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Securities and Exchange Commission of Nigeria's Draft Revised Code of Corporate Governance: An Appraisal

Published online by Cambridge University Press:  14 September 2011

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Abstract

In furtherance of its role to entrench good corporate governance practice in Nigeria, the Securities and Exchange Commission of Nigeria published a draft revised Code of Corporate Governance. It is intended that this revised code will replace the country's current corporate governance code which came into force in 2003. This article sets out a thorough examination of the draft code with a view to appraising whether the final version of the code will be well-suited to meet its desired goals. Consequently, some of its provisions have been critically reviewed while others have been acclaimed. Furthermore, the article draws attention to the increased responsibility of the Securities and Exchange Commission in establishing good corporate governance practice and makes extensive suggestions in this regard.

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Type
Research Article
Information
Journal of African Law , Volume 55 , Issue 2 , October 2011, pp. 280 - 299
Copyright
Copyright © School of Oriental and African Studies 2011

INTRODUCTION

The Securities and Exchange Commission of Nigeria recently published a draft revised Code of Corporate Governance (the Draft Code) for comments by stakeholders and the general public.Footnote 1 This proposed code, which is to be applicable to public companiesFootnote 2 only, is the outcome of the work of the National Committee for the Review of the Code of Best Practices on Corporate Governance in Nigeria 2003 (the 2003 Code), inaugurated by the Securities and Exchange Commission in September 2008 to address the weaknesses of the 2003 Code and improve on the mechanism for its enforcement. More specifically, the committee was charged with the responsibility of identifying weaknesses in, and constraints to, good corporate governance. It was further charged with the responsibility of examining and recommending ways of effecting greater compliance with good corporate governance practices by public companies in Nigeria.

The scope of the Draft Code is testimony to the fact that the Securities and Exchange Commission desires to institute a broad corporate governance framework for public companies in the country. The necessity of having an effective corporate governance framework cannot be over-emphasized. In the first place, the present code (that is, the 2003 Code) is about six years old and certainly too old to provide for the emergent issues in corporate governance. Secondly, the recent banking scandal in the country, blown open by the new governor of the Central Bank of Nigeria, was stated to be largely the result of corporate governance failureFootnote 3 in both practice by the banks and enforcement by the regulatory authorities. Given the magnitude of the scandal, one wonders whether other public companies, especially those listed on the Nigerian Stock Exchange, would come out clean if a thorough corporate governance audit were carried out on their activities.

The importance of good corporate governance in the effective and efficient administration of companies cannot be overstressed. Basically, the main purposes of corporate governance can be said to be, first, to ensure that the board, in representing the shareholders, protects the company's resources and allocates them in a manner to meet the company's goals. Secondly, it is to ensure that those governing and managing the company account properly to its stakeholders. Thirdly, corporate governance ensures that shareholders and other stakeholders can and do hold the board to account for their management and control of the company.

In the light of these observations, this article undertakes a critical examination of the Draft Code, with a view to appraising whether the Code omits anything that it should contain, or contains matters that would better be left to legislative provisions on the statute book.

MAIN FEATURES OF THE DRAFT CODE

The Draft Code has a very broad scope. It adopts a holistic approach to the codification of corporate governance that is not only comprehensive, but is in line with current trends and also accords with international best practice in terms of its scope. Most certainly, the Draft Code has many positive aspects, especially when compared to the 2003 Code which it would likely replace. However, it is not a perfect document. In a bid to review the main features of the Draft Code, this article explores the commendable aspects of the Draft Code as well as its shortcomings. Also, it considers specific sections of the Draft Code with a view to a more detailed review of particular provisions.

The good

As already stated, perhaps the most commendable feature of the Draft Code (and this stands it out from the 2003 Code) is its comprehensiveness in scope and resourceful content manifested in many ways. In the first place, it seeks to entrench best practice boardroom behaviour. This is evident in its expressly stipulating the responsibilities of the board, functions of the chairman, functions of the managing director / chief executive officer and additional duties of the company secretary. The provisions dealing with these matters substantiate the Companies and Allied Matters Act (CAMA),Footnote 4 which is either surprisingly silent on some of these matters or lacking in detail.

Secondly, the provision of the Draft Code on conflicts of interest procedureFootnote 5 complements section 280 of the CAMA which provides that the personal interest of a director shall not conflict with any of his duties as a director.Footnote 6 Consequently, a director is disallowed, in the course of managing the affairs of a company or utilizing the company's property, from making any secret profits or receiving other unnecessary benefits.Footnote 7 Section 280(2) of the CAMA codifies the golden rule “that a director must not, without the consent of the company, make any profit out of his position in the company beyond his agreed remuneration”.Footnote 8 Section 16 of the Draft Code has now, and rightly too, laid down the procedure to be adopted by directors when faced with a conflict of interest situation.

Thirdly, without prejudice to the comments below on certain sections of part C, this part of the Draft Code is the first explicit attempt to codify aspects of the board's relationship with a company's shareholders.

Fourthly, section 24 of the Draft Code attempts to capture the reality concerning the dispatch of general meeting notices to shareholders. Beyond the 21 days statutory notice,Footnote 9 the Draft Code stipulates an additional period of not less than seven days if the notice is sent by post. It is noteworthy that the additional seven days is a minimum. This provision of the Draft Code is more in line with reality compared with the CAMA provision. It is important that those entitled to receive notice of general meetings actually do, and in sufficient time to enable them study the documents before the date of the meeting.Footnote 10

Fifthly, the provisions of part D of the Draft Code illuminate the provisions of section 342 and part III of the fifth schedule of the CAMA. The Draft Code expands the number of issues that should be contained in a company's report (what it refers to as “sustainability issues”). This is another instance of the Draft Code making provisions that are contemporary. For example, matters such as company policies on HIV/AIDS and malaria, which are serious issues capable of adversely affecting the performance and sustainability of a company, are brought to the fore. Thus, companies are made to give consideration to these matters.

