Another corporate governance issue with well-established international best practice relates to the committees of the board of directors. In continuation of the discussion on the compliance of the Code of Corporate Governance in Nigeria 2011 (2011 SEC Code) with international best practices on corporate governance, we shall discuss board committees in this article.
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As a general company law principle, directors are empowered to establish committees to facilitate the discharge of their onerous responsibilities. There are provisions in the Companies and Allied Matters Act, Cap. C20, Laws of the Federation of Nigeria 2004 (CAMA) which vest directors with the power to establish committees. In the first place, section 64(a) provides that unless otherwise provided in the CAMA or in the Articles of Association of a company, the board of directors of the company may exercise their powers through committees consisting of such members of the body as they think fit.
Secondly, section 263(5) of the CAMA provides that the board of directors may delegate any of their powers “to committees consisting of such member or members of their body as they think fit” and “any committee so formed shall, in the exercise of the powers so delegated, conform to any regulations that may be made by the directors.”
In addition, by virtue of section 265 of the CAMA, where a committee established by the board is unable to act, the board may act in place of the committee.
The next issue, having established the fact that directors have the powers under the law to establish committees, is to determine the necessary committees that a typical board should have. In contemporary times, there are three crucial board committees that have been identified as being critical in the entrenchment of good corporate governance practices. These are the audit committee, nomination committee and remuneration committee. This is evident from a perusal of contemporary corporate governance codes of the different countries.
Furthermore, consequent upon the recent global financial crisis, it has become evident that greater attention must be paid to risk management in companies. Thus, risk management committee is also being recognised as another crucial board committee that companies, especially financial institutions, must establish in order to facilitate adequate corporate governance practice. In companies without separate risk management committees, the audit committees were usually charged with that responsibility.
The 2011 SEC Code is substantially compliant with international best practice on key board committees. It provides for the establishment of the audit committee and risk management committee. However, the responsibilities of the nomination committee and remuneration committee are vested in the governance/remuneration committee established under section 11 of the 2011 SEC Code. In view of the increasing responsibilities assigned to the nomination and remuneration committees by contemporary corporate governance codes, including the 2011 SEC Code, the fusion of the usual responsibilities of a nomination committee and those of the remuneration committee in a single board committee may be stifling.
Another significant best practice in respect of the three crucial board committees identified to be central to the institutionalisation of good corporate governance practice is that independent directors constitute the entirety or majority of their membership. This exposes the inadequacy of sections 4.3 and 5.5(c) of the 2011 SEC Code that require public companies to have at least one independent director. An examination of the annual reports issued by companies quoted on the Nigerian Stock Exchange reveals that it is only in the banking sector that up to two independent directors are on the board of directors. The reason for this can be attributed to section 5.3.6 of the Code of Corporate Governance for Banks in Nigeria Post-Consolidation 2006 which prescribes a minimum of two independent non-executive directors for banks operating in Nigeria. The major drawback of the insufficiency in the number of independent non-executive directors of public companies in Nigeria is that they cannot constitute the entirety or majority of members of the crucial corporate governance committees as international best practice dictates.
Consequently, it is contended that the 2011 SEC Code falls short of international best practice on board committees. In the first place, it did not provide for adequate number of independent directors to ensure that key corporate governance committees are composed entirely, or by a majority, of independent non-executive directors.
Secondly, even though 2011 SEC Code provided for the establishment of audit committees under section 30.1, that provision is superfluous as audit committees are statutorily and compulsorily required to be established by all public companies by virtue of section 359(3) of the CAMA.
Thirdly, the 2011 SEC Code merged the functions of the nomination and remuneration committees into its oddly named governance/remuneration committee established under section 11. Nowadays, those committees are charged with enormous responsibilities under contemporary corporate governance codes, such as the 2011 SEC Code. Gone are the days when throughout an entire year (in some cases, even for years) these committees would not meet. In present times, each of the corporate governance committees must meet several times annually. In relation to the nomination committee, it plays a critical role in the annual evaluation of the board and its directors as stated in section 11.2(h). The performance evaluation of directors is required to be stated in the annual reports of companies under section 34.4(d). In the case of the remuneration of directors, this is now no longer a guarded secret of the Human Resource Director and the Managing Director, (including the non-executive director representative of the foreign holding company, in the case of some multinational companies). The remuneration committee must meet on such matters annually and render its report as required by sections 11.2(f) and 34.5(e) and (f) of the 2011 SEC Code.
One area though that the 2011 SEC Code seems to be in the forefront as far as board committees are concerned is the requirement that companies should have risk management committees. This is provided for in section 10 of the 2011 SEC Code. A major revelation from the recent global financial crisis is that boards of directors had not paid adequate attention to the risks faced by their organisations. The establishment of a risk management committee at board level will put such matter clearly before the board. This could result in better management of risks by companies and the consequent avoidance of a re-occurrence of the calamity of the recent past which some companies, especially financial institutions, are still grappling with.
Next week, we shall appraise the extent of the 2011 SEC Code compliance with international best practice on another critical corporate governance issue. Meanwhile, should you have any comments on the issues raised concerning board committees above, kindly share them using the comments area of this post below. If you are already a registered user, you will be required to log in to comment on this post; otherwise, you will have to register before posting your comment. Registration is simple and FREE.