The Case Of the Corporate Governance Code: Much Ado Over Nothing?
The Financial Reporting Council of Nigeria (FRCN) released the National Code of Corporate Governance, in accordance with section fifty (50) of the Financial Reporting Council of Nigeria Act, 2011 on October 17, 2016. Unfortunately, barely a year later, the President suspended the code and replaced the management of the FRCN.
The term ‘’Corporate Governance” popularly shortened as (CG) came into the corporate scene around the 20th century. Tracing its formal history might be a difficult task but it is recorded to have made a clear appearance in the 70s when the rise of corporate corruption took over the business scene in the United States. In order to address the situation, the then Federal Securities and Exchange Commission (SEC) instituted the Corporate Governance reform agenda to see that shareholders elect their directors who in turn appoint Corporate Officers to manage the corporation. Subsequently, the market crashes in the 1980s clearly pushed out the pressing need for the proper structuring of corporations. By the 1990s, Corporate Governance had become popular worldwide.
In Africa, according to Qudrat-I Elahi (2009), good governance first came into a formal report in the World Bank Report of 1989 and through the 1990s become more popular. However, even though Corporate Governance had been embraced on this continent, it was still perceived as a box-ticking exercise for compliance with international standards.
There is not a single definition of Corporate Governance as it can be viewed from different perspectives according to countries’ specific situations and opinions of philosophers. Despite several definitions, the constant essence is about transparency, accountability, efficiency, integrity, and responsibility in governance in business operations.
Corporate Governance Codes are standards for good/best practices that aim to guide organisations in respective economies, industries or sectors. Moreover, striving to emulate developed economies in CG, notably the EU, UK, and Canada, other economies in Africa have made concerted efforts to set up National CG Codes that address peculiar situations.
A review of the National Code of Corporate Governance (Nigeria) introduces a three-in-one code for public, private, and Non-for-Profit Organisations. These codes aim to ensure that all other existing Corporate Governance Codes are unified to guide all organisations’ operating in the country.
The Public Sector Code
Corporate governance in the public sector is still a recent development. The global financial crises drew more attention towards the importance of good governance structures not only in the private sector but also, the public sector. Furthermore, in the case of Nigeria, there have been several cases of government and political interference into the activities of public sector boards and subsequently, the structures of Public Sector Entities. Hence, the FRCN developed a public sector code to guide Public Sector Entities (PSEs); Ministries and Departments (M&Ds), to ensure that these organisations operate in a transparent, accountable, and ethical manner whilst delivering their responsibilities.
The code places the State – in this case, the relevant Ministry supervises the organisation on behalf of the Government as the owner. In order to achieve the aims of the code, it is reiterated that the State, having appointed various boards of directors and management of each PSE should not be involved in the day to day operations of the entities to uphold their independence (autonomous status) in their operations (items 7.2 and 7.3 of the code).
Consequently, just as in every other CG Code across the world, guidelines, roles, compositions, and general structures, operations, and compositions of Board and sub-committees are provided, while stressing on the need for transparency, integrity, accountability, and responsibility. Still on structure, the code stipulates that Executive Directors (EDs) should not be less than two (2) and one should be the CEO while EDs should not be more than one-third of the entire board and non-executive directors not less than two-thirds. Further, it clarifies the relationship between the government and the board and between stakeholders and the board. The code also provides guidelines on reporting and sustainability. This code is however only in force after an executive directive has been secured from the Federal Government of Nigeria through the Presidency. It is expected to supersede every other public governance code after its commencement.
The Private Sector Code
Private sector codes are not new in Nigeria. There are several sectorial governance codes, however, the provision of a National Private Sector Code was necessitated because of the need to harmonize and unify all existing sectorial governance Codes into one, in order to guide against confusion. As with every other private sector CG, this code sets to regulate ownership dominance and ensure stakeholders’ rights are respected, especially as ownership dominance and lack of stakeholder engagement are rampant in many Nigerian enterprises.
This code, which is mandatory, provides a minimum standard for corporate governance for private and all public companies in Nigeria (Section 2 of code). Similar to the Public Sector Code, it clearly states the guidelines, roles, compositions, and general structures, operations, and compositions of the Board and other committees, while stressing on the need for transparency, integrity, accountability, and responsibility. It recognizes the board as the bridge between a company and its stakeholder, in creating value for them.
Membership of the board shall not be less than eight (8) with EDs not more than one-third and non-executive directors not less than two-thirds while independent non-executive directors not less than half of the number of non-executive directors. However, this regulates private companies not holding companies or subsidiaries of public companies that can only appoint not less than five (5) board members with three (3) non-executive directors. The code also touches on risk management, internal and external auditing, stakeholder engagement and rights while not leaving out reporting guidelines. Furthermore, it stresses the need for an active code of business conduct and ethics in every company.
The Not-for-Profit Organisations’ Code (NFPOs)
Although not new in many developed countries, the NFPO code is relatively new to many Nigerians. CG Code was extended to this sector because of its popularity in the economic agenda of other countries and also due to the governance challenges currently being experienced in the not-for-profit sector in Nigeria. There have been unhealthy challenges of total control of NFPOs by their founders, improper succession structures, and misappropriation of funds. A correction of these is expected to ensure social values are always delivered as expected of NFPOs and fraud and dishonesty eliminated from the sector.
This code specifically addresses the organisational structure of NFPOs, dwelling on the informal situation prevalent; particularly, in the management, of these organisations in order to guard against undue concentration of powers on one office. However, the part that specifies a clamp-on indefinite term for a founder/leader in running an organization under three (3) major governance positions, carries an exception for religious & cultural organisations where it states that ‘nothing in the code is intended to change the spiritual leadership & responsibilities of Founders, General Overseers, Pastors, Imams, Muslim Clerics, Bishops, Presidents, Apostles… which are distinguishable from purely CG and management responsibilities and accountabilities of the entities’ (9.3). In addition, the code touches on the operations of the board, stakeholder engagement and reporting guidelines.
The code is expected to be applicable to nine (9) NFPO sectors (charitable, educational, professional & scientific, religious, literary/artistic, political/administrative grouping, social & recreational clubs & associations, trade unions, and others), on a ‘comply or justify non-compliance’ basis.
If adhered to, the respective CG codes are envisaged to enhance management credibility, preserve long-term investments, improve access to new capital, and lower cost of capital. Furthermore, they are aimed at driving increased transparency and accountability in annual and financial reporting; engendering healthier, transparent, and more competitive entities. Ultimately, they are foreseen to be active catalysts in supporting investment decisions and shareholder value, thereby increasing the ease of doing business in the nation. Nigeria is in dire need of sustained investments – both local and foreign, as it weathers current economic and social crises.
The motive of FRCN is auspicious and the timing, urgent, however, the release of the code was greeted with rejection especially from the private sector and the Not-for-profit Organisations (NFPOs) in spite of the various stakeholder engagement and consultation exercises conducted over a long period of time.
The big question remains: ‘were the stakeholders left behind in the process of formulating these codes?’
Reflecting on the saying that ‘the strength of a building is only determined by the strength of its foundation’, it is obvious that although the codes mean well, there could have been a foundational omission in the processes that led to their development. This seeming omission becomes an urgent resolution to be undertaken by the FRCN led by its new management.