Sixthly, another area where the Draft Code has made a bold improvement on the statutory provisions is in relation to the audit committee which every public company is required to have by virtue of section 359(3) and (4) of the CAMA. The provision of section 30.2 of the Draft Code that “members of the committee should have basic financial literacy and should be able to read financial statements” and that “at least one member of the committee should have knowledge of accounting or financial management” is a welcome development. The regrettable silence of the CAMA on the skill sets required to be qualified to be a member of an audit committee is a major factor contributing to the ineffectiveness of audit committees in Nigeria. It is likewise gratifying that the Draft Code empowers the committee to seek external professional advice, where necessary.Footnote 11 The statement of additional responsibilities of the audit committee is useful in clarifying the extent of responsibility imposed on members of the committee and clearly charts the course of the scope of its focus.Footnote 12

Seventhly, the Draft Code champions the principle of transparency by providing for the revelation, through publication in the annual reports of companies, of certain matters which were not usually brought to the attention of shareholders. There are several instances where the Draft Code has imposed obligations on companies to publish certain matters in their annual report.Footnote 13 This will go a long way towards ensuring that company directors are more circumspect in the management of the affairs of companies since matters which reveal the quality of management of the company, until now not openly available to shareholders, will be in the public domain.

Furthermore, section 35.4 of the Draft Code provides that: “[c]ompanies should ensure that shareholders have equal access to company's [sic] information. The Board should endeavour to establish web sites and investor-relations portals where the communication policy as well as the companies' [sic] annual reports and other relevant information about the company should be published and made accessible to the public.”

Indubitably, the Draft Code represents a remarkable shift in corporate governance regulation. It is made with the best of intentions with a view to protecting investors. However, in its present state, it has many flaws which must be corrected before it is formalized and made operational. Thus, what remains is to fine-tune the Draft Code further, to ensure that the objectives of the review are achieved. This article now considers some of those areas of the Draft Code requiring fine-tuning.

The bad

In spite of the evident good intentions of the Draft Code, it is, in its current state, laden with many shortcomings which, unless corrected, will do great damage to the worthy project of revising Nigeria's corporate governance code. This article will now discuss the main shortcomings. One, there are numerous typographical errors in the Draft Code. Some of these are unique to the downloaded version of the Draft Code, while some are unique to the version published in the newspapers. For example, the typographical errors in the downloaded version include the use of incorrect punctuation, use of incorrect words, the omission of words, inappropriate casing of letters and inappropriate use of acronyms.Footnote 14

Two, the Draft Code is ambiguous on its mode of enforcement. It is conceded that there is no consensus on the mode of enforcement of corporate governance codes.Footnote 15 Generally, there are two broad systems of corporate governance enforcement mechanisms: rules-based and “comply or explain”. Whereas some experts favour the legal sanction approach which is typified by the Sarbanes Public Company Accounting Reform and Investor Protection Act 2002Footnote 16 (Sarbanes-Oxley Act) of the United States of America, others favour the so called “comply and explain” option which makes compliance with corporate governance codes self-regulatory. It is difficult to ascertain which enforcement mechanism is adopted for the Draft Code. On the one hand, it seems to suggest that compliance with the Draft Code is voluntary,Footnote 17 on the other, it suggests that compliance is obligatory.Footnote 18 There should be no discretion on compliance with the Draft Code on the part of public companies. The negative consequences of non-compliance with corporate governance codes are too catastrophic for investors and the economy. The Draft Code should represent the minimum standard of behaviour required of public companies. It may also be considered apposite, as a way of ensuring compliance, for the Nigerian Stock Exchange to make compliance with the Draft Code a pre-listing requirement (in the case of new companies seeking quotation on the Nigerian Stock Exchange) and a post-listing requirement (in the case of companies already listed on the exchange).Footnote 19

Three, closely related to the suggestion above is the need to compel every company to which the Draft Code applies to have a corporate governance charter which must be filed with the Securities and Exchange Commission. A major advantage in such a stipulation is that it would draw the attention of the company's officers to the necessity of addressing the issue of corporate governance. This would be consistent with the stipulation in part I of the Draft Code for applicable companies to have a code of ethics.

Four, the Draft Code refers to several types of directors.Footnote 20 With the exception of independent directors defined in section 5.5, the other types of directors are defined neither in the Draft Code nor in the CAMA. Especially as the CAMA does not define them,Footnote 21 it would be appropriate for the interpretation section in the Draft CodeFootnote 22 to do so. It is interesting to note that this omission was made in spite of the fact that the Draft Code defines the term “director” in section 37.

Five, in view of the increased scope of responsibility and authority vested in non-executive directors under the Draft Code, it would be necessary for that category of directors to be able to hold meetings as a group. This should be expressly provided for in the Draft Code so as to dispel negative insinuations concerning such meetings. In a typical board, there are two broad groups of directors: executive directors and non-executive directors. While the executive directors could have meetings of just members of that group, the non-executive directors do not have an official opportunity to meet as a group. This is so in spite of the fact that there are some responsibilities assigned only to non-executive directors as a group in the Draft Code. For example, section 14.3 provides that “only non-executive directors should be involved in decisions regarding the remuneration of executive directors”. A meeting of non-executive directors would, in the author's view, be an appropriate forum to discuss such matters, instead of excusing the executive directors from a board meeting when that item is about to be discussed.

