The Code of Corporate Governance in Nigeria 2011 (2011 SEC Code) issued by the Securities and Exchange Commission and which became effective on 1st April, 2011, can be said to be the most comprehensive corporate governance legislation in Nigeria at the moment. A perusal of the provisions of the 2011 SEC Code reveals that a lot of efforts went into the production of the Code.
The journey towards the making of the 2011 SEC Code commenced in September 2008 with the setting up of the National Committee, headed by Mr. M. B. Mahmoud, by the SEC. The Committee was charged with the responsibility of reviewing the Code of Best Practices in Corporate Governance in Nigeria issued by the SEC in 2003 (2003 SEC Code) with a view to addressing its weaknesses and improving the mechanism for its enforceability. The Committee was further required “to identify weaknesses in, and constraints to, good corporate governance, and to examine and recommend ways of effecting greater compliance and to advise on other issues that are relevant to promoting good corporate governance practices by public companies in Nigeria, and for aligning the Code with international best practices.” After a painstaking job, the committee submitted its report together with a draft Revised Code of Corporate Governance. After some modification to the draft, the SEC exposed a Draft Revised Code of Corporate Governance in 2009 for comments by stakeholders and members of the public. The 2011 SEC Code is the final outcome of this elaborate process.
The stated intention of the SEC in making the 2011 SEC Code is to ensure that the Code is consistent with international best practices on corporate governance. Evidently, as can be gleaned from its provisions, there was a deliberate attempt to align the provisions of the 2011 SEC Code with international best practices on corporate governance. The extent to which the 2011 SEC Code is consistent with international best practices on corporate governance shall be the focus of this post and the next couple of posts every Monday on this website in the next couple of months. The provisions of the 2011 SEC Code would be benchmarked against selected international best practices on corporate governance with a view to identifying the extent to which the 2011 SEC Code is in conformity with international best practice on the issue being discussed. If the 2011 SEC Code falls short of international best practice on any of the selected issues discussed, the deficiencies in the 2011 SEC Code on the issues would be exposed with a view to drawing attention to them so that future attempts at reviewing the Code will result in a contemporary, comprehensive and commendable corporate governance code.
In this first part of this series, we shall consider the Chairman-CEO duality.
The main issue in respect of Chairman-CEO duality is whether one person should, at the same time, be both the chairman and chief executive officer of a company. Historically, the recommendation that the roles of chairman and managing director/chief executive officer should be separated first came to prominence in the code of best practices set out in the Cadbury Report in 1992. The main rationale behind the separation is to avoid over-concentration of powers in the hands of an individual. The danger an extremely powerful chief executive officer poses to a company is better left to the imagination. As has been postulated, an “all-powerful CEO seemed the most important cause of the collapses of Maxwell and Polly Peck in the early 1990s” in the U.K. Also, according to Lipman and Lipman, permitting the chief executive officer to also be the chairman of the board is a bad practice (except in private companies), since it permits the chief executive officer to have too much power over the board of directors and undermines the board’s fiduciary duty to monitor management. The split of the roles of the chairman and the chief executive officer ensures that a system of checks and balances exists in the running of the affairs of the company. Furthermore, it curtails abuse of power by an all-powerful chief executive officer. In spite of these obvious advantages derivable from the separation of the functions, scholars are not in unanimity in acceding to the benefits of the separation of powers as between the chairman and the chief executive officer.
In countries with two-tier board structure, the separation of the functions is commonplace since the chairman of the supervisory board is not usually the head of the management board. The Chairman-CEO duality concerns principally arise in countries with the unitary board structure. Even then, in such countries, there is currently a near unanimity in their corporate governance codes that the same person should not perform the roles of the chairman of the board of directors and the managing director/chief executive officer. In some countries, the same person is not only precluded from performing the roles of chairman and chief executive officer, a retired chief executive officer is precluded from going on to become the chairman of the company upon retirement. The rationale for this is that he would still be influential in the organization and might unduly be tempted to interfere in the day-to-day running of the company which is the responsibility of the chief executive officer. Another benefit derivable from denying a retired chief executive officer from going on to become the chairman of the company is to prevent unnecessary conflicts between the two most important officials of the company as this would most certainly be unhealthy and potentially can negatively impact the growth and progress of the company. This will ultimately affect the value of shareholders’ investment in the company.
