Historical Development of Corporate Governance in Nigeria

[easyazon_block add_to_cart=”default” align=”left” asin=”0199607966″ cloaking=”yes” layout=”top” localization=”yes” locale=”US” nofollow=”yes” new_window=”yes” tag=”thecorpro-20″]The history of corporate governance in Nigeria can be said to be somewhat distorted and confusing. Nonetheless, corporate governance cannot be divorced from Company Law in general. Prior to the time the expression “corporate governance” became popular, Company Law recognised and still recognises two organs of a company: the board of directors and the company in general meeting. Corporate governance as a concept merely stressed the greater focus that should be paid on how a company should be run by those put in charge of the company’s affairs. Unsurprisingly therefore, the centrality of the board of directors in the institutionalisation of the tenets of sound corporate governance in every company cannot be denied. The prominence of board of directors in corporate governance is evident in model definitions of corporate governance which in a nutshell regards corporate governance as the processes and structures by which the business and affairs of an institution are directed and managed in order to improve long-term shareholder value by enhancing corporate performance and accountability, while taking into account the interest of other stakeholders. As convoluted as the historical development of corporate governance is in Nigeria, an attempt has been made here to capture this in proper perspective.

[sociallocker]It is necessary to discuss the historical development of corporate governance in Nigeria in periodic context. For this purpose, four periods are readily identifiable.

[A]       Pre-1990 era:

Before 1990, the principal Company Law statute in Nigeria was the Companies Act 1968. This enactment was a comprehensive legislation modelled after the Companies Act 1948 of the United Kingdom. It contained elaborate provisions regarding the running of companies in relation to the roles of the board of directors and the members in general meeting. However, this statute was not without its legions of limitations. As a result of numerous criticisms from stakeholders, the Companies Act 1968 was repealed and replaced in 1990 by the then Companies and Allied Matters Decree No, 1 of 1990. With some minor modifications over the years, this statute which is now known as the Companies and Allied Matters Act, Cap. C20, Laws of the Federation of Nigeria 2004, is the principal statute regulating companies in Nigeria.

[B]       1990 to 2003:

The Companies and Allied Matters Act, Cap. C20, Laws of the Federation of Nigeria 2004 was the product of a rigorous process championed by the Nigerian Law Reform Commission. It contained a lot of innovative provisions such as provisions on greater and more effective participation in, and control of, the affairs of a company through improved provisions in respect of meetings. It is made provision for greater accountability by directors. At the time the initiative to make the statute commenced, corporate governance has not emerged as a distinct concept. Thus, the statute made general provisions on the administration of companies registered in Nigeria.

However, after the coming into force of the statute, some corporate challenges around the world brought the issue of corporate governance to the fore. Consequently, some countries started review their corporate governance practices. This resulted in some countries issuing corporate governance codes to address issues neither specifically nor sufficiently addressed by their respective company legislation. The collapse of Enron, WorldCom and other major corporations in the early 2000s brought corporate governance consideration to the front burner all over the world.

In the case of Nigeria, its foremost formal corporate governance code could be traced to the Code of Corporate Governance for Banks and Other Financial Institutions in Nigeria which was issued by the Bankers’ Committee in August 2003. This Code was the outcome of the work of the Bankers’ Committee’s Sub-Committee on Corporate Governance. It was initiated in response to the financial crisis in Nigeria in the early 1990s and in the realisation that poor corporate governance was one of the major factors in virtually all known instances of financial sector distress. As is evident from its nomenclature, the Code was applicable to all banks and other financial institutions operating in Nigeria at the time it was issued. Its major weakness was that it was not issued by a regulator having been issued by a voluntary association of the Chief Executives of the banks in Nigeria, otherwise known as Bankers’ Committee. Thus, not much is known about the Code.

The Code was predicated on 11 Principles. These are:

  1. Responsibilities of The Board of Directors: The Board should exercise responsibility, leadership, enterprise, integrity and judgment in directing the Institution so as to achieve continuing prosperity for the Institution and act in its best interest, in a manner based on transparency, accountability and equity. Every Institution should be headed by an effective Board that can lead and control the Institution.
  2. Structure of the board of Directors: The Board should include a balance of executive and non-executive directors (including independent non-executives) such that no individual or group of individuals can dominate the Board’s decision –making process.
  3. The Chairman and the Chief Executive Officer: There should be a clear division of responsibilities at the head of the institution – the running of the Board and the management of the institution’s business – which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision making.
  4. Appointments to the Board: There should be a formal and transparent procedure for the appointment of new directors to the Board.
  5. Proceedings of the Board of Directors: The Board should meet regularly and Board members should attend meetings regularly.
  6. Directors’ Remuneration: Institutions should establish a formal and transparent procedure for developing policies on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in approving his or her own remuneration. Also, levels of remuneration should be sufficient to attract and retain the directors needed to run the company successfully, but institutions should avoid paying more than is necessary for this purpose. A proportion of executive directors’ remuneration should be structured so as to link rewards to corporate and individual performance.
  7. Board Performance Assessment: There should be a formal assessment of the effectiveness of the Board as a whole and the contribution by each individual director (including the Chairman) to the effectiveness of the Board.
  8. Risk Management: The Board must identify key risk areas and key performance indicators of the business enterprise and monitor these factors.
  9. Financial Disclosure: There should be a degree of accountability of directors to shareholders and other stakeholders of the institution and of Management to the directors.
  10. Relations with shareholders: The Board should serve the genuine interests of the shareholders of the institution and account to them fully.
  11. Audit Committee: The Board should establish formal and transparent arrangements for considering how they should apply the financial reporting and internal control principles and for maintaining an appropriate relationship with the institution’s auditors.