Six, it is astounding that there is no defined role for the category of independent directors, such that the reason for providing for independent directors in the Draft Code is lost. The Draft Code merely defines who an independent director isFootnote 23 and prescribes that a public company should have at least one independent director on its board.Footnote 24 It is perhaps this lack of a defined role for independent directors that led to the inadequate stipulation in the Draft Code that the minimum number of independent directors that should be on the board of public companies is one.Footnote 25 An independent director is a non-executive director who is sufficiently detached from the company and its management as to be independent in character and judgment. Implicit in their independence is that their main, if not singular, consideration in board deliberations is promoting the interest of the company as a whole, thereby securing the interests of shareholders, the owners of the company. All independent directors are non-executive directors, but not all non-executive directors are independent. A company having a majority of non-executive directors on its board might still lack a board composed of members who are independent in character and judgment. Current best practice is to have a majority of independent directors on the board. Accordingly, section A.3.2 of the Combined Code on Corporate Governance 2008 of the United Kingdom (UK Combined Code) provides: “Except for smaller companies,Footnote 26 at least half the board, excluding the chairman, should comprise non-executive directors determined by the board to be independent.”Footnote 27

The role of independent directors on the board is crucial. Unless the number of independent directors on the board is of sufficient number as to be impactful, the essence of their presence will be defeated. In the United Kingdom and United States of America, the approach adopted is to ensure that independent directors constitute a majority of board members, while in South Africa they constitute a majority of non-executive directors who themselves must form a majority of the board. In these jurisdictions, the independent directors can influence board decisions. This contrasts sharply with the provision in the Draft Code which requires a public company to have a minimum of one independent director. Certainly, they would be unable to direct the course of events at board meetings which could leave them always frustrated at board meetings. The Draft Code should stipulate at a minimum that a majority of non-executive directors should be independent, if it is considered too drastic to stipulate that a majority of members of board should be independent. Another shortcoming on independent directors in the Draft Code relates to their role. In other jurisdictions, they constitute all or the majority of members of key corporate governance committees, such as the nomination,Footnote 28 remunerationFootnote 29 and auditFootnote 30 committees. It is also imperative that the Draft Code compels companies to indicate in their annual reports the status of every company director, that is, to state whether a director is executive, non-executive or independent.

Seven, still on directors, the Draft Code has still not removed the opacity existing in the current law concerning directors' remuneration. The level of disclosure in companies' annual reports and accounts in respect of directors' remuneration is grossly below international best practice. An evaluation of the annual reports and accounts of companies quoted on some international stock exchanges is quite revealing. In some cases, some of these companies have subsidiaries operating in Nigeria and quoted on the Nigerian Stock Exchange. This is an area where the corporate governance code could further complement the CAMA. In advanced economies, for example, directors' remuneration details in the annual reports and accounts of companies state the remuneration of each director, showing such information as basic salary, allowances, pension contribution and bonus. Also, non-cash benefits such as share options are shown. There is no excusable reason for such level of disclosure concerning directors' remuneration not to be incorporated in the Draft Code. This would certainly promote transparency and accountability. It is doubtful if the remuneration committees established by listed companies under the 2003 Code actually function. As a result of recent corporate failures, the practice now is for companies to publish remuneration reports which must be approved by shareholders at annual meetings.Footnote 31 The remuneration report contains the remuneration policy of the company concerned. Furthermore, the determination of directors' remuneration is no longer the function of the human resources department of a company: it is now determined by the board's remuneration committee. This practice is international best practice and applies across the globe. The Draft Code should be sufficiently forward-looking to incorporate such beneficial international best practice.

Eight, though the Draft Code, as observed above, has made tremendous improvements on the CAMA provisions relating to audit committees, there are many aspects to be covered to ensure that these committees deliver the value expected of them. Some of the areas where there remains room for improvement include the committee's composition, role, relationship with the board and leadership. On composition, the CAMA confused the nature of audit committees when it stipulated that they should be composed of representatives of shareholders and directors, in equal numbers.Footnote 32 In other jurisdictions, the audit committee is a very crucial board committee in the corporate governance framework. As a board committee, it is made up of only board members: usually solely independent directors.Footnote 33 The committee in those other jurisdictions performs all the functions purportedly reserved for audit committees in section 359(6) of the CAMA and section 30.4 of the Draft Code.Footnote 34 What most companies in Nigeria do to avoid the awkwardness in the composition of audit committees as prescribed by the CAMA is to establish a “board audit committee” which is different from the audit committee constituted under section 359(3) of the CAMA which they term the “shareholders audit committee”. It is the so-called board audit committee that performs the duties of the audit committee as stipulated in the CAMA. The so-called shareholders audit committee is then charged with the routine of being presented with the company's quarterly results for “approval”, actually for information, as the committee cannot alter the figures which would have been previously approved by the board. In some more circumspect companies, the so-called “board audit committee” is called a “risk management committee”. It nevertheless has the same crippling effect on the audit committee prescribed by the CAMA. Little wonder, therefore, that 20 years after the establishment of audit committees in public companies as prescribed by the CAMA, these committees, without exception, have been largely and sadly ineffective. The only advantage this so-called audit committee has is that it has provided an avenue for some select shareholders to mix with directors. In all the companies surveyed, the chairman of this audit committee is usually one of the shareholder members of the committee. These shareholder members do not represent the interests of shareholders at all, as envisaged by the drafters of the CAMA. There is an urgent need to review the establishment, role, relationship with the board and leadership of audit committees. The nature of review envisaged will entail an amendment to the CAMA on audit committees. It does not seem likely that shareholders who are already mixing with directors will willingly forgo this arrangement. Thus, the risk management committee envisaged under section 10 of the Draft Code could be strengthened to fill the gap under the Nigerian corporate governance framework.

