however sets expectations for increased level of independence from INEDs. Principle 7 of the Code prescribes for establishing the independent status of an INED. The criteria while not exhaustive aims to strengthen independence on the board and ensures that Directors who are classified as INEDs are “independent – both in character and in judgement”. Boards are also expected to annually ascertain and confirm the continued independence of each INED of the Company. It is also noteworthy that an existing NED should not be reclassified into an INED on the same board.
6) THE COMPANY SECRETARY - Principle 8 highlights the key role that the Company Secretary plays in supporting the effectiveness of the Board and mandates that he/she provides independent guidance and support to the Board. In line with this, the Code mandates that the Board should properly empower the Company Secretary as well as approve his/her performance evaluation, appointment and removal.
7) BOARD COMMITTEE STRUCTURE - The Code recommends the establishment of Committees responsible for nomination and governance, remuneration, risk management and audit. However, companies are availed the flexibility of combining these responsibilities in Board Committees taking into consideration the size, needs and activities of the Company. The Code also recommends that the Board Committees responsible for nomination, governance, remuneration and audit comprise of only NEDs (majority of who should be INEDs where possible). Committee Chairpersons are also expected to present a written report of their deliberations to the full board at its quarterly meetings.
8) INTERNAL CONTROL - Principle 11 of the Code introduces additional responsibilities for the Audit Committee. Specifically, the Audit Committee is expected to ensure the development of a comprehensive internal control framework and obtain annual assurance (internal and/or external) and report annually in the audited financials on the design and operating effectiveness of the Company’s internal controls over financial reporting. The Code buttresses the importance of an effective internal control system
9) INFORMATION TECHNOLOGY - The Code stipulates that the Board constitutes a committee which will be responsible for providing oversight for risk management related matters within the organization. Amongst other duties, this committee will be responsible for reviewing the company’s IT governance framework on an annual basis. The reviewed framework is to be approved by the Board. IT governance issues will begin to take front burner in organizations. An annual IT governance assessment will need to be performed to ascertain that the right policies, processes and controls are in place to ascertain that the overall management of enterprise data – including its availability, integrity, confidentiality and overall security.
10) TENURE - The Code introduces a maximum tenure of three terms of three years each for INEDs while recommending periodic refreshing of the NEDs on a board. It also requires boards to determine the tenure of EDs within a company. In determining the tenure of an ED, the board should take into account his performance, the existing succession planning mechanism, continuity of the board and the need for continuous refreshing of the board.
Boards will need to re-evaluate the tenure of its Independent Directors as defined in their charters/governance policies to align with the Code. To ensure continuous refreshing of the Board, Board would need to define tenure for the EDs and NEDs. There should also be periodic assessment (at a minimum annually) of the EDs and NEDs, the outcome of which should be utilized in determining the renewal of their contracts and tenure respectively.
11) PERFORMANCE EVALUATION - The Code recommends an annual board evaluation to assess the performance of the collective board, board committees and individual directors in executing their oversight role on the company. It also introduces a Corporate Governance Evaluation to be performed annually, which will be focused on the implementation of the Code. Both evaluations are to be externally facilitated by an independent consultant at least once every three years. The summary of the report of this evaluation is to be included in the company’s annual report and investors’ portal.
12) REMUNERATION - The Code provides that the company’s Remuneration Policy should be disclosed in the annual reports, alongside remuneration for all Directors. It is no longer sufficient for Companies to disclose Directors’ remuneration in their annual reports. The remuneration policy should also be disclosed.
13) EXTERNAL AUDIT FIRM & AUDIT PARTNER ROTATION - External audit firms may be retained for no longer than ten years continuously and may not be considered for reappointment until after a seven year period after disengagement. Where an external auditor’s tenure has already exceeded ten years, such auditor should cease to hold office as an auditor of the company at the next Annual General Meeting from the commencement of the Code. In order to preserve independence, there should be a rotation of the audit engagement partner every five years.
