A summary of the Financial Reporting Council National Code of Corporate Governance
Introduction
The Financial Reporting Council on the 15th of April, 2015 exposed the National Code of Corporate Governance (“NCCG” or “the Code”) for comments by stakeholders. According to the FRC, the code is aimed at ensuring that Institutions in the country adhere to global corporate governance best practice. The code is a complete deviation from the ubiquitous SEC, CBN, NAICOM, PENCOM and NCC codes of corporate governance, all of which were addressed to specific sectors of the Nigerian economy.
According to the FRC, the NCCG is an attempt by the Federal Government to correct the perceived defect in the “bottom-up” strategy used in introducing the concept of corporate governance into Nigeria in 2003, which limited the concept to listed and unlisted public companies.
The NCCG which is in triplicate, has a wider coverage when compared to the above mentioned codes. The codes coverage includes;
- The Private sector ;
- The public sector; and the
- Not for profit organisations
Summarized below are the salient provisions of the NCCG.
National Code of Corporate Governance for Private Sector in Nigeria 2015
This code introduces corporate governance into the private sector. According the code, the private sector includes;
- All public companies (whether listed or not);
- All private companies that are holding companies or subsidiaries of public companies; and
- All “Public Interest Entities” as defined by section 77 of the Financial Reporting Council of Nigeria Act 2011. According to the above mentioned section, “Public Interest Entities” mean governments, government organizations, quoted and unquoted companies and all other organizations which are required by law to file returns with regulatory authorities and this excludes private companies that routinely file returns only with the Corporate Affairs Commission and the Federal Inland Revenue Service.
The purport of the above is that contrary to the wide spread belief prior to the exposure of the draft code, the code does not apply to all private companies, unless private companies that are holding companies or subsidiaries of public companies. It is worthy of mention at this juncture that the compliance with the provision of this code by the above mentioned companies is mandatory.
Similar to provisions of existing codes of corporate governance, the code makes it mandatory for private sector companies to have a board of a sufficient size relative to the scale and complexity of the company’s operations, and which must be composed in such a way as to ensure diversity of experience and gender without compromising competence, independence, integrity and availability of members to attend meetings.
To safeguard the integrity of the Board, the code provides that no person, having retired from the Board or Executive Management of a company, should continue to exercise any surreptitious influence or dominance over the Board.
According to the Code, the number of Executive Directors on the Board should not be more than one-third of the Board, whilst the number of Non-Executive Directors on the Board should not be less than two-third of the Board, with the number of Independent Non-Executive Directors not less than half of the number of Non-Executive Directors.
The code makes provision for the position of Senior Independent Non-Executive Director who would provide a sounding board for the Chairman of the Board and serve as an intermediary for the other Directors when necessary. To maintain a strong relationship with the shareholders, and to give the shareholders easy access to the Board, the Senior Independent Non-Executive Director is required to be available to shareholders if they have concerns, where contact through the normal channels of the Chairman, Chief Executive or other Executive Directors has failed to resolve or for which such contact is inappropriate.
According to the code, the Board of private sector entities should establish Nomination and Governance Committee, Remuneration Committee, Audit Committee, and Risk Management Committee, whilst the Board of small private sector companies are granted the liberty to merge any of the committees.
The code recognises the importance of evaluating the performance of the Board, and makes it mandatory for the Board of private sector entities to conduct a rigorous annual evaluation of its own performance, that of its committees, the Chairman and individual Directors. The code provides that the performance evaluation should be conducted by external consultants and the name of the consultants should be disclosed in the annual report.
The Code requires Directors to report in annual and half-yearly financial statements that the business is a going concern, supporting their reports with assumptions or qualifications as may be necessary.
It is worthy of mention that once this Code becomes operational, listed and Significant Public Interest Entities with market capitalization of not less than =N=1 billion, and/or whose annual turnover is not less than =N=10 billion, would be required to engage Joint External Auditors for their statutory audit. The purport of this is that for each of the above categorized companies that has retained an International Audit Firm (a firm that has at least a non-Nigerian partner) as its Auditor, there must be a second Audit firm which must be an indigenous Audit firm with no expatriate participation or foreign affiliation. The Code is however silent on whether these categories of companies would still require a second audit firm where they are presently being Audited by an indigenous Audit firm.
Public Sector Governance Code in Nigeria 2015
Whilst its provisions are merely persuasive, the code is not applicable to public companies as is the case with the SEC code, the code applies in the main to all “public interest entities”, including Government Ministries and Departments. This is predicated on the belief of the FRC that in order to entrench sound corporate government, public interest entities must also imbibe the spirit and culture of corporate governance. The code provides that the relationship of the government and the public sector entities should be considered as a relationship between a parent company and a subsidiary. In view of this, it is expected that the Government would develop a strong interest in the compliance, conformance and performance obligations of the public sector entities.