Nine, the Draft Code appears to have taken cognizance of the pervasive influence of technology in modern times. Thus, in section 35.4 of the Draft Code, companies are required to establish web sites and investor-relations portals where their communication policy and annual reports are published and made accessible to the public. It may also be beneficial to require companies to publish notices of general meetings, quarterly results, names of shareholders with unclaimed dividends and proxy forms on such web sites.

Ten, the Draft Code seems to have overlooked an essential committee in the worldwide corporate governance framework. As a general consensus, there are three committees which are essential for the satisfactory entrenchment of effective corporate governance practice: the nomination committee, remuneration committee and audit committee. These committees were rightly recognized in the 2003 Code even though the provisions of the 2003 Code on audit committees echo, so to speak, the equivalent CAMA provisions. However, for some inexplicable and inexcusable reason, the Draft Code does not provide for these three board committees. Section 9.1 of the Draft Code empowers company boards to determine the number and composition of those committees it considers necessary in the performance of their duties. It further provides that, in addition to the audit committee required by CAMA, the board may establish “a governance / remuneration committee and risk management committee and such other committees as the board may deem appropriate depending on its size, needs or industry requirements of the company”.Footnote 35 It is commendable that company boards are given the discretion to establish as many board committees as considered appropriate in the circumstances. It is however inadequate not to provide for all three key corporate governance committees: nomination, remuneration and audit. Each of these committees is charged with significant responsibilities. Thus, it is considered unhelpful and stifling to charge a single committee with the responsibilities of any two of these committees. This is even more so with the growing awareness of corporate governance requirements, the increasing number of enlightened company shareholders, and inherent shareholder activism stimulated by the growing number of shareholders' associations. In view of these issues, each of these three key committees has an enormous amount of work to do. A clear example of this type of “designed-to-fail committee” is the governance / remuneration committee established under section 11 of the Draft Code. A careful evaluation of its functions as stated under section 11.2 reveals that this committee is charged with the duties of both a nomination committeeFootnote 36 and a remuneration committee.Footnote 37 This merger is unworkable as it is stifling and distracting. Also, it has the potential to make the committee too large, with all the negative and unproductive consequences of unduly large and unwieldy committees. It is, therefore, recommended that the Draft Code should adopt international best practice by providing for the three crucial board committees for an effective corporate governance framework: nomination, remuneration and audit. However, in view of the confusion over the audit committee occasioned by the CAMA as already highlighted above, it is further suggested that the board committee charged with that function should be designated a risk management committee. This suggestion concerning a risk management committee is actually the practice in financial institutions. Thus, the model is workable. It only requires fine-tuning.

Eleven, there is immense value in harmonizing the corporate governance codes in Nigeria. Currently, apart from the 2003 Code, there are at least three other corporate governance codes applicable to banks,Footnote 38 pension operatorsFootnote 39 and insurance companies respectively.Footnote 40 These corporate governance codes have different, and sometimes inconsistent, provisions on the different issues relating to corporate governance. This makes it challenging for companies to comply. It does not require much effort to imagine the possible confusion and grave difficulty companies would be subjected to in future on account of this needless multiplicity of corporate governance codes. Interestingly, unlike the 2003 Code, these other codes declare themselves to be mandatory.Footnote 41 One issue in the different corporate governance codes that highlights the need for the harmonization of corporate governance codes in Nigeria is independent directors. Unlike the impression created in the 2003 Code, the other codes, including the Draft Code, recognize that an independent director is not another name for a non-executive director.Footnote 42 However, there are glaring disparities in the provisions in the different corporate governance codes on the number, mode of appointment, tenure, qualifications and role of independent directors.

Twelve, the Draft Code does not have a commencement date. Perhaps it is too early to decide that, given the amount of work still to be done before the final version of the Code is ready.

These matters are vexed issues which the Draft Code should address appropriately to make its provisions robust, relevant and contemporary in relation to modern international best practice on such subjects. They represent major shortcomings of the Draft Code: yawning gaps which should be filled. They are different from other matters which, though provided for in the Draft Code, require some fine-tuning to ensure fitness for purpose.

The ugly

The Draft Code contains extensive provisions regarding effective corporate governance practice, but some of them require fine-tuning to ensure that they achieve the desired purpose. A review of those provisions and the modifications that could be made to them follows.

Part A: Application of the code

  • • Section 1.1: The implication of section 1.1(c) is that the code applies to all public companies. Consequently, it is unnecessary to have section 1.1(a) and (b). It would serve very well just to have section 1.1 that reads: “[t]his Code of Corporate Governance shall apply to all public companies in Nigeria.”

  • • Section 1.2(b): This would be a justification for non-compliance. It should, therefore, be deleted.

  • • Section 1.3(b): The phrase “or whenever necessary, demand” should be deleted as such expression implies an option which has no place in an obligatory code of corporate governance.

Part B: The board of directors

  • • Section 3.1: This subsection should not have been numbered section 3.1 as that suggests that there is a section 3.2, which is not the case.

