N.B: THIS MAY NOT
BE NECESSARY FOR BAR PART II, DUE TO CURRENT TURBULENCE WITHIN THE FRCN AND THE
CODE ITSELF AS BEING SUSPENDED………..
N.B: THIS WRITE UP IS AN EXCERPTS FROM TEMPLAR NEWSLETTER (www.templars-law.com)
The
Financial Reporting Council of Nigeria (“FRCN”) recently issued the National
Code of Corporate Governance 2016 (the “Code”). The Code is made pursuant to
the powers of the FRCN under Sections 50 and 51 of the Financial Reporting
Council of Nigeria Act 2011 (the “Act”) and has a commencement date of 17
October 2016.
THE
SCOPE OF THE CODE
The
Code is essentially a consolidation and refinement of different sectorial codes
on corporate governance and has been issued in three parts:
1) the Code of Corporate Governance
for the Private Sector;
2) the Code of Governance for
Not-for-Profit entities; and
3) The Code of Governance for the
Public Sector.
N.B: The Code of
Corporate Governance for the Private Sector (the “Private Sector Code”) is
mandatory while that for the Not-for-Profit entities will be operated on a
“Comply or Justify non-compliance” basis in a manner similar to the United
Kingdom’s Corporate Governance Code. On the other hand, the Code of Governance
for the Public Sector will not become immediately operative until an executive
directive is secured from the Federal Government of Nigeria for that code to
take effect.
THE
CODE OF GOVERNANCE FOR THE PRIVATE SECTOR
The
Private Sector Code applies to;
(i)
Public
companies (whether listed or not);
(ii)
Private
companies that are holding companies or subsidiaries of public companies; and
(iii)
Regulated
private companies as defined under the Private Sector Code.
N.B: The Code
defines regulated private companies as “private companies that file returns to
any regulatory authority other than the Federal Inland Revenue Service (FIRS)
and the Corporate Affairs Commission (CAC), except such companies with not more
than eight (8) employees”.
SALIENT PROVISIONS FROM THE CODE
1. DIRECTORSHIP: The Private Sector Code requires
prospective directors of a company to disclose membership of other boards and
serving directors to disclose prospective appointments to other boards. Also,
more than two members of a nuclear or extended family are precluded from
sitting on the board of a company at the same time. In addition, the Code
provides that the positions of the chairman of the board and chief executive
officer shall be separate and held by different individuals. The chairman of
the board is also required to be a non-executive director.
These
requirements will allow the company to gauge a prospective/serving director’s
level of commitment to the board as well as determine existence of conflict (if
any) and forestall abuse of power by the directors.
2.
INDEPENDENT NON-EXECUTIVE
DIRECTOR: The
Private Sector Code requires the board of every company to include independent
non-executive directors, and provides a non-exhaustive list of factors for
measuring independence including; not being a substantial shareholder, not
being an employee of the company within the past five (5) years and not serving
on the board for more than nine (9) years.
This
requirement is aimed at inclusion of unbiased and objective directors on the
board for the purpose of checks and balances in the decision making process to
sustain investors’ trust and confidence in the board.
3. CONFLICT
OF INTEREST: The Private Sector Code precludes any member
of executive management3 of a relevant regulatory institution4 who leaves the
services of such institution from being appointed as a director or top
management staff of a company that has been directly supervised or regulated by
the said institution until after three years of disengaging from that
institution.
This
provision is aimed at preventing conflict/bias on the part of the member of the
executive management in dispensing his duties as a director.
4.
TENURE OF OFFICE OF DIRECTORS: The Private Sector Code provides
that the tenure of office of the Managing Director/Chief Executive Officer and
executive directors shall be not more than two terms of five years each. The
tenure of non-executive directors should not be more than three terms of four.
5.
Minority Shareholder Protection: In addition to several
provisions protecting shareholders rights which are similar to the statutory
rights available to minority shareholders under the Companies and Allied
Matters Act(CAMA), the Private Sector Code gives a shareholder or group of
shareholders who have a cumulative shareholding interest of not less than one
per cent of the share capital of a company the right to contribute to the
agenda of the Annual General Meeting by submitting items for inclusion in the
agenda.