14) RISK MANAGEMENT - The Code requires the board to oversee and approve the establishment of a framework that defines, among other things, the company’s risk policy, risk appetite and risk limits and review periodically relevant reports to ensure the ongoing effectiveness of this framework. The board is also expected to undertake at least annually, a thorough risk assessment covering all aspects of the company’s business.
15) INTERNAL AUDIT - The Code requires the board to oversee and approve the establishment of a framework that defines, among other things, the company’s risk policy, risk appetite and risk limits and review periodically relevant reports to ensure the ongoing effectiveness of this framework. The board is also expected to undertake at least annually, a thorough risk assessment covering all aspects of the company’s business.
16) COMPLIANCE - The Code encourages the Board as part of its responsibilities to ensure that the company is in compliance with the laws of the Federal Republic of Nigeria and other applicable regulations. It further requires external auditors to report to the regulator any observed instance where companies or anyone associated with the companies commit an indictable offence under any law whether or not such matter is or will be included in the Management Letter issued to the committee responsible for audit and/ or the board.
17) WHISTLEBLOWING - The Code requires the board to establish and periodically review an effective whistleblowing framework for stakeholders who wish to report any illegal or unethical behaviour, as well as ensure that there is no retaliation against the whistleblower for making reports. Such whistleblowers who suffer retaliation may be entitled to compensation and/or reinstatement as appropriate. Furthermore, the Audit Committee is required to present issues reported through whistleblowing channels to the board.
Boards are required to establish a whistleblowing program and design policy which should address all the specific requirements of the Code. The whistleblowing program should be reliable, accessible, provide anonymity for the whistleblowers and, confidentiality of the whistleblowing reports and the resulting investigations.
18) SUSTAINABILITY - The Code encourages companies to pay adequate attention to sustainability issues by disclosing their Environmental, Social and Governance (ESG) activities in their annual reports. Furthermore, it also encourages an independent review of these ESG reports to be carried out.
Board’s will need to formalize their approach to sustainability issues within the organization by articulating strategic initiatives to be implemented and a framework for reporting these activities using globally accepted reporting standards. Boards will also need to obtain assurance on their sustainability report from an independent assurance provider. This will enable users of the sustainability report effectively measure the company’s ESG investment.
19) DISCLOSURES - The Code contains extensive disclosure requirements which should be made in the annual reports of companies. The Code requires boards to provide adequate information on their corporate governance practices and level of compliance with the Code, summary of the annual evaluation reports of the board including the name of the consultants utilized for the exercise, sustainability policies and programmes, Director remuneration, related party transactions, Directors’ interest in contracts, company policies on accounting and risk management issues.
The increased level of disclosure required by the Code helps to promote a more transparent and uniform reporting process and enables accountability to stakeholders. Boards will have to ensure that timely disclosures are made to provide internal and external stakeholders with relevant and reliable information about the quality of the company’s governance practices.
A precursory look into the Code shows a commendable effort by the Nigerian Government to enhance and cultivate policies and practices that promote good corporate governance however little. This effort shows a forward- thinking plan to ensure that Nigeria corporate world can compete with their counterparts based on international best practice in the world. For example, the provisions on sustainability, disclosure and transparency are in line with international best practices.
The Code appears to take a softer approach with respect to corporate governance and gives companies room to establish corporate governance policies which are suitable for their operations taking into cognizance the various recommendations in the Code. In this regard, it is stated expressly in the Code that "flexibility – the ability to apply the Code in a wide range of circumstances, and scalability – the ability to apply to companies of differing sizes, are of utmost importance for successful implementation".
While congratulating the FRC for their innovation and proactiveness, there are still areas of potential uncertainty, ambiguity and conflict. One overlap seems to be the lack of sanctions for failure to implement the Code properly and effectively. The existence of clear sanctions and implementation of same in instances of failure to adhere to same will propel strict compliance with the Code which is essential for the success of business. Another overlap in the Code seems to be the lack of review time frame and process to ensure that the Code remains in line with current and best practices of doing business in Nigeria.