Code of Corporate Governance in Nigeria 2011 and International Best Practices on Corporate Governance: Directors’ remuneration

Company law statutes generally provide for the remuneration of directors. Also relevant in respect of directors’ remuneration is the Articles of Association of the company concerned. Apart from the provisions of the statute on directors’ remuneration, it is a common practice in different jurisdictions to regulate some aspects of directors’ remuneration not sufficiently covered by statute. In the course of the investigation of recent corporate failures, it became evident that directors abused their positions by fixing for themselves enormous pay packages, even when their companies did not perform well. In this article, we shall consider the extent to which the Code of Corporate Governance in Nigeria 2011 (2011 SEC Code) compares with international best practices on directors’ remuneration.


[Click on each button below to reveal more text!]

Best practice of directors’ remuneration

There are some practices in respect of directors’ remuneration which have emerged as best practices as these are provided for in numerous contemporary corporate governance codes – in some cases, in exactly the same words! These international best practices shall be discussed under four broad headings as below.

Remuneration policy

There are three broad issues as far as the policy on directors’ remuneration is concerned. In the first place, it is generally required that there should be a formal and transparent procedure for fixing the remuneration packages of individual directors and no director shall be involved in deciding his/her own remuneration. Secondly, levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully and a significant proportion of executive directors’ remuneration should be structured so as to link rewards to corporate and individual performance. Thirdly, the remuneration policy of a company should address base pay and bonuses, employee contracts, severance and retirement benefits and share-based and other long-term incentive schemes.

Remuneration procedure

In terms of the procedure for administering remuneration, contemporary corporate governance codes generally require the board of directors of companies to establish a remuneration committee charged with the responsibility of recommending the remuneration of directors and other key management personnel of the company to the board. The remuneration committee is required to be composed of not less than three directors, all of whom must be non-executive directors and of which a majority of them must be independent directors.

Independent Directors: 111 Frequently Asked Questions Aptly Answered

Disclosures on remuneration issues

There are some disclosures companies are required to make on matters related to remuneration. In the first place, it is generally provided that companies should provide clear disclosure of their remuneration policies, level and mix of remuneration, and the procedure for setting remuneration. The essence of this disclosure is to enable investors to understand the link between remuneration paid to directors and key management personnel and the performance of companies. Secondly, companies are also required to fully disclose the remuneration of each individual director on a named basis with a breakdown of each director’s remuneration earned through base/fixed salary, variable or performance-related income/bonuses, benefits-in-kind, stock options granted, share-based incentives and awards, and other long-term incentives. Thirdly, companies are also required to name and disclose the remuneration of top key management personnel who are not directors. Finally, the names of the members of the remuneration committee and their attendance at meetings of the committee are required to be disclosed also.

Current developments

Currently, there is so much noise regarding the so-called “Say-on-Pay” by which shareholders are to pass a non-binding advisory vote on a company’s yearly remuneration policy and the board of the company is required to determine the remuneration of executive directors in accordance with the remuneration policy put to shareholder’s vote. This trend is gaining much traction with calls being made in some quarters for the shareholders vote to be binding.

Evaluation of the provisions of the 2011 SEC Code

Quite remarkably, the 2011 SEC Code has elaborate provisions on directors’ remuneration and clearly recognises that the compensation of board members is a major duty of the board of directors. It is, however, apposite to evaluate the provisions of the 2011 SEC Code along the framework of the identified best practices considered above.

Remuneration policy

It is noteworthy that the 2011 SEC Code sufficiently addresses the policy issues concerning remuneration. It expressly provides that companies should “develop a comprehensive policy on remuneration for directors and senior management” and the “levels of remuneration should be sufficient to attract, motivate and retain skilled and qualified persons needed to run the company successfully.” Again, boards are required to undertake a periodic “peer review” of the compensation and remuneration levels of the company to ensure that the company remains competitive.