  • • Section 4.2: This is one provision that reveals the downside of having a multiplicity of corporate governance codes. This provision is inconsistent with the provision on the same subject in the corporate governance codes made by the relevant regulatory agencies for banks,Footnote 43 pension operatorsFootnote 44 and insurance companies.Footnote 45 Also, shareholders and directors should have the discretion to decide the maximum number of directors that a company should have, in line with the CAMA.Footnote 46

  • • Section 4.5: This provision does not belong in section 4. To the extent that it recognizes that the board should be independent of management, then it should be in section 3. To the extent that it recognizes that the board has oversight responsibilities, it should be in section 2. Consider whether it is correct that a board comprising members of management (that is, executive directors) can be independent of management.

  • • Section 5.1(b): The restriction of this provision to public companies with listed securities is unnecessary. The Draft Code is meant to be applicable to all public companies in Nigeria, listed or unlisted.Footnote 47

  • • Section 5.1(c): If the chairman is separate from the chief executive and the Draft Code is an obligatory code for all public companies in Nigeria, then the phrase “[a]s far as practicable” in this paragraph should be deleted. The paragraph should read: “[t]he Chairman of the Board should be a non-executive director.” It could even perhaps be stipulated, to emphasize the relevance of the independent director, that the chairman should be an independent, non-executive director. This is consistent with international best practice.Footnote 48

  • • Section 5.5: At the risk of sounding repetitive, it must be reiterated that the provisions of the different corporate governance codes must be properly harmonized on the issue of independent directors. Furthermore, this provision in the Draft Code is unexpectedly deficient by not providing any definite role for independent directors. Best practice is for key board committees on corporate governance issues to be composed solely or mainly of independent directors. These committees include audit,Footnote 49 remunerationFootnote 50 and nomination.Footnote 51

  • • Section 5.5(a)(iii): Replace “has served” with “has not served”.

  • • Section 6.1: This subsection should not have been numbered section 6.1 as that suggests that there is a section 6.2, which is not the case.

  • • Section 7.1: Having two members of the same family on the board of a public company is dangerous unless there are safeguards to forestall abuse of office. An illustration of this apparent danger will suffice. Since the Draft Code prescribes five as the minimum number of directors for a public company,Footnote 52 and is silent on the quorum for board meetings, the quorum for meetings of boards with fewer than six members will be two, unless the company's articles of association provide otherwise.Footnote 53 Thus, technically, it is possible for two family members to hold a valid board meeting of a public company. The grave, potential mischief of such a situation is better left to the imagination.

  • • Section 8.4: This provision is insufficient. The role of a company secretary should be articulated by way of terms of reference which should cover matters such as board meetings, general meetings, reports and accounts, shareholders, corporate governance, memorandum and articles of association, new directors' induction, and non-executive directors' support and training programme.

  • • Section 8.5: The second sentence serves no useful purpose and falls far short of the provision of the CAMA on this matter.Footnote 54 This sentence could, therefore, safely be omitted from the Draft Code.

  • • Section 9.5: It is not clear at whose instance or approval senior management should attend board committee meetings. In other words, it is not clear whether approval of the chairman of the board, chairman of the committee, members of the board or members of the committee itself is required before a member of senior management may attend a board committee meeting.

  • • Section 11.2(h): There are four aspects of board evaluation: evaluation of the board itself; evaluation of committees of the board; evaluation of the chairman; and evaluation of other individual directors.Footnote 55 This paragraph apparently does not acknowledge this fact, even though section 15.1 of the Draft Code recognizes these categories.

  • • Section 13.4(f): What does “interlock director” mean? A definition of this phrase in the Draft Code is necessary since the phrase is absent from the CAMA.

  • • Section 14.3: This suggests that executive directors can be present when their remuneration is being discussed, although they should not participate in the discussion or in any voting in respect of such matters. To the extent that this suggests that executive directors could be present at meetings where their remuneration is discussed, this provision is flawed. The point has earlier been made that the Draft Code should formally recognize the right of non-executive directors to hold a meeting of their members only, where matters such as this can be addressed.Footnote 56

  • • Section 14.10: This provision should be clear as to what elements of the remuneration of directors should be disclosed in the annual report. This matter has been addressed above. For the avoidance of doubt, full disclosure of directors' remuneration should be prescribed, including salary, allowances, pension contribution, bonus and share options, and, in the case of expatriate directors, other payments made in the home country for which the company is eventually charged such as “home pay”, “home pension contribution” and “home health insurance”.

  • • Section 19.2: The use of the expression “reasonable period” to define the tenure of non-executive directors unfortunately avoids taking a definite stand. Stipulating a term of three years, in the first instance, subject to renewal as deemed appropriate by the company and subject to satisfactory performance would be adequate. This would tie in neatly with the provision of section 259(1) of the CAMA that requires one third of the directors to retire annually by rotation.

  • • The arrangement of the sections after section 13 (appointment to the board) should be organized in a sequential order. Thus, section 14 should be terms and conditions of service, section 15 should be conflict of interest, section 16 should be insider trading, section 17 should be remuneration, section 18 should be performance evaluation of the board, section 19 should be orientation and training of directors, and section 20 should be tenure and re-election of directors.

Part C: Relationship with shareholders

Section 25.1: To the extent that the third sentence does not contradict the provisions of section 261 of the CAMA that allow for the appointment of two or more directors by a single resolution, it remains unchallenged.

Part E: Risk management and audit

  • • Section 30.4(i): It is not clear which chairman is being referred to: the chairman of the board or the chairman of the audit committee. Similarly, there is no clarity on who should make the “highlight” to the chairman.

  • • Section 31.4: The practicability of the internal audit unit to “report directly to the audit committee” and “have unrestricted access to the chairman of the audit committee” should be re-assessed in view of the composition and structure of audit committees as stipulated in section 359(4) of the CAMA, the location of members of the committee, and the frequency (or otherwise) of audit committee meetings.

