Still on the draft FRC Code of Corporate Governance – Corporate Governance audit AUDIT
The exposure draft of the Financial Reporting Council Codes of Corporate Governance continues to generate discussions given the far reaching implications of the provisions. Some of the controversial provisions include specification of a minimum Board size for private companies (a position which runs contrary to the provisions of the Companies and Allied Matters Act), the introduction of the Lead Independent Director and tenure limits amongst others. The Private Sector Code seeks to introduce an annual Corporate Governance Audit for private companies to further strengthen and enthrone good corporate governance in Nigeria. In this interview, Bisi Adeyemi, Managing Director of DCSL Corporate Services Limited discusses the benefits of a Corporate Governance Audit and what such an audit should entail.
Can you enlighten us on what corporate governance is about?
Corporate governance is an encompassing concept that defines the way a company or organization is managed and controlled. Corporate governance serves as a tool for ensuring transparency, responsible and ethical management of resources. It increases probity and accountability. It also ensures that appropriate structures and processes are in place to detect and avert potential failures before they occur.
What is a Corporate Governance audit?
The draft FRC Code seeks to mandatorily require private companies to conduct annual corporate governance audits to appraise the status of compliance with the Code and corporate governance best practice. The Report of such an audit is expected to be presented at the company’s AGM and accessible on its investors’ portal. However, beyond regulatory requirement, a corporate governance audit should be carried out by an entity as a “sound check” to ensure that its processes, practices and policies remain in sync with best practice. An effective corporate governance audit affords the opportunity to undertake an assessment of key functions within the Corporate Governance framework.
Who should conduct a corporate Governance Audit?
A Corporate Governance Audit should be conducted by an independent external consultant appropriately qualified to undertake the audit. The Code provides that such a consultant must be registered with the regulator. In my view, the requirement for registration is an unnecessary layer of oversight.
What does a corporate governance audit entail and what are the benefits?
A well-articulated corporate governance audit will assist in benchmarking the Company’s performance against established best practice and provides a platform upon which such performance could be improved. A detailed and thorough corporate governance audit gives assurance with respect to the effectiveness of the key functions in the Corporate Governance Framework such as:
- Internal controls and compliance – How independent is the Internal Audit Function? Who does the Internal Auditor report to? Is there an Internal Audit Charter?;
- Disclosures and Financial Reporting – Is the entity making appropriate disclosures? Do the financials present a true and fair view?.
- Risk Management – Has the Board defined the risk threshold, appetite and capacity? Are there adequate processes in place to monitor identified risks including credit, liquidity, operational, reputation, franchise, etc;
- External Audit-Auditor independence – Does the External Auditor provide non-audit services? What impact would these have on independence? Are there processes in place to ensure auditor independence on an ongoing basis? ;
- Audit Committee – How competent are Audit Committee members? Are they independent of Management?
- Strategy – How is strategy defined? Is the Board involved in the process or does it “rubber stamp” strategy as defined by the CEO and her team? Is there an alignment of company operations with defined strategy? Does the company execute? How frequently is strategy reviewed?
- Human Resource – Matters such as Performance Management, succession planning, aligning compensation with corporate performance (executive management), reporting lines, reporting to the board, etc;
- Corporate Culture – Ethical values, code of conduct, whistle blowing procedure, ethics hotline, protection for whistle blowers.
In your opinion, should Corporate Governance be extended to the Public Sector?
Yes, absolutely. It is in this regard that one welcomes the draft Code for the Public Sector. The Code seeks to introduce Independent Non-Executive Directors on the Boards of Public Sector Entities; Whistle Blowing Procedures and Ministerial Management Committee to be composed of persons outside the public service. Public entities should practice the highest standards of corporate governance in a manner that ensures that public assets are properly managed and accounted for. Ministries, Departments and Agencies of government should adopt corporate governance principles of Accountability, Transparency, Integrity, Responsibility and Fairness. This will ensure that actions stand up to public scrutiny.
Beyond the Corporate Governance Audit – What Next?
Care should be taken to ensure that the Audit does not become a box ticking exercise. Companies should see the intrinsic benefits in doing the right things the right way. Good corporate governance assures business sustainability, enhanced reputation and enables an enterprise attract the best talents. Post Audit, steps should be taken to bridge the identified gaps. Government should begin to look at rewarding entities that have truly embraced good corporate governance as a way of life – beyond the public presentation of plaques and laurels. Perhaps have a “white list” that prequalifies compliant companies. Name and shame those who act unethically. I am an advocate of voluntary compliance. The regulator should establish basic standards that assure investor protection – adequate disclosures, financial reporting – legislate and enforce those. It should then leave the other issues to individual companies to decide to comply or explain to shareholders. It should then find more creative ways of actually rewarding those who genuinely comply.
What contributions has DCSL made towards entrenching good Corporate Governance practice in Nigeria?
DCSL Corporate Services Limited (DCSL) over the past few years, has through its Corporate Governance Series of open enrolment Seminars, Roundtables and publications contributed to thought leadership on the subject matter of Corporate Governance. We are convinced that good corporate governance impacts positively on a company’s operations and acts as a panacea for corporate failure.
We also established the DCSL Academy to equip those who have responsibilities within the governance framework to enable them deliver optimally on their respective responsibilities. The Academy is a Governance and Corporate Secretarial Training & Resource Centre of specialized learning for Company Secretaries, In–House Legal Counsel, Compliance Officers and Interns.
We facilitate bespoke trainings for Board and Senior Management with subject matter experts as Facilitators. Over the years, we have had several collaborations with notable institutions in and outside Nigeria. In continuation of the Corporate Governance series we are hosting a Seminar for Directors and Owner Managers of Small and Medium Sized Companies on practical steps to Sustaining a Business in the 21st Century on the 30th of July 2015 at the Protea Westwood Hotel, Awolowo Road Ikoyi, Lagos. Our flagship Seminar for Audit Committee members holds on the 9th and 10th of September 2015.
How can companies enthrone Corporate Governance?
Corporate Governance is beyond compliance. It goes beyond ticking the structural indicator boxes. The Board has to clearly set the tone at the top and leave no one in doubt as to the ethical fibre of the organization. Policies, processes and practices should be founded on the principles of corporate governance. The longer term objective of building a sustainable enterprise rather than checking the boxes should be the driving force in imbibing a culture of corporate governance.