Furthermore, in relation to the process of determining directors’ remuneration, it provides that a company’s remuneration policy should define the criteria and mechanism for determining levels of remuneration and the frequency for review of such criteria and mechanism; define a process, if necessary with the assistance of external advisers, for determining executive and non-executive directors’ compensation; and provide how and to what extent executive directors’ reward should be linked to corporate and individual performance. It further requires the board to approve the remuneration of each executive director (including the CEO) individually, taking into consideration direct relevance of skill and experience to the company at that time.

In addition, the 2011 SEC Code provides that only non-executive directors should be involved in decisions regarding the remuneration of executive directors. More specifically still, it provides that executive directors should not be involved in the determination of their remuneration.

Finally on the issue of remuneration policy, the 2011 SEC Code recognises that the remuneration of executive directors (including the Managing Director/Chief Executive Officer) may comprise a component that is long-term performance related and may include stock options and bonuses though these are to be disclosed in the company’s annual reports. It also provides that where share options are adopted as part of executive remuneration or compensation, the board should ensure that they are not priced at a discount except with the authorization of the Securities and Exchange Commission. Any such deferred compensation should not be exercisable until one year after the expiration of the minimum tenor of directorship. Again, the limits of the share option should be set in any given financial year and be subject to the approval of the shareholders in general meeting.

Obviously, the provisions of the 2011 SEC Code on policy issues regarding directors’ compensation are quite robust. The only area of concern relates to the vesting of share option where it stipulates that the option should be exercisable “one year after the expiration of the minimum tenor of directorship.” It would have been more appropriate if the option is exercisable after the cessation of directorship instead of the minimum tenor of the directorship.

Remuneration procedure

The 2011 SEC Code prescribes the utilisation of a board committee in handling remuneration matters. Accordingly, it provides for the establishment of a Governance/Remuneration Committee which is charged with, among other responsibilities, the responsibilities of making recommendations on compensation structure for executive directors and providing input to the annual report of the company in respect of directors’ compensation. It further provides that the Governance/Remuneration Committee is to be composed of only non-executive directors.

The three main shortcomings of the 2011 SEC Code on the board committee charged with remuneration matters are, first, it lumps the onerous responsibility of handling directors remuneration with the duties of directors nomination and appraisal which the committee is additionally charged with. Second, there is no indication as to the size of the committee. Third and perhaps the biggest shortcoming is that no provision is made for independent directors in the membership of this committee. This flaw can be traced to the inadequacy in the provisions of the 2011 SEC Code as far as independent directors are concerned which we  previously considered [see here].

Independent Directors: 111 Frequently Asked Questions Aptly Answered

Disclosures on remuneration issues

The 2011 SEC Code merely provides that company’s remuneration policy and all material benefits and compensation paid to directors (including executive directors’ remuneration and share options) should be published in the company’s annual report. This is an aspect of directors’ remuneration matter in which the 2011 SEC Code is most deficient when its provisions are benchmarked against international best practices on directors’ remuneration. It did not provide for the full disclose of the remuneration (with its breakdown) of each individual director and key management personnel on a named basis. Interestingly, one of the quoted banks in Nigeria provided this information in its 2011 annual report. It also did not provide for the disclosure of the names of the members of the Governance/Remuneration Committee and their attendance at meetings of the committee.

Current developments

The 2011 SEC Code has nothing on “Say-on-Pay” by shareholders. This is not surprising as this is even a recent and evolving development in the more advanced economies. It is remarkable, though, that King III 2010 of South Africa has provisions on the issue.

Next week, we shall appraise the extent of the 2011 SEC Code is in compliance with international best practice on another critical corporate governance issue. Meanwhile, should you have any comments on the issues raised concerning board performance evaluation discussed 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.


Posted in Corporate Governance Tagged with: , , , ,
One comment on “Code of Corporate Governance in Nigeria 2011 and International Best Practices on Corporate Governance: Directors’ remuneration
  1. Marcellino says:

    The need the for the provision of the Act on Directors’ remuneration is very essential as to ensure a proper check on the Director in order to avoid misappropriation of the company’s fund by the Board.

Leave a Reply