29 Mar Nigerian Code of Corporate Governance 2018
Corporate governance is the system of rules, practices and processes by which an organization is directed and controlled. Corporate governance essentially involves balancing the interests of a Company with those of its many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community.
The Financial Reporting Council of Nigeria (FRCN) recently released the Nigerian Code of Corporate Governance 2018 (‘the Code”) on January 15, 2019. The Code identified key principles that seeks to institutionalize corporate governance best practices in Nigerian companies and to promote public awareness of essential corporate values and ethical practices that will enhance the integrity of the business environment. The Financial Reporting Council of Nigeria Act confers upon the Council, powers to ensure good corporate governance practices in the public and private sectors of the Nigerian economy.
Prior to the Code, several industry regulators such as the Nigeria Communication Commission (NCC), Central Bank of Nigeria (CBN), Securities and Exchange Commission (SEC), National Insurance Commission (NIC) and National Pension Commission (NPC) developed corporate governance codes for companies operating in their sectors known as the Sectoral codes.
The new code applies to all Public companies whether listed or not, Private companies that are holding companies of Public companies, privatized companies as well as regulated Private companies whose file returns to any other regulatory authority other than the Federal Inland Revenue Services and the Corporate Affairs Commission. The Code adopts a flexible Apply and Explain approach. Hence all applicable entities are required to abide by the provisions of the code and to explain any deviations from it.
Some of the Key Provisions of the Code are as follows: –
The Composition of the Board
Principle 2 of the Code empowers companies to determine;
- The size and composition of their Board considering the scale and complexity of its operations.
- The need for enough members to serve on its committees
- The need to secure quorum at meetings; as well as ensuring diversity.
The Code also recommends appropriate balance and mixture of Executive Directors (EDs), Non-Executive Directors (NEDs) and Independent Non-Executive Directors, (INEDS) the majority of which must be non-executive directors on the Board.
The Chairman of the Board
Principle 3 articulates the responsibilities of the Chairman of the Board in providing overall leadership to the Company and driving effective board operations. The Chairman should not be involved in the day- to-day operations and activities of the Company. The Code also 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.
The Independent Director
Principle 7 of the Code prescribes for establishing the independent status of an INED. Whilst all directors are expected to exhibit a level of independence, the Code sets expectations for an increased level of independence from INEDs such as having strong Independent voice and character at the Board. This aims to strengthen independence on the board and ensure that directors who are classified as INEDs are truly “independent’’.
The Company Secretary
Principle 8 highlights the role a Company Secretary undertakes in supporting the effectiveness of the Board and mandates that same provides independent guidance and support to the Board. The Code also mandates that the Board should properly empower the Company Secretary and approve the performance evaluation, appointment and removal of the Company Secretary.
Board Committee Structure
Principle 11 of the Code recommends the establishment of Committees; the Nomination and Governance Committee, the Remuneration Committee, the Risk Management Committee and the Audit Committees. Companies are however availed the flexibility of combining the responsibilities of these Board Committees taking into consideration the size and activities of the Company. The Code also recommends that these Board committees should consist only of NEDS (majority of whom should be INEDs where possible).
Principle 12 of 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 consider the performance, the existing succession planning mechanism, continuity of the Board and the need for continuous refreshing of the Board.
Principle 16 of the Code provides that the Company’s Remuneration Policy should be disclosed in the annual reports, alongside remuneration for all directors. The Code discourages earning of sitting allowances for EDs at board and committee meetings. The Code further discourages NEDs from earning performance-based pay. This is to minimize bias in their decision making.
Principle 17 the Code requires the Board through the Risk Management Committee 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 a thorough risk assessment covering all aspects of the Company’s business.
Principle 19 of the Code recommends an effective whistle-blowing framework for reporting any illegal or unethical behavior. The Code requires the Board to establish and review periodically an effective whistleblowing strategy to ensure that there is no retaliation against the whistleblower for making reports.
External Audit Firm & Audit Partner Rotation
Principle 20 of the Code stipulates that, External Auditor’s tenure should not exceed ten years and may not be reconsidered for reappointment until seven years after their disengagement. In order to preserve independence, the Code recommends a rotation of the audit engagement partner every five years.
Principle 26 under Part E of 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.
By adhering to the principles articulated in the code, it is expected that the practice of good governance would increase the level of transparency and induce voluntary compliance with the highest ethical standards across industries. It would further enhance the Government’s efforts of easing the burden of doing business in Nigeria thereby attracting and retaining foreign investments and facilitating increased trade.
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