National Corporate Governance Code!

Corporate governance is all about running an organisation in a way that guarantees that its owners or stockholders receive a fair return on their investment.

It addresses the need for organisational stewards or managers to act in the best interest of the firm’s core stakeholders, particularly, minority shareholders or investors, by ensuring that only actions that facilitate delivery of optimum returns and other favourable outcomes are taken at all times.

This, Joe Duke 11 and Kechi Kankpang, also argued in their work titled: “Linking Corporate Governance with Organisational Performance: New Insights and Evidence from Nigeria,” is typically facilitated by creating an operating milieu, which promotes the observance of codes of conduct that  espouse accountability, transparency, fairness, ethical behaviour, responsibility and other values designed to act as safeguards against institutional corruption and the mismanagement of scarce organisational resources.

                                      The policies, rules, processes, practices, programmes and institutions used in administering, directing and controlling the operations and affairs of an organisation generally constitute the elements and instruments of its corporate governance.

In fact, they noted that the main responsibility for corporate governance rests with the Board of Directors of a firm. The board is usually made up of executive (full time) and non-executive (part-time and independent) members.

Clearly, good corporate governance serves as a framework to secure investor confidence, enhance access to capital markets, promote growth and strengthen economies. By providing for clear ‘rules of the game’ and ‘checks and balances’, corporate governance systems help to lower company costs (for capital and production) and increase economic output. Such characteristics make corporate governance necessary, beneficial and useful for all sectors and types of companies whether they are multinationals, state-owned enterprises, domestic firms, small businesses or family-owned operations.

Although corporate governance frameworks differ from country to country based on the legal, regulatory and institutional environment, they have a common aim: to define clearly the rights, responsibilities and behaviours that are required of a company’s owners (the ‘principals’) and managers (the ‘agents’) for the business to operate successfully.

That is why the recent release of the draft document of Nigeria’s harmonised National Code of Corporate Governance (NCCG) by the Financial Reporting Council of Nigeria (FRC) has continued to attract a lot of  reactions. Representatives of the Central Bank of Nigeria (CBN), the Securities and Exchange Commission, among other regulators, shareholders’ associations, as well as some members of the private and public sector organisations, advised the FRC during a public hearing last week to review some aspects of the draft code.

Presently, Nigeria boasts of six different persuasive codes issued by six different regulators to meet the need of the entities they regulate. The six different persuasive codes were issued and are currently being applied by the Central Bank of Nigeria, the Nigeria Deposit Insurance Corporation, National Insurance Commission, National Pension Commission, the Securities and Exchange Commission, the Corporate Affairs Commission and the Nigerian Communications Commission.

However, modern society believes that the era of very weak and persuasive corporate governance codes is long gone due to stiff competing environment for foreign direct investment; of which binding regulation is a major factor being considered by investors and stakeholders. To this end, the proposed NCCG, which is a harmonised code of corporate governance, covers both the private sector, public sector and not-for-profit organisations.

For the private sector, the corporate governance code is to cover entities that only render operational returns as opposed to financial returns to designated regulators; requires a clear statement of the main purpose of a corporate board to clear any ambiguity; specification of a minimum board size of eight while the maximum board size is left to corporate needs; strengthening the position of internal auditor by making appointment and removal from office; board prerogatives and the adoption of external board dominance as a critical factor in corporate board independence.

Further, the code for the private sector on the NCCG prohibits the continued dominant influence of ‘board retirees’ to sustain board independence; strengthening the concept of independent non- executive directors and the appointment of one of them as a lead or senior independent non-executive director; the introduction of a 75 per cent board override vote for a dissenting position of a majority of independent non-executive directors and strengthening of the position of the Company Secretary by making appointment and removal board prerogatives, and a recognition of the distinct functional and administrative responsibilities; strengthening of whistle blowing apparatus; and a joint certification by chief executive officers and chief financial officers of the company’s financial condition to the board before the approval of the financial statements; among others.

On the other hand, the public sector code stipulates a re-statement of the compliance and performance obligations of public sector entities; introduction of public entities (oversight) committee in each ministry, rather than a centralised oversight agency; application of a corporate governance code for the first time in Nigeria to MDAs, state-owned entities, parastatals and government commercial agencies; proper composition of public sector boards predicated on external dominance, rather than internal dominance; and specification of a cool-off period for regulators ascending to the board or becoming employees of any corporate body that has been under the regulatory oversight of such regulators, among others.

Also, the not-for-profit code among other requirements, also stipulates that the application of the principles of the code is mandatory, but the diversity of the sector necessitates individual compliance modalities. It requires elaborate provisions to ensure independence and distinguish governance from management, while stating that private and public sector corporate governance key underlying values are extended to the not-for-profit sector organisations.

“The need for an annual general meeting/assembly to whom to account properly for stewardship. Limitation of the tenure of founders and leaders and the offices they can hold simultaneously. The way and manner to address conflicts with founders/leaders in corporate governance,” the document added.

KPMG Nigeria, in its presentation argued that the draft National Code of Corporate Governance is not complete due to the absence of the transitional arrangements. This component, according to KPMG is the key and is required by relevant stakeholders to be able to provide comments on the feasibility of the commencement period and the reasonability of the transition arrangements.