  • • Section 32: The mechanism for the whistle-blowing arrangement is inadequately provided for. There should be a requirement for the “hotline” and “email address” to be widely publicized, for example, through notice boards in the company, publication in company annual reports, on the company website, etc. In addition, it must be pointed out that Nigerian law does not currently afford much protection to the risky practice known as whistle-blowing.Footnote 57 This is a grave shortcoming which must be addressed if the whistle-blowing initiative is to succeed.

  • • Section 32.4: It would serve the purpose of the provision well to indicate the frequency of the presentation of the report to the chairman of the audit committee.

  • • Section 33.2: If the phrase “at least every three (3) years” in the first sentence of the subsection were replaced with “at most every three (3) years”, this would serve the intended purpose. As it is, the provision means that external audit firms can rotate audit partners not earlier than three years. In fact, they can decide not to rotate them at all! This certainly cannot be the intention of the provision. If the suggestion made is adopted, the implication would be that external audit firms must change the audit partner after no more than three years, which is what the provision seeks to ensure. Also, the period for which an audit firm can be retained (that is, seven years as proposed) is too long and could jeopardize the requisite independence of the audit firm, which is fundamental. A period of five years would have been more appropriate.

Part G:Footnote 58 Accountability and reporting

Section 34.14: This seems to be an unnecessary repetition in view of section 34.7 of the Draft Code.

Part H: Communication

Section 35.4: A time limit of not more than six months from the date of commencement of the Draft Code should be given for companies to comply with the provisions regarding ownership of a website.

Part I: Code of ethics

Section 36(2): The term “key executive” is used copiously in this subsection,Footnote 59 yet there exists no definition for the term in the Draft Code. This situation is worsened by the fact that there is no such term in the CAMA.

In summary

These specific remarks on itemized sections of the Draft Code are made with a view to ensuring that the Draft Code, while achieving its comprehensive coverage of corporate governance issues, is sufficiently detailed to achieve its desired goals. However, the Draft Code is but a bundle of words. Actions are required to be taken by the companies concerned but, much more importantly, the regulator (in this case, Securities and Exchange Commission) has a crucial role to play to ensure that the Draft Code achieves the desired result.

ROLE OF THE SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission is statutorily the apex regulatory organization for the Nigerian capital marketFootnote 60 with enormous powers and functions as stipulated in the Investments and Securities Act 2007. It is alive to its tremendous role in the entrenchment of good corporate governance practice in Nigeria, of which the introduction of the Draft Code is an initial step. Beyond this, it must oversee the code when finally in force, among several other responsibilities.

In addition to the suggestions above to entrench good corporate governance practice in Nigeria, the Securities and Exchange Commission should strengthen its monitoring team to ensure that the Draft Code is complied with when it comes into force. There must be sufficient manpower and structure to ensure that companies render the requisite returns, as suggested below, and that the content of these returns is tested for their veracity and accuracy. Where it is discovered that false returns have been rendered, appropriate remedial actions should be taken to ensure the communication of the accurate information and also to sanction defaulters. The consequence of corporate governance failure is too pervasive for the Securities and Exchange Commission to be laid back in its enforcement.

Closely related to the above is the need for an annual corporate governance audit to be undertaken on public companies. As conceived, the annual corporate governance audit would be the corporate governance equivalent of the annual audit of companies' financial statements by independent external auditors. A corporate governance audit is necessary to ensure that there exists a structured and regulated check on corporate governance practices and / or compliance, which is certainly outside the scope of the audit of companies' accounts undertaken by independent external auditors. A major constraint in implementing the annual corporate governance audit is the availability of professionals and manpower to carry out such an exercise. In this regard, the Securities and Exchange Commission can liaise with the Institute of Chartered Secretaries and Administrators of Nigeria which, like its counterpart in the United Kingdom, is the repository of good corporate governance knowledge and professionals in Nigeria. Furthermore, it would be necessary for the Securities and Exchange Commission to institute a process of registering or licensing those who wish to practise as corporate governance auditors, consultants and / or professionals.

It might be necessary for the Securities and Exchange Commission to organize sensitization workshops, seminars and training for its officials, those of the public companies and other interested and / or involved industry personnel on the Draft Code before it comes into force. Put differently, the Draft Code should be exposed to the public long before its commencement date for reporting or compliance purposes.

Furthermore, the Securities and Exchange Commission should undertake the task of preparing specimen templates and reports which can be adapted by companies in preparing the reports to be sent to it and members of the companies. The main advantage for the Securities and Exchange Commission in taking the initiative in preparing specimen reports and templates for use by companies is that it makes its monitoring responsibility more efficient and effective. It affords it the opportunity of ensuring that reports adequately cover the desired scope. In addition to this, the Securities and Exchange Commission should frequently constitute working groups to study particular aspects of the Draft Code and issue “guidance notes” to assist companies in complying with the requirements of the Draft Code. This would also enable the Securities and Exchange Commission to keep abreast of current developments in specific areas of the code to ensure it remains up to date. In view of the ever rapid development in technology and the frequent change in society, the challenge of keeping the code current is real. Adequate structures must, therefore, be consciously and determinedly put in place to have the code frequently reviewed to meet current challenges. Failure to have the code frequently reviewed will lead to an unfortunate loss of the flexibility advantage that the “comply or explain” approach bestows. It must also be added that the Securities and Exchange Commission should as a matter of course undertake a regular review of the code's performance with a view to identifying the areas needing tweaking or replacement, and amending them as appropriate.