In spite of the comprehensive provisions of the Code, it did not make much impact. A major factor that could have occasioned this was the issuance of the Code of Best Practices on Corporate Governance in Nigeria by the Securities and Exchange Commission in October 2003, about two months after the issuance of the Code.

[C]       2003 to 2011:

The Code of Best Practices on Corporate Governance in Nigeria (2003 SEC Code) issued by the Securities and Exchange Commission in 2003 greatly impacted the corporate governance scene in Nigeria. In the first place, it was the first corporate governance code to be issued by any regulator in Nigeria. Secondly, it was applicable to all public companies registered in Nigeria.

The 2003 SEC Code was the outcome of the work of a 17-member committee (headed by Mr. Atedo Peterside) set up by the Securities and Exchange Commission in collaboration with the Corporate Affairs Commission on 15th June 2000. Membership of the Committee was carefully selected to cut across all sectors of the economy including members of professional organizations, organized private sector and regulatory agencies. The mandate of the committee was clear: to identify weaknesses in the current corporate governance practice in Nigeria and fashion out necessary changes that will improve the corporate governance practices in Nigeria.

After the coming into force of the 2003 SEC Code, there were numerous changes in the corporate world. Quite rapidly, the provisions of the 2003 SEC Code became inadequate to address the new developments in the corporate scene; yet no amendment to it was forthcoming from the Securities and Exchange Commission. This oversight in amending the 2003 SEC Code to bring its provisions up to date with current realities resulted in some regulators of specific sectors issuing industry-specific corporate governance codes which not only took into account the current situations when those codes were made, but they also contained provisions on some matters peculiar to their respective sectors.

In 2006, the Central Bank of Nigeria issued its Code of Corporate Governance for Banks in Nigeria Post-Consolidation (2006 CBN Code). Compliance with the provisions of this Code is mandatory for all banks operating Nigeria. Essentially, the Code which was issued following the consolidation of Nigerian banks in 2005 was meant to address the identified weaknesses in corporate governance of banks in Nigeria and to resolve the challenges of corporate governance which are bound to occur post-consolidation. Some of the corporate governance challenges addressed in the 2006 CBN Code were way outside the purview of the 2003 SEC Code. This situation decries the absence of regular amendment to the 2003 SEC Code and justifies the issuance of the 2006 CBN Code. However, it does seem that the lack of regular amendment that bedevilled the 2003 SEC Code has afflicted the 2006 CBN Code. No doubt, the 2006 CBN Code is overdue for revision. It is noted though that the CBN issued an Exposure Draft of a Revised Code of Corporate Governance for Banks in Nigeria in the second half of 2012. This is yet to be finalised.

Independent Directors: 111 Frequently Asked Questions Aptly Answered

In 2008, following the reforms in the pension sector which gave rise to greater private sector involvement in pension fund management, the National Pension Commission (PENCOM) issued the Code of Corporate Governance for Licensed Pension Operators (2008 PENCOM Code). The 2008 PENCOM Code sets out rules to guide pension fund administrators (including closed pension fund administrators) and pension fund custodians on the structures and processes to be used towards achieving optimal governance processes. The Code outlines minimum corporate governance requirements, meant to ensure that governance policies are entrenched in the companies. It was developed with a view to establishing overall economic performance and market integrity by creating incentives for pension schemes to impact positively on stakeholders with a view to gaining the confidence of these stakeholders. There are numerous developments in the corporate governance scene which the 2008 PENCOM Code has no provisions for. Thus, it would not be out of place for the PENCOM to commence the process of amending this Code for continued relevance.

The third regulator to issue an industry-specific corporate governance code is the National Insurance Commission (NAICOM). In 2009, it issued the Code of Good Corporate Governance for the Insurance Industry in Nigeria (2009 NAICOM Code). The 2009 NAICOM Code which was effective on 1st March 2009 is mandatory for all insurance and re-insurance companies under the regulatory supervision of the NAICOM. The expectation of the NAICOM in issuing the 2009 NAICOM Code is to unleash the hidden potential of the insurance sector for maximum impact with a view to inducing strong economic growth in Nigeria. It is believed that sound corporate governance practice in the insurance industry would ensure transparency, accountability and enhanced shareholders value. The 2009 NAICOM Code recognised the following as basic principles of good corporate governance: a proactive, responsible, responsive, accountable and committed Board/Management; definite management succession plan; culture of compliance with rules and regulations; good knowledge about business and insurance matters with requisite experience; disclosure and transparency; and effective exercise of shareholders’ rights.