“Therefore, the draft National Code of Corporate Governance cannot be operationalised in its current state without the transitional arrangement being clearly articulated. Transitional arrangements normally adopted for fundamental rule changes such as a code of corporate governance are usually phased out over a suitable time period (2-3 years) to allow companies to adequately prepare for the adoption of the code.

“We recommend such a transition period in this instance and expect that when the transitional arrangements are eventually articulated by the FRC, the council will re-expose the code for further public comments in order to demonstrate the required transparency expected of a fair regulator,” they added.

Furthermore, while commenting on the proposed mandatory audit firm rotation in the code, the international professional services firm noted that the draft code of corporate Governance seeks to mandate audit firm rotation of five years in Nigeria and also prevents an audit firm from being reappointed after five years. But KPMG’s views were that the key contributors to improved audit reporting and audit quality are the skills and personal qualities of the audit partners and staff members supported by a robust system of audit quality inspections.

“Mandatory audit firm rotation does not increase the number of high quality audit professionals, or their redistribution across a larger number of audit firms. Rather, mandatory audit firm rotation diminishes audit quality, increases  the cost and administrative burden for companies, erodes reliability of financial reporting and ‘commoditises’ the audit profession with significant implication on the level of trust placed by shareholders and investors on financial reporting and the value of an audit.

“Therefore, the focus of the FRC should be on strengthening auditor independence through compliance with the requirements of International Ethics Standards Board of Accountants (IESBA5) and performing a comprehensive review of external audit firms. If Mandatory Firm rotation is adopted then it should reflect international best practice,” it added.

In the area of board composition, while the draft National Code of Corporate Governance requires a minimum number of eight directors (i.e. executive, non- executive and independent non-executive directors) to constitute the board of a company, some firm described the concept as strange concept. They argued that prescribing minimum board sizes was alien to virtually all international codes of corporate governance, adding that there is no empirical evidence to demonstrate that an ‘eight –man board’ is the required number that will assist the board of a company achieve its objectives.

On its part, PricewaterhouseCoopers (PwC) Nigeria, in a separate presentation, noted that the draft code suffers from “Regulation Creep” in that it adds “too much details in many ways and yet also lack clarity in several other ways,” adding that it is almost a compendium of rules.

Continuing, PwC Nigeria stated that the code “being so glaringly different from those in other markets would set us apart from the rest of the world at a time Nigeria is seeking to be a top foreign direct investment destination country.”

According to PWC, the exposure draft does not conform to international best practice view.

Also, one of the representatives of the CBN, Osaretin Oyewumi in her presentation, noted that: “There are existing, enabling and legal frameworks around corporate governance already. Specifically, for the CBN, you know there is the CBN Act. When you read that and read the FRC Act, that sounds like it is exclusive to all of corporate governance. The CBN Act already prescribes how many members of the board, how many directors you should have. So, take the enabling Act into consideration."

A former Senator and the Chairman, UAC of Nigeria Plc, Senator Udoma Udo Udoma had criticised the proposed NCCG, saying the FRC wants to usurp the powers of other regulatory agencies.

But the Managing Director/Chief Executive Officer, Cowry Asset Management Limited, Mr. Johnson Chukwu, explained that what the FRC set out to achieve is to protect the interest of minority shareholders. He also argued that the proposed NCCG would bring about a higher level of corporate governance standards and high level of transparency in corporate governance.

“But the hue and cry is because market operators feel that the unified draft corporate governance standards would over regulate the economic space and businesses and might stifle creativity and industrial growth. They are also afraid that the objective of growing enterprises may also be defeated. You need to harmonise the objectives of the corporate entity with the objectives of the individuals.

“For instance, if you take the issue of board composition, you have one-third of board members being constituted by non-interest bearing shareholders, that is, shareholders who have no interest in the business, which is what you call independent shareholders. The independent shareholders' lack of interest in the business may make them not to be as committed in driving the growth of the business.

“And when the key stakeholders bring up policies that would drive the growth of the company, he might be frustrated by the large number of independent shareholders who are only risk averse and have no personal interest in the prosperity and growth of that entity. So, I think having people who have no interest, whatsoever in a company dominating and having undue influence over the affairs of the company may not allow for economic growth,” he stated.

The Chairman of the FRC, Mrs. Maryam Ladi Ibrahim noted that the concept of good corporate governance remains essential to the well-being of companies and other stakeholders. According to her, until recently, corporate governance was not in the front burner of public space.

“Indeed, it was a phenomenon prominent in boardroom and academic environment. However, recent events in some parts of the world, including our country, have brought to the fore, the need for sound corporate governance in modern society,” he added.

Ibrahim revealed that the Council received comments from 45 institutions including professional and regulatory bodies as well as relevant professionals. She said the public hearing was expected to enhance discussions and acceptability of the document.

Therefore, in order to address stakeholders’ concerns, the FRC needs to look at several aspects of the proposed code that market operators have identified their complaints and see how they can be modified to achieve the primary objective of protecting minority interest without compromising economic growth.