Legal and Regulatory Framework of Corporate Governance in Nigeria and its Benefits (Part 2)

Hello and welcome to another edition of 1st Fiduciary’s Governance and Compliance Digest.

Governance commenced four weeks ago and has been treated in two parts. Here is a quick recap of the discussions so far:

Corporate Governance is essential to the sustainability and longevity of any company. It involves balancing the interests of the company’s stakeholders while in pursuit of achieving its business objectives.

In Nigeria, Corporate governance can be traced to the Companies and Allied Matters Act (CAMA) 1990, the primary legislation for the establishment and management of businesses, which replaced the Companies Act of 1968. The CAMA 1990 was, in 2020, repealed and replaced with the Companies and Allied Matters Act (CAMA) 2020.

Fundamental corporate governance guidelines such as directors’ responsibilities to their company, remuneration, disclosure of interest, etc., are embedded in CAMA. Apart from CAMA, there are other industry/sector specific legislations such as the Banks and Other Financial Institutions Act (BOFIA), Central Bank of Nigeria (CBN) Act, National Insurance Commission (NAICOM) Act, which equally incorporate governance guidelines for their regulated companies.

Furthermore, various codes of corporate governance have been issued over time by regulatory agencies in Nigeria to address issues that inadequately and specifically covered by the legislations. The Nigerian Code of Corporate Governance 2018 (the NCCG Code or the Code), which cuts across all sectors of the Nigerian economy, was issued by the Financial Reporting Council of Nigeria (FRCN) to replace all existing sectoral codes. Sectoral Regulators are, however, empowered to issue industry specific guidelines pursuant to the principles of the NCCG Code for companies under their authority.

The Code specifies minimum standards of practice that companies should adopt through an ‘apply and explain’ principles approach. This approach requires companies to take responsibility of adopting recommended best practices outlined in the Code, which suit the company’s type, size, and can aid a its growth.

The NCCG Code is aimed at companies of varying sizes and complexities across the different sectors of the Nigerian economy and mandates four categories of entities to adopt and comply and report on their compliance with its principles. These are public companies (whether listed on an exchange or not), private companies that are holding companies of public companies or other regulated entities, concessioned or privatised companies and regulated private companies that file returns to any regulatory authority other than the Federal Inland Revenue Service (FIRS) and the Corporate Affairs Commission (CAC).

We conclude our discuss on Corporate Governance as follows:

1. Compliance Matters in Reporting Companies’ Annual Reports

Reporting entities are required by the FRCN to include a summary of the following matters, as recommended in the NCCG Code, in their Governance Report:

• Processes used in relation to all board appointments – The NCCG Code recommends that the Board should be sufficiently constituted to effectively undertake its responsibilities of providing entrepreneurial and strategic leadership to ensure the Company’s continued survival and prosperity.

The report on the appointment processes is envisaged to include the recommendation that every Director should receive a letter of appointment or contract of employment, specifying the terms and conditions of their appointment or employment and covering issues such as:

1. 1. duration of the appointment or tenure.
   2. details of the remuneration.
   3. summary of the rights, fiduciary duties and other responsibilities of the Director.
   4. requirement to disclose any material interests in the Company and other entities carrying on business or providing services to the Company, etc.
      • Summary of the report of the annual corporate governance evaluation and the extent of the application of the Code.
      • The name of the consultants and independent experts engaged.
      • Remuneration policy – This should disclose the remuneration of all directors, sitting allowances, directors’ fees, reimbursable travel and hotel expenses, and allowances and benefits accrued to non-executive directors (NEDs)
      • The risk management framework – This may cover the company’s defined risk policy, appetite, and limits, annual risk assessment process of all aspects of the company’s business.
      • Clear information on the company’s governance structures, policies, and practices.

2. Penalties for Non-compliance with NCCG Code

Non-compliance with the provisions of the NCCG 2018 may attract penalties which sector Regulators and the FRCN may stipulate.

The Securities and Exchange Commission (SEC), for instance, further to developing the SEC Corporate Governance Guidelines (SCGG) pursuant toa the NCCG Code, given the peculiarity of the capital market, requires public companies to comply with the provisions of the NCCG Code and the SCGG and stipulates that any company or entity that violates the provisions of the NCCG Code and the SCGG shall be liable to a fine of ₦500,000.00 in the first instance and a further sum of ₦5,000.00 for every day the violation persists and or any other sanction as the Commission may deem fit in the circumstance.

3. Recommendations for Exempted Companies

Having discussed the essence of corporate governance and examined its legal and regulatory framework in Nigeria, it is clear that adopting a well-defined corporate governance framework, whether compelled by the NCCG Code or not, affords any business organization evident benefits like improved coordination, clarity as roles and responsibilities of officers of the company, increased public and stakeholders’ trust and investor confidence, amongst others.

Exempted companies which are private companies that only file returns to the Federal Inland Revenue Service (FIRS) and the Corporate Affairs Commission (CAC) are still required to comply with the governance requirements contained in CAMA 2020. In addition to the requirements of CAMA 2020, some recommendations of the NCCG Code for considerations are outlined below:

1. Board Composition: Appropriate mix of skills and diversity in the experience and gender of competent and independent Board members.
2. Separation of the position and roles of the Chairman and Managing Director.
3. Appointment of independent non-executive directors to constitute a majority.
4. Disclosure of multiple directorship by prospective directors.
5. Establishment of a board member selection framework.
6. Appointment of a non-executive as the Chairman of the Board.
7. Appointment of the Company Secretary through a rigorous selection process.
8. The establishment of professional business and ethical standards.
9. Implementation of a stakeholder communication and management policy.
10. Establishment of a risk management framework defining the Company’s risk policy, appetite, and limits.
11. Annual risk assessment of all aspects of the Company’s business.

For further discussion and assistance with filing any of your organization’s returns, as well as providing you with Board Evaluation and Nominee services, please contact us below.