After a lot of speculation and suspense, the Financial Reporting Council (‘FRC’) on Wednesday, 15th April 2015, finally issued an exposure draft of the National Code of Corporate Governance. The much touted ‘Super Code’ which aims to address the sectoral divergences and peculiarities, takes the form of a 3-in-one Code with variations to suit the peculiarities of the Public Sector, Private Sector and Not-For-Profit Organizations (NPFOs). The segmentation of the Codes on sectoral basis is an attempt to answer the question of the workability of a code for all sectors.
The oversight responsibility for coordinating the adoption and implementation of the National Code which is mandatory in character, and applicable to all sectors of the Nigerian economy, is domiciled with the FRC.
The National (Public Sector) Code of Corporate Governance aptly describes the purpose of public sector governance as being ‘to ensure that a Public Sector Entity (PSE) –by whatever name called–fulfils its overall mandate, achieves its intended outcome for citizens and service users, and operates in a very effective, efficient, transparent and ethical manner’.
The main highlights of the Public Sector Code include the expansive scope of its application thus raising questions as to its practicality in implementation; the provision on Board Composition which require that at least half of the Non-Executive Directors must be independent and the provision on the qualification criteria for appointment as Secretary to the Board of a PSE within the contemplation of the Companies and Allied Matters Act.
Given the notion of government as the active personification of the “ownership” of PSEs, seeking to enthrone Board independence in decision-making and ensuring objectivity in providing oversight are laudable objectives. Whether these are achievable and enforceable will be the subject of future discuss.
The Private Sector Code has as its focal thrust the harmonization and unification of all the existing sectoral corporate governance codes applicable in Nigeria (CBN, SEC, NAICOM, PENCOM & the NCC Codes). The Code also derives strongly from the contents of the existing codes and attempts to unify these codes into one with the ultimate objective of strengthening good corporate governance practice in Nigeria. The Code is intended to be applicable to all private sector-based public and private interest entities and it is mandatory in character. Salient provisions of the Code include the following:
•Board Composition: The new Code deviates from the position espoused by the existing codes by stating clearly that the number of Executive Directors shall not be more than one-third of the Board with the remaining being Non-executive Directors, half of whom must be independent.
•Board Size: Section 5.6 prescribes a minimum Board membership of 8 for all Private Sector entities other than small companies for whom the regulator shall prescribe the minimum number of independent non-executive Directors to safeguard both minority and stakeholders’ interests. The Code fails to define what constitutes a ‘small company’ within this context, thus encouraging liberal interpretation of this term and in a roundabout manner attempting to re-legislate the provisions of the Companies and Allied Matters Act (CAMA) regarding the minimum number of Directors on the Board of a Company.
•Senior Independent Director: Sections Section 5.7 and 6.2 introduce the position of a senior independent Director who is expected to ‘provide a sounding board for the chairman’.
•Cross-Directorships: The Code provides that Non-Executive Directors should not be on the Boards of companies in the same industry to avoid conflict of interest, breach of confidentiality and diversion of corporate opportunity.
•Executive Directors: The Code provides that the MD/CEO should not be the only Executive Director on the Board of – a position that can be contended would enhance accountability.
•MD/CEO’s Tenure: Also likely to generate some measure of controversy is the pegging of the tenure of office of the Managing Director/CEO of all Private Sector entities to two terms of five years each and that of the other Executive Directors to three terms of four years each.
•Board Performance Evaluation: The Code seeks to reduce the cycle of the Board performance evaluation from an annual one to once every three years. It however introduces as mandatory annual Corporate Governance Audit to be conducted by an independent external consultant registered with the regulator.
•Tenure of External Auditors: The Code reduces the tenure of External Auditors from ten years to five years. In addition, Section 19.2.2 provides that for every first statutory auditor that is an international firm (i.e. one with at least one non-Nigerian partner), the subsequent statutory auditor should be a National firm (i.e. one that has no foreigner as a partner).
Perhaps the most controversial of the Codes is that for Not-for-Profit Organizations (NFPOs) which though has been received mostly with criticism and wide-spread indignation, raises the greatest concern about the enforceability of the Code. Good governance within the context of NFPOs is defined as “a transparent decision-making process in which the leadership of a non-profit organisation, in an effective and accountable way, directs resources and exercises power on the basis of shared values”. The draughtsman acknowledges the challenges and limitations inherent in the application of this Code by noting that the sector encompassing the NFPOs is extremely diverse, to which a dogmatic approach may be futile. The Code accordingly adopts some measure of flexibility in interpretation by accepting the peculiarities of each NFPO and approaching them from a mandatory, yet case by case perspective. The key objectives have been outlined as good governance and orderly succession centered on the core values of transparency, accountability and disclosure with the founders encouraged to view the enthronement of formalized structures as the bedrock to preserving legacy.
Some key features of the NFPO Code include listing of the categories of organization to which it applies to facilitate self-classification by NFPOs and the institutionalization of the organizational structure of NFPOs as provided by their respective Constitutions, Articles of Association or enabling Statutes. The Code also prescribes a structure to the Board of Trustees (BOT) for NFPOs, recommending that there be a Chairman who shall be separate and distinct from the Chairman of the Governing Board/Executive Council. Executive Management is expected to take the form of a Management Committee which shall be responsible for administering the organization and delivering the outcomes for which it was set up.
One is concerned that the Financial Reporting Council is arrogating legislative powers to itself by proposing to amend portions of existing laws and by its apparent self-nomination as a super-regulator over industry specific regulators. Of equal concern is FRC’s competence and capacity to undertake the herculean oversight responsibilities it seeks to impose upon itself in the performance of the role of a super-regulator for mandatory corporate governance compliance.
The FRCN had exposed the draft National Code of Corporate Governance and invited comments up to the 15th of May, 2015. The Public Hearing hitherto scheduled to hold on May 19, 2015 has been postponed indefinitely following a court injunction in a suit challenging the codification of the National Code. We await the Court’s decision in this regard.
ADEBISI ADEYEMI