This
provision enables participation of minority shareholders in the decision making
process of the company, and inhibits domination by majority shareholders, as
matters which are of interest to the minority shareholders can be transacted at
AGMs.
6.
External Auditors: The Private Sector Code
provides that the tenure of office of auditors of a company shall not exceed
ten (10) years continuously and such auditors shall only be considered for
reappointment seven (7) years after disengagement. Furthermore, where an
auditor’s aggregate tenure has already exceeded ten years at the date of
commencement of the Private Sector Code, such auditor shall cease to hold
office as an auditor at the end of the financial year that the Code comes into
effect. In addition, companies are required to request that the audit partners
are rotated every five (5) years. The Private Sector Code also prescribes a
list of services which auditors are precluded from offering to companies
including actuarial, investment advisory and taxation services.
These
provisions would mitigate laxity by auditors in the performance of their
functions as a result of overfamiliarity with the company, its processes and officers and preserve
independence of the auditors.
7.
Internal Audit: The Private Sector Code requires
every company to establish an Internal Audit Unit (IAU). Amongst other
responsibilities, the IAU will report to the Statutory Audit Committee (SAC),
SAC and Board Audit Committee (BAC) on the adequacy and effectiveness of
management, governance, risk and control policies, deficiencies observed in
these policies and management mitigation plans.
This
requirement would enable companies identify any governance deficiencies and any
potential risk factors prior to an external audit and establish mechanisms to
mitigate these factors.
8.
Whistle Blowing: Every company is required to have
whistle blowing6 policy which will encourage stakeholders to report unethical
conduct and violations of any laws or policies to an internal and/or external
authority, so that such conduct /violation can be verified, and appropriate
sanctions applied to avoid a re-occurrence. The Private Sector Code provides that the
whistle-blowing mechanism shall include a dedicated telephone “hot-line”,
e-mail address, and other electronic communication methods that could be used
(even anonymously) to report illegal or unethical practices. The responsibility
of reviewing reported cases and notifying the SAC and BAC of these cases lies
with the head of the IAU. Companies are required to treat all whistle-blowing
disclosures (including the identity of the whistle blower) as confidential. In
addition, the Private Sector Code affords protection to whistle blowers, by
precluding companies from subjecting a whistle blower to any detriment
whatsoever on the grounds that he has made a disclosure in accordance with the
provisions of the code.
Furthermore,
an employee who has suffered any detriment7 by reason of disclosure made
pursuant to the Private Sector Code shall be entitled to compensation and/or
reinstatement, whilst in the case of other stakeholders; the whistle-blower
shall be adequately compensated.
These
provisions will facilitate cooperation of stakeholders with regulatory
authorities in curbing corporate excesses and violation of applicable laws
within companies, as well as foster international corporate governance best
practices by officers and management of Nigerian companies as the awareness of
the plausibility of exposure and the attendant repercussion in instances of
non-compliance will serve as a deterrent.
THE CODE V CAMA
Some
provisions of the Private Sector Code conflict with provisions of CAMA which is
the primary legislation regulating the administration of companies in Nigeria.
Two areas in which these conflict occurs are with respect to:
Directors
Remuneration
The
Private Sector Code requires the board of every company to establish a
remuneration committee which shall be responsible for recommending the
remuneration of both executive and non-executive directors to the board,
amongst other function. This is contrary to the CAMA which gives the company in
general meeting the power to determine the remuneration of the directors.
This
provision also appears inimical to the principles of corporate governance,
given that the members of the board would be in a position to recommend their
remuneration, and further contradicts another provision of the Private Sector Code
to the effect that “a director shall not be present during the time any matter
in which he has an interest is being discussed or decided”.
Voting by the Board
In
addition, the Private Sector Code provides that “Where a majority of
independent non-executive directors’ dissent on an issue decided by the board,
such decision can only be valid where at least 75% of the full board (without
reference to quorum) vote in favour of such decision”
This
provision conflicts with the CAMA which expressly provides that questions
arising at any meeting shall be decided by a majority of votes, and where there
is an equality of votes, the chairman shall have a second or casting vote.
. ...............THE END..................................
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