The Draft Code is undoubtedly expansive in scope and represents a bold effort to entrench good corporate governance practice in Nigeria. It, quite expectedly and rightly too, ventured into areas not covered in the 2003 Code. Some of these new areas pose challenges and the Securities and Exchange Commission should be ready and willing to assist in ameliorating these challenges; otherwise those provisions in the code will amount, at best, to mere words. An example is the provision on whistle-blowing. The current legal regime offers inadequate protection to whistle-blowers. Thus, it would be risky on the part of an employee, for instance, to “blow the whistle” when the need arises, given the inadequate protection afforded him. Thus, it is imperative that the Securities and Exchange Commission initiates schemes to ensure that whistle-blowers are adequately protected through relevant legislation against such oppressive and offensive conducts as intimidation, victimization, harassment and job loss. Closely related to this, is that the Securities and Exchange Commission should be more actively involved in procuring the much overdue amendment to the CAMA. There has unfortunately been so much talk and no work on this matter.

The impact of motivation on performance is a well-known fact in management circles. Beyond the direct advantage derivable by companies in complying with good corporate governance practice, it may be necessary for companies that are outstanding in their compliance regime to be officially recognized. To this end, the Securities and Exchange Commission could institute an annual corporate governance award or annual award for corporate governance excellence to be given to companies. This recognition would have the effect of engendering competition among public companies in corporate governance compliance. It could be organized by the Securities and Exchange Commission or by a third party with the Securities and Exchange Commission's support and approval. Better still, it could be incorporated into the Nigerian Stock Exchange annual president's merit award.Footnote 61

The point has been made above, but it is worth repeating here, that the Securities and Exchange Commission should vehemently champion a move towards corporate governance code harmonization and/or unification. This would save companies from palpable confusion. Also, it would eliminate an impending power struggle among regulators.

CONCLUDING REMARKS

The Draft Code, when it becomes operational, will be the most comprehensive corporate governance code in Nigeria. It is the boldest attempt yet to cover the entire field in the vast domain of corporate governance. This appraisal of the Draft Code has been undertaken with a view to revealing those details which have either been overlooked or inexplicably escaped the careful scrutiny of the drafters of the Draft Code. Drawing extensively from best practice on corporate governance as evidenced from the provision of the corporate governance codes of different countries cited in the course of the analysis, it is intended to point out the direction of corporate governance practice to ensure that the mistakes made in other jurisdictions are avoided. The benefits derivable from entrenching an effective corporate governance framework are desirable and achievable. To this end, some suggestions and recommendations have been made to fast-track the realization of such noble aspirations.

This article has highlighted the role of the regulator in the institutionalization of an effective corporate governance mechanism. Without doubt, the Securities and Exchange Commission has an enormous responsibility. It will not only be responsible for the enforcement of the Draft Code when eventually operational, a task which is daunting in itself, but it has the added burden of keeping the Draft Code alive by ensuring that it is reviewed as frequently as necessary to keep it in line with developments and challenges in the corporate world. There might be a real need to strengthen the Securities and Exchange Commission to prepare it for the significant role it has to play in the corporate governance regime that the Draft Code will engender once it is operational.

One area of concern identified in the review is the issue of the multiplicity of corporate governance codes. Unless this urge by every regulator to issue “mandatory” corporate governance codes is checked, it seems that before long there could be almost more corporate governance codes than there are companies to regulate! The point was made that only the corporate governance code issued by the Securities and Exchange Commission should be so called and regarded. All the other codes issued by regulators applicable to their specific industries could be termed “guides”.

It seems certain that the corporate governance framework is on course for a major boost. With the refinement of the Draft Code indicated above and a determination on the part of the Securities and Exchange Commission to be pro-active in its enforcement and constant revision of the code as occasion demands, all seems set for the entrenchment of commendable corporate governance practice in this sphere, and the avoidance of the catastrophic consequences its absence would engender.

References

1 The Draft Code is available at: <http://www.sec.gov.ng/uploads/notices/20091008215709Review of Code Corporate Governance (Amended) – EKA.doc> (last accessed 22 December 2009). The Draft Code was also widely published in national newspapers. See advertisements in (29 September 2009) This Day (Lagos, Nigeria) at i and (30 September 2009) The Guardian (Lagos, Nigeria) at 47.

2 Sec 24 of the Companies and Allied Matters Act, cap C20, Laws of the Federation of Nigeria 2004, defines a public company as any company other than a private company and its memorandum must state that it is a public company.

3 See the address by the governor of Central Bank of Nigeria, Mallam Sanusi Lamido Sanusi, on developments in the banking system in Nigeria on 14 August 2009, available at: <http://www.cenbank.org/out/speeches/2009/Govadd-14-8-09.pdf> (last accessed 24 December 2009).

4 Above at note 2.

5 Sec 16 of the Draft Code.

6 CAMA, sec 280(1).

7 Id, sec 280(2).

8 Orojo, JOCompany Law and Practice in Nigeria (5th ed, 2008, LexisNexis)Google Scholar at 268. See also Boston Deep Sea Fishing Co v Ansell (1888) 39 ChD 339 CA and Regal (Hastings) Ltd v Gulliver (1967) 2 AC 134.

9 CAMA, sec 217(1).

10 See Smyth v Darley (1849) 2 HL Cas 789; Onwuka v Taymani (1965) LLR 62; and Young v Ladies Imperial Club (1920) 2 KB 523.