In Nigeria, the separation of powers is not a novel provision in corporate governance codes. The first regulatory stipulation for the separation of the two roles can be attributed to the 2003 SEC Code which provided in section 2(b) that the positions of the chairman and chief executive officer “should ideally be separated and held by different persons. A combination of the two positions in an individual represents an undue concentration of power.” Also, the three industry-specific corporate governance codes in force in Nigeria have equivalent provisions. However, the most elaborate provision of the subject in Nigeria can be found in the 2011 SEC Code. In section 5.1(b), it provides that “the positions of the Chairman of the Board and Chief Executive Officer shall be separate and held by different individuals.” Furthermore, to ensure clarity in the position of the 2011 SEC Code on the issue, section 5.1(a) provides that the Chairman “should not be involved in the day-to-day operations of the company.” The day-to-day responsibility of running the company is vested on the Managing Director/Chief Executive Officer and his executive/management team.
It is noteworthy that the 2011 SEC Code has elaborate provisions on the role of the chairman of the board. Section 5.1(a) thereof pointedly declares that the chairman’s primary responsibility is to ensure effective operation of the board such that it works towards achieving the company’s strategic objectives; and not to be involved in the day-to-day operations of the company. Furthermore, section 5.1(d) states that the functions of the chairman shall include the following:
- providing overall leadership and direction for the Board and the Company;
- setting the annual Board plan;
- setting the agenda for Board meetings in conjunction with the Chief Executive Officer and the Company Secretary;
- playing a leading role in ensuring that the Board and its committees are composed of the relevant skills, competencies and desired experience;
- ensuring that Board meetings are properly conducted and the Board is effective and functions in a cohesive manner;
- ensuring that Board members receive accurate and clear information in a timely manner, about the affairs of the Company to enable directors to take sound decisions;
- acting as the main link between the Board and the Chief Executive Officer as well as advising the Chief Executive Officer in the effective discharge of his duties;
- ensuring that all directors focus on their key responsibilities and play constructive role in the affairs of the company;
- ensuring that induction programmes are conducted for new directors and a continuing education programme is in place for all directors;
- ensuring effective communication and relations with the Company’s institutional shareholders and strategic stakeholders;
- taking a lead role in the assessment, improvement and development of the Board; and
- presiding over general meetings of shareholders.
The provisions of the 2011 SEC Code on the role of the Chairman of the Board of Directors complement the provisions of the CAMA on the issue which are scanty, scattered and truncated.
Also worthy of note is the fact that the 2011 SEC Code has commendable provisions which explicitly clarify the role of the managing director/chief executive officer of all public companies in Nigeria. In the first place, it recognises the managing director/chief executive officer as the head of the management team and answerable to the board. Secondly, he is required to be knowledgeable in relevant areas of his company’s activities and demonstrate industry, credibility and integrity while maintaining the confidence of the board and management of the company. Thirdly, the managing director/chief executive officer and the senior management of the company are enjoined to establish a culture of integrity and legal compliance which should be assimilated by personnel at all levels of the company. Fourthly, the 2011 SEC Code provides that the functions and responsibilities of the managing director/chief executive officer include the day-to-day running of the company; guiding the development and growth of the company; and acting as the company’s leading representative in its dealings with its stakeholders. Sixthly, it is further provided that the authority of the managing director/chief executive officer and the relationship between the officer and the board should be clearly and adequately described in his letter of appointment. Also, the Board may delegate such of its powers to the managing director/chief executive officer as it may deem appropriate or necessary to ensure smooth operation of the company.
In conclusion, it is obvious that the 2011 SEC Code is in conformity with international best practice on Chairman-CEO duality. In view of the fact that the Chairman-CEO duality was already recognised and provided for in the three industry-specific corporate governance codes which were in force before the 2011 SEC Code, it may be argued that in providing for separation of powers, the 2011 SEC Code is merely re-enacting an established corporate governance practice in Nigeria. However, it is noteworthy that the provisions of the 2011 SEC Code are much more elaborate than those of the industry-specific corporate governance codes.
In the next article in this series which shall be published on Monday 28th January, we shall consider the adequacy or otherwise of the provisions of the 2011 SEC Code on another critical corporate governance issue. Meanwhile, should you have any comments on the Chairman-CEO duality, 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.