The three industry-specific corporate governance codes discussed above addressed corporate governance issues peculiar to the respective sectors at the time of their issuance which the 2003 SEC Code did not address. Furthermore, the 2003 SEC Code lacked adequate provisions on other contemporary corporate governance issues. These include independent directors; critical board committees in relation to corporate governance; directors’ appointment, tenure, remuneration and evaluation; ensuring the independence of the external auditors; whistle-blowing procedures; sustainability issues; and general disclosure and transparency issues. It was therefore quite obvious that there was a need to update the 2003 SEC Code. Thus, on 1st April 2011, the Securities and Exchange Commission issued the Code of Corporate Governance in Nigeria which replaced the 2003 SEC Code.

Independent Directors: 111 Frequently Asked Questions Aptly Answered

[D]       2011 to date:

As already noted, as at 2011 there were four regulators who were active in the corporate governance scene. These are the Central Bank of Nigeria, the National Pension Commission, the National Insurance Commission and the Securities and Exchange Commission. Each of these issued a corporate governance code. Thus, since 2009 to this period there are four corporate governance codes in force in the country. Of these four corporate governance codes, three of them (those issued by the Central Bank of Nigeria, the National Pension Commission and the National Insurance Commission) are industry-specific. They are applicable to companies in the sector that the Commission concerned has authority. The corporate governance code issued by the Securities and Exchange Commission was applicable to ALL public companies registered in Nigeria irrespective of the sector in which such companies operated. Also, public companies were bound by the 2003 SEC Code whether they were listed on the stock exchange or not.

The SEC Code in force in Nigeria until 1st April 2011 was the 2003 SEC Code. However, on 1st April 2011, the Securities and Exchange Commission issued the Code of Corporate Governance in Nigeria 2011 (2011 SEC Code) which replaced the 2003 SEC Code. The making of the 2011 SEC Code commenced in September 2008 when the SEC constituted a National Committee, headed by Mr. M. B. Mahmoud, for the review of the 2003 SEC Code to address its weaknesses and to improve the mechanism for its enforceability. In addition, the Mahmoud Committee was mandated 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.”  In 2009, the committee, after a thorough job, submitted its report together with a draft Revised Code of Corporate Governance to the SEC. After consultations with other regulatory bodies, the SEC at its 43rd meeting reviewed the draft code submitted by the Mahmoud Committee and introduced some amendments to it.  In the same year, the SEC exposed a Draft Revised Code of Corporate Governance to the public through the print media and its website, for further comments and suggestions from members of the public, before finalisation.  Subsequently, the 2011 SEC Code was released by the SEC with a commencement date of 1st April 2011. The 2011 SEC Code is expected to be the minimum standards expected of public companies in Nigeria. The 2011 SEC Code has been adjudged to be quite comprehensive. Nevertheless, it is not a perfect document; it still contains some flaws. [See here]

Independent Directors: 111 Frequently Asked Questions Aptly Answered

Interestingly, a few months after the 2011 SEC Code became operational the Financial Reporting Council of Nigeria Act 2011 was enacted by the Federal government. This statute has far-reaching provisions regarding the operation of companies in Nigeria. One of the areas the Financial Reporting Council of Nigeria was given express jurisdiction over is corporate governance. Accordingly, sections 23(g) and 45 provide for the establishment of a Directorate of Corporate Governance for the Financial Reporting Council of Nigeria. Sections 50 and 51 stipulate the objectives and functions of the Directorate of Corporate Governance of the Financial Reporting Council of Nigeria to be the following: to develop principles and practices of corporate governance; promote the highest standards of corporate governance; promote public awareness about corporate governance principles and practices; act as the national coordinating body responsible for all matters pertaining to corporate governance; promote sound financial reporting and accountability based on true and fair financial statements duly audited by competent independent Auditors; encourage sound systems of internal control to safeguard stakeholders’ investment and assets of public interest entities; and ensure that audit committees of public interest entities keep under review the scope of the audit and its cost effectiveness, the independence and objectivity of the auditors. The Directorate of Corporate Governance of the Financial Reporting Council of Nigeria is further empowered to organize and promote workshops, seminars and training in corporate governance issues;  issue the code of corporate governance and guidelines, and develop a mechanism for periodic assessment of the code and guidelines; provide assistance and guidance in respect of the adoption or institution of the code in order to fulfil its objectives; and establish links with regional and international institutions engaged in promoting corporate governance.

It remains to be seen the impact the Financial Reporting Council of Nigeria would have on principles and practice of corporate governance in Nigeria. It is appropriate to expect so much from the Financial Reporting Council of Nigeria in view of the enormous powers vested on it by the Financial Reporting Council of Nigeria Act 2011.

Let’s keep our fingers crossed as events unfold. But should you have any views to share on this matter, please do so using the comments section of this post. 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 to be able to comment. Let’s share your views on this matter.[/sociallocker]

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