The New Nigerian Code Of Corporate Governance: A Comprehensive Review

The New Nigerian Code Of Corporate Governance: A Comprehensive Review

by Ademola Adeyoju


When the stock market crashed in the early 18th century, “people all over the country lost all of their money. The Clergy, Bishops, and the Gentry lost all of their life savings. The Postmaster General took poison. Suicides became a daily occurrence.”[1] Even Sir Isaac Newton lost a 20,000 euros fortune in the whole mess, causing him to remark thus: “I can calculate the movement of the stars, but not the madness of men.”

Corporate failure brings disastrous consequences.

Yet, once upon a time, there were no corporate governance (CG) measures. Businesses were conducted in what was, essentially, a free market. But in the wake of widely-publicized corporate scandals — featuring tax evasion, the misuse and abuse of power by directors, fund diversion, and improper accounting — and disasters often emanating from inordinate focus on profit-making, greed, and collusions between those who are in charge of corporate decision-making, governments, and authorities all over the world have rolled out regulations, codes, and laws to govern corporate practices and methods.[2]

“Starting from the ‘first well-documented’ securities manipulation fraud, known as the ‘Dutch Tulip Mania’ in 1636 and 1637 in the Netherlands”, followed by the Mississippi Company Scandal of France in 1717, the South Sea Bubble Scandal of England in 1720, the failure of corporate giants such as WorldCom and Enron in the USA in 2001, Parmalat in Italy during 2003, and numerous other such cases around the world, have rocked the corporate world, resulting in either new or revamping of the older governance structures, codes and guidelines.”[3]

These outside interventions and subsequent development of codes governing corporate bodies have become necessary because many, if not all, of the corporate scandals witnessed in the past involved criminal negligence or outright fraud by those in the top echelon of the corporate management because there were no laws or regulations in place to monitor and control the activities of the aforementioned set of people.

Corporate Governance in Nigeria[4]

As the concept of CG is largely a Western import, it is hard to trace its history in Nigeria[5]. In any case, the incidence of CG in Nigeria cannot be divorced from company law in general, and so, before the 90s, the major law regulating corporate affairs and organization was the Companies Ordinances of 1922. This was repealed after Nigeria’s independence and replaced with the Companies Act of 1968. Closely modelled after the United Kingdom’s Companies Act of 1948, the 1968 Act was, in many ways, a vestige of Nigeria’s colonial relationship with the British. Although CG had not emerged as a distinct concept by this time, the Act contained elaborate provisions on the running of companies. As business got more complicated, the Act soon became inadequate. Thus, it was repealed and reenacted as the Companies and Allied Matters Decree No 1 of 1990 and the Decree eventually gave birth to the Companies and Allied Matters Act (CAMA) of 2004.

The CAMA codifies directors’ duties and mandates them to act at all times in what they believe to be in the interest of the company, to exercise their powers for specified (as against collateral) purposes only, and not to delegate their powers — in instances where they are allowed to delegate — in such a way as to amount to an abdication of duty.

Cementing the doctrine of shareholders’ primacy, the CAMA also provides that directors are trustees of their company’s money, property, and asset and must use and account for them in the best interest of shareholders. Directors must not make secret profit and must always disclose any incidence of conflict of interest. The CAMA also provides, among other things, that every company must keep and maintain accounting records as will be sufficient to show and explain the company’s transaction[6], that the directors have a duty to prepare and lay before the general meeting the financial statement,[7] and that every company must make and deliver to the Corporate Affairs Commission an annual return at least once a year.[8]

Similar to what obtains under the American Sarbanes-Oxley Act (SOX), the latest amendments to the old, tired, and haggard CAMA — that is, the Companies and Allied Matters Act, 1990 (Cap C20, LFN, 2004) Repeal and Re-enactment Bill, 2018 — mandates every Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs) to certify the company’s financial statement, vouching that the information contained therein are, to the best of their knowledge, true.

Letting the law lead the corporate governance way is not a new phenomenon in Nigeria. Before there were any real efforts to make CG codes, “the three main legislations in Nigeria: the Companies and Allied Matters Act 1990, the Investment and Securities Act (ISA) 1999 and the Bank and other Financial Institutions Act 1991 were used for operating the corporate sector in Nigeria.”[9] These legislations contain mandatory codes of governance and failure to comply attract sanctions.