11 Sec 30.3 of the Draft Code.

12 Id, sec 30.4.

13 See id, secs 14.10, 29.2(e), 31.1, 34.4, 34.6, 34.7 and 34.15.

14 The typographical errors are profuse, running into several pages. They have, therefore, not been included in this article. A copy of the list of typographical errors can, if required, be obtained on request from .

15 See E Wymeersch “Enforcement of corporate governance codes” (2005) 46/2005 ECGI Working Paper Series in Law 1 at 4, identifying four enforcement approaches.

16 See sec 404.

17 Sec 1.3(a) and (b) of the Draft Code. Specifically, sec 1.3(b) provides that shareholders should “encourage” compliance with the Draft Code by their companies. See also sec 34.7 and 34.14 of the Draft Code.

18 Id, sec 1.3(d) and (e).

19 Investments and Securities Act 2007, sec 31(3).

20 For example, executive directors (sec 5.3), non-executive directors (sec 5.4), independent directors (sec 5.5), family directorship (sec 7), interlocking directorship (sec 7) and alternate directors (sec 37).

21 In fact, the expressions “non-executive director” and “alternate director” were surprisingly not used in the CAMA at all. It is sec 244(2) of the CAMA that refers to an executive director, and that is in passing.

22 Sec 37 of the Draft Code.

23 Id, sec 5.5(a) and (b).

24 Id, secs 4.3 and 34.4(a).

25 Id, secs 4.3 and 5.5(c).

26 A smaller company is defined in the UK Combined Code as a company that is below the FTSE 350 throughout the year immediately prior to the reporting year.

27 This provision is re-enacted in sec B.1.2 of the UK Corporate Governance Code effective 29 June 2010 (UK 2010 Code). See also sec 303A.01 of the New York Stock Exchange Listed Company Manual (NYSE Manual) containing its corporate governance rules. But contrast sec 2.18.1 and sec 2.18.2 of the King III Report, the corporate governance code of South Africa effective 1 March 2010 (King III Report), which provides that the majority of board members should be non-executive directors and that majority of the non-executive directors should be independent.

28 See: sec A.4.1 of the UK Combined Code; sec B.2.1 of the UK 2010 Code; sec 303A.04(a) of the NYSE Manual; and sec 2.23.7 of the King III Report.

29 See: sec B.2.1 of the UK Combined Code; sec D.2.1 of the UK 2010 Code; sec 303A.05(a) of the NYSE Manual; and sec 2.23.7 of the King III Report.

30 See: sec C.3.1 of the UK Combined Code; sec C.3.1 of the UK 2010 Code; sec 301(3)(A) of the Sarbanes-Oxley Act; sec 303A.07(b) of the NYSE Manual; and sec 3.2.1 of the King III Report.

31 Compare with sec 14 of the Draft Code.

32 CAMA, sec 359(4).

33 See note 30 above.

34 See: sec C.3.2 of the UK Combined Code; sec C.3.2 of the UK 2010 Code; sec 303A.07(c)(i) of the NYSE Manual; and sec 3.4.10 of the King III Report.

35 Sec 9.2 of the Draft Code.

36 See id, sec 11.2(a), (b), (c), (d), (g), (h), (i) and (j).

37 See id, sec 11.2(e) and (f).

38 Code of Corporate Governance of Banks in Nigeria Post-Consolidation 2006 (Bank Code).

39 Code of Corporate Governance for Licensed Pension Operators 2008 (Pension Code).

40 Code of Corporate Governance for Insurance Industry in Nigeria 2009 (Insurance Code).

41 See: sec 1.7 of the Bank Code; sec 5.5.1 of the Pension Code; and sec 11 of the Insurance Code.

42 See sec 7(b) of the 2003 Code.

43 See sec 5.3.5 of the Bank Code.

44 See sec 4.1.6 of the Pension Code.

45 See sec 5.04(i) of the Insurance Code.

46 CAMA, secs 246(1), 247 and 249(3).

47 Sec 1.1 of the Draft Code.

48 See, for example: sec A.2.2 of the UK Combined Code; sec A.3.1 of the UK 2010 Code; and sec 2.16.2 of King III Report.

49 See note 30 above.

50 See note 29 above.

51 See note 28 above.

52 Sec 4.2 of the Draft Code.

53 CAMA, sec 264. See also: Re Greymouth – Point Elizabeth Railway and Coal Company Limited (1904) 1 Ch 32; Martins v Ogungbadero (1967) NCLR 393; and Pricklik v Marsh and Others (1961) WNLR 59.

54 CAMA, sec 296.

55 Sec 15.1 of the Draft Code.

56 See “The bad” above.

57 On the inherent danger of whistle-blowing, see Cooper, CExtraordinary Circumstances: The Journey of a Corporate Whistleblower (2008, John Wiley & Sons)Google Scholar at 242–79. See generally Rapp, GC “Beyond protection: Invigorating incentives for Sarbanes-Oxley corporate and securities fraud whistleblowers” (2007) 87 Boston Law ReviewGoogle Scholar 91; Ramirez, MK “Blowing the whistle on whistleblower protection: A tale of reform versus power” (2007) 76 University of Cincinnati Law ReviewGoogle Scholar 183; and Moberly, RE “Sarbanes-Oxley's structural model to encourage corporate whistleblowers” (2006) Brigham Young University Law ReviewGoogle Scholar 1107.

58 Rather curiously, there is no part F in the Draft Code. Either it was inadvertently omitted or part G should have been part F. If the latter is the case, then parts H – J would need to be renamed accordingly.

59 See sec 36.2(1), (3) and (4) of the Draft Code.

60 Investments and Securities Act 2007, sec 13.

61 It is arguable whether this award still commands the level of respect it enjoyed in the past.