The code is applicable to the following Public Sector Entities (PSE);
- All Ministries, Departments and Agencies of government;
- All State-Owned Entities;
- All parastatals; and
- All government commercial agencies.
According to the code, there should be a clear separation between the State’s ownership function and other State management and regulatory involvement that may influence the conditions for PSEs, particularly with regard to market regulation and discipline. The code further provides that the operational practices and legal forms under which public sector entities operate should be streamlined in order to allow creditors to successfully press their claims and initiate insolvency procedures where necessary, and that the public sector entities should not be exempt from the application of general laws and regulations.
The code places certain obligations on the government with respect to the public sector entities under their care. These obligations include and are not limited to the following;
- Developing and issuing a very clear ownership policy that defines the overall objectives of state ownership, the state’s role in the corporate governance and how it intends to implement its ownership policy, otherwise referred to as Government Governance;
- Refraining from taking active part in the day-to-day management of the public interest entities, by allowing the Boards of these entities to discharge their responsibilities, exercise their authorities and assert their independence;
The code makes it mandatory for public sector entities to have a board which would provide conceptual, strategic and ethical leadership to the entities. According to the Code, the Board should comprise both executive and Non-executive Directors, with the number of executive directors not falling below 2, and not more than one-third of the entire Board size, out of which one must be the CEO. In addition to the Executive Directors, the code further provides that the Board should have Non-executive Directors whose number should not be less than two-third of the entire Board.
The code provides for the separation of the position of the Chairman and the CEO, and further provides that the number of Independent Directors on the Board should not at any time be less than half of the number of Non-executive Directors.
To ensure the effectiveness of the Board, the code provides that the Board of public sector entities should conduct an annual evaluation of its performance with a view to reviewing its size, mix of skills, expertise and experience and other qualities in order to measure its performance levels in relation to the requirements of the Government or its owners. The code also urged public sector entities to ensure that the performance evaluation is conducted at least once every 3 years by independent external consultants.
To support the Board in the performance of its oversight function, the code provides that every public interest entities should have an Audit & Risk Management Committee, a Finance & General Purpose Committee, as well as a Governance Committee, with each of these committees having comprehensive and well-articulated terms of reference/charter.
The code requires that all public interest entities should be audited annually, and prohibits the External Auditors of public interest entities from auditing the entities for more than 5 consecutive years.
In addition to the foregoing, the code stressed on the need for public interest entities to have a code of conduct and a whistle blowing policy which should be known to employees, stakeholders and the general public.
The Not-For-Profit Organisations Governance Code 2015
As uncanny as this code may seem, the reason for the introduction of this code, as well as the content of the code gives strong credence to the need for Not-For-Profit Organisations (NFPO) to be governed by a separate code of corporate governance. According the FRC, in view of the volume of funding these organisations attract, it is necessary to ensure good governance and orderly succession.
The code which is mandatory, is applicable to all NFPO’s in Nigeria including charitable organisations, Educational Institutions, professional and scientific organisations, religious organisations, literary and artistic societies, political organisations, social and recreational clubs and associations, trade unions and other organisations with similar missions but not deemed classifiable under any of the above categories by the Founders or Governing Bodies.
According to the code, it is mandatory for the Governing Board of the NFPO to convene a general assembly or an annual general meeting each year in addition to any other meeting as may be provided for in its Constitution/Articles of Association or other statutes, and the Directors and every member of the NFPO are entitled to receive notice and attend the general assembly or annual general meeting.
Similar to the provisions of the Companies and Allied Matters Act, LFN, 2004, all NFPO’s are required to have a Board of Trustees, Governing Board and Management Committee. The code also provides for the position of the Chairman and CEO of the NFPO.
To ease some pressure on the Board, the code requires that the Board be supported by a Finance and General Purposes Committee, a Governance Committee, as well as a Risk Management and Audit Committee. The code further makes it mandatory for the Board of NFPO’s to conduct biannually, an appraisal of it performance, and that of its sub-committees.
All NFPO’s are required by the code to have External Auditors who would be appointed by the Risk Management and Audit Committee. According to the code, external audit firms should be retained for no longer than 5 years continuously. External audit firms disengaged after a continuous service to the NFPO for 5 years may be considered for re-appointment 5 years after their disengagement. Where an external audit firm’s aggregate or cumulative tenure has already exceeded five years at the date of commencement of the Code, such external audit firm shall cease to hold office as an auditor of the organisation at the end of the financial year that this Code comes into force.
Finally, the code makes it mandatory for every NFPO to carry out annual corporate governance audit which should be facilitated by an independent external consultant who must be registered by the regulator for this purpose.