Now, after the events of the 90s and 2000s, many countries, notably the UK, the US, France, China, and Germany began to issue CG codes to stipulate and implement best practices. At this time, CG became a worldwide phenomenon. Nigeria was also caught in the fever. Corporate challenges and failure at home and abroad exposed the inadequacies of the CAMA. Something had to be done.

As a deliberate response, the Code of Corporate Governance for Banks and other Financial Institutions in 2003 was issued. As groundbreaking and detailed as the Code was, it had little to no impact since the apex capital market regulator in Nigeria, the Securities and Exchange Commission (SEC) issued the Code of Corporate Governance for Public Companies (the “SEC Code”) in October the same year.

The SEC Code soon became inadequate to cope with the pattern of challenges ravaging the corporate world. Even then, no amendments were forthcoming. This led regulators to descend in the arena and issue industry-specific codes. And so, after the bank consolidation exercise of 2005, the Central Bank of Nigeria (CBN) issued the Code of Corporate Governance for Banks Post-Consolidation in 2006.[10] Another industry-specific code was issued in 2008 when the Pension Commission (PENCOM) issued the Code of Corporate Governance for Licensed [Pension] Operators in 2008.

Then there is the National Insurance Commission (NAICOM) Code of Business Ethics and Principles on Corporate Governance for the Insurance Industry of 2009[11], the CBN Code of Corporate Governance for Banks and Discount Houses of 2006 (replaced by the 2014 Code), and the Nigerians Communications Commission Code of Corporate Governance for the Telecommunication Industry (replaced by the 2016 Code).

Meanwhile, due to the shortcomings of the SEC Code, a committee was set up in 2008 to review, revise, and update the Code. The committee’s effort gave birth to the 2011 Code of Corporate Governance for Public Companies, with a commencement date of 1 April 2014. Unlike the other codes, this applied to every public company in Nigeria, irrespective of the industries they belong to.

Now, on 17 October 2016, a National Code of Corporate Governance (NCCG) was issued by the Financial Reporting Council of Nigeria (FRCN). The Code was made pursuant to the powers of the FRCN under the Financial Reporting Council of Nigeria Act 2011. “The Code [was] essentially a consolidation and refinement of different sectoral codes on corporate governance and [was] issued in three parts: the Code of Corporate Governance for the Private Sector; the Code of Governance for Not-for-Profit entities; and the Code of Governance for the Public Sector.”[12]

Following widespread expression of concerns and reservations, the NCCG was suspended on 28 October 2018 mainly because the Code was considered too strong and prescriptive.

A Review of the Financial Reporting Council of Nigeria’s Newly Released NCCG

On 15 January 2019, the new NCCG was launched. Structured into seven parts and 28 principles, the Code seeks to “institutionalize corporate governance best practices in Nigerian companies”[13] and to “promote public awareness of essential corporate values and ethical practices that will enhance the integrity of the business environment.”[14]

Designed to be flexible and scalable, the new Code applies to “companies of varying sizes and complexities across industries,”[15] and unlike previous CG codes, the new Code operates on an ‘apply or explain’ basis, rather than the traditional ‘comply or explain’ basis.

According to the Code Philosophy, the ‘apply and explain’ philosophy requires companies to take responsibility for demonstrating how the specific activities they have undertaken best achieve the intended outcomes of the corporate governance specifications in the Code’s Principles. This will assist in preventing a ‘box ticking’ exercise while ensuring companies deliberately consider how they have (or have not) achieved the intended outcomes.

Key Highlights

· Role of the Board

The Code recognizes the centrality and authority of the Board of Directors in the company. The Code thus enjoins the Board to provide strategic leadership and create a process which promotes diversity in its membership using a variety of criteria such as gender, age, and cognitive strength, without compromising competence, independence, and integrity.

To ensure optimal performance, the Code encourages Directors to endeavour to attend all Board meetings and it makes attendance record of Directors a criteria for their reelection. And then, for assessment purposes, the Code recommends that an annual, formal, and rigorous evaluation of the performance of the Board, Chairman, and individual Directors be conducted.

Protection of Shareholders
The Code recreates the essence of the shareholder theory — originally proposed by Milton Friedman and immortalized by the CAMA — and dedicates three whole Principles to ensuring that shareholders, especially minorities, are not left out in the running and management of their investment. Among other things, the Code recommends that general meetings should be conducted in an open, easily accessible place, which allows shareholders to participate and contribute effectively.

However, the problem with the shareholders theory, and the Code’s Principles, remains that whenever the owner of wealth (shareholders/principals) contracts with someone else (directors/agents) to manage their affairs, the agency dilemma crops up. The agency dilemma is the devilishly tempting dungeon of decision that directors find themselves every time they have to make a decision that may satisfy either their self-interest or shareholders’ interest!

· Corporate Social Responsibility

Apparently driven by a broad vision of corporations as positive social citizens, the new Code incorporates and pays serious attention to such issues as sustainability, transparency, and full disclosure.

In a move that recognizes a symbiotic relationship between companies and the society within which they operate, the Code matches international standards by encouraging companies to have regard to environmental, social, and community health and safety and to help stakeholders make informed decision by always keeping them in the loop. In doing this, the Code places responsibility on the Board to “promote ethical culture and responsible corporate citizenship”[16] and to “ensure that management act in the best interest of the shareholders and other stakeholders”.[17]

This focus on corporate social responsibility is good. It makes sense. As has been proven, companies that do good do well. And responsible is the new sexy — just ask Google, Coca-Cola and Microsoft.

Business Conduct and Ethics
To prevent corporate abuse and failure, market manipulation and corporate scandal, promote the corporate reputation and secure investors’ confidence, the Code recommends the establishment, communication, and enforcement of policies for monitoring insider trading, related party transactions, and other corrupt activities.

The Code also implores Directors to disclose any real or perceived cases of conflict of interest, precludes insiders from abusing the confidence reposed in them by improperly using privileged information in their possession, and encourages constant engagement and communication with stakeholders.

The Code also recommends the establishment of an internal audit committee to assess risk management, governance, and internal control systems. To keep the committee on its toes and ensure optimal, transparent performance, an external assessor is to review the effectiveness of the internal audit committee at least once every three years.

Also, independent external auditors, who understand the business of a company and can provide transparent and unbiased assessments, should be appointed to periodically conduct a thorough sweeping-through. And the Code empowers the Board to recommend the removal of an auditor, in accordance with the CAMA, where the Board is satisfied that the auditor has abused its office. But by so doing, the Board is also, indirectly, invested with the power to ‘punish’ an external auditor that would tend to investigate and expose their improprieties.

· Whistleblowing

Recognizing that “an effective whistle-blowing framework for any illegal or unethical behavior minimizes the company’s exposure and prevents recurrence,” the Code recommends the Board to establish a framework to encourage stakeholders — customers, employees, and host communities — to report cases of unethical dealings and “violations of laws and regulations to the attention of an internal and/or external authority so that action can be taken to verify the allegation” and so that appropriate sanctions or remedial actions may follow.

The Code also makes the Board responsible for ensuring that no whistle-blower suffers, is castigated or is deprived of his entitlements by reason only of a disclosure.

· Sanctions

Apart from sanctions that may be imposed by regulatory authorities for standard breaches, there appears to be no sanction attached to non-compliance with the new Code.


In spite of the plethora of laws and regulations made to control corporate affairs all over the world, corporate failures have not ceased. In 2016 alone, Teva Pharmaceutical Industries incurred civil and criminal charges leading them to resolve to pay over $519 million in fines, and Odebrecht/Braskem pleaded guilty to the largest foreign bribery case in history and agreed to pay $3.5 billion in penalty. Over the past decade in Nigeria, billions of Nigerian taxpayers’ money have gone into recapitalizing and injecting life into failed banks and corporations.

But although there are no absolute metrics to measure the effectiveness of CG codes, no one can deny the fact that they have been instrumental in injecting some sanity into the corporate affairs. When adhered to, CG codes aid corporate success and growth and enhances corporate image in the eyes of stakeholders, investors, and authorities. Violation of CG codes, on the other hand, can lead to monumental catastrophe and disaster. Viewed from a philosophical perspectives, CG codes represent the soul and conscience of a company that keeps it from cutting corners, or committing fraud, or breaching corporate laws and regulations.

Rounding off, it is important to note that the new NCCG is principle-based, which is why there are no sanctions attached to non-compliance. Even then, its provisions are progressive and innovative. Every company that truly desires growth, hopes to build and maintain public trust and confidence, and intends to stand out as a responsible entity now has a standard template to work with.

Ademola Adeyoju

Associate, Aelex

Lagos, Nigeria

Source: http://nigerianlawtoday.com/the-new-nigerian-code-of-corporate-governance-a-comprehensive-review/

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