NECA’s Position Paper
Draft Amended National Code of Corporate Governance of the Financial Reporting Council of Nigeria.
PREAMBLE
The Nigeria Employers’ Consultative Association (NECA) is the umbrella organization of employers in Nigeria. It was formed in 1957 to provide a forum for government to consult with the private sector employers on labour and social-economic policy issues. NECA is represented on several Boards of Government’s parastatals and has been actively involved with Government Agencies in shaping policies that affects Organised Businesses
About NECA: Who We Are:
The Nigeria Employers’ Consultative Association (NECA) is the umbrella organization of employers in Nigeria. It was formed in 1957 to provide a forum for government to consult with the private sector employers on labour and social-economic policy issues. NECA is represented on several Boards of Government’s parastatals and has been actively involved with Government Agencies in shaping policies that affects Organised Businesses
The Subject Matter:
The Financial Reporting Council of Nigeria (FRC) recently released amended draft National Code of Corporate Governance (draft Code or NCCG) for Nigeria sequel to the first Public Hearing held on 30th June 2015. The NCCG is for three (3) sectors: Private Sector, Public Sector and Not-for-Profit.
We support Government’s efforts to deepen corporate governance provisions and practices in Nigeria. At the same time however, there is a need to align certain provisions in the NCCG with existing laws in the country as well as the need to recognise the different operational needs and set up of companies.
We have set out below, some key areas of concern that need to be reviewed in the draft amended Code for the Private Sector.
| Code Provision | Issues | Our Position |
| Application of the Code
Section 2.1(c) “All quoted and unquoted companies excluding small private companies that routinely file returns only with CAC and FIRS”
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The Federal High Court in the case between the FRC and Eko Hotels held that private companies are excluded from registering with the FRC. In view of the fact that the decision has not been reversed by the Court of Appeal, it will not be proper for the same FRC to extend its jurisdiction over private companies through the Code or to achieve what the FRC Act 2011 cannot achieve. In addition, the present Code of Corporate Governance issued by the Securities and Exchange Commission is applicable only to public companies. | Section 2.1 (c) should apply only to Public Companies. |
| Section 2.2 – Compliance with the provisions of this code is mandatory | The code proposes comply or else / penalty policy which is harsh. United Kingdom pioneered code of corporate governance in the world and it is still comply or explain mandatory problem because a code is required to state the general principles for corporate governance while the board of each company is to decide how those principles are to be applied. Netherland, South Africa are some of the countries still adopting the comply or explain policy without any problem. This is in recognition of the fact that code of corporate governance is not legislation. If the level of acceptability of the corporate governance principles is high enough, then, such principles could be incorporated in legislation.
In addition, the assumption that the code is mandatory because Nigerians obey regulations when they are mandatory is not correct. This is because there are several instances, such as the way Nigerians voluntarily and dutifully complied with the safety instructions during the outbreak of Ebola without any compulsion |
Companies should be encouraged to apply the principles of the code and the policy of comply and explain should be adopted instead of the comply or else policy presently stated in the code. |
| Section 4.9 – The board should be responsible for Information Technology governance | Information Technology falls within the day-to-day activities of the company which is the responsibility of the management and not the board | “Management should be responsible for Information Technology management governance while the board should oversee it, instead of being directly responsible for it.” |
| Section 5.6 Membership of the board should not be less than eight (8). | This is contrary to section 246 of CAMA that states that every company shall have at least two directors. The provision of a code must not contradict the provisions of the any law which is what the draft code intends to do. | “The code should provide that every company to which this code is applicable shall have a minimum of two directors and the maximum specified in its articles of association.” |
| Section 5.10.5 on holding directorship in other companies within the same industry | This is contrary to Section 281 of the CAMA, which allows for multiple directorship but prescribes guidelines. | Section 5.10.5 should be deleted |
| Sections 5.7 and 20.4 –The board should appoint one of the independent non-executive director as the lead independent non-executive director to provide a sounding board for the chairman and to serve as an intermediary for other directors when necessary. He should be available to shareholders if they have concerns. | The proposed position and roles of lead independent non-executive director are unknown to law. It is similar to the position of “caucus leader” in our politics which will add no value to the board. It will only encourage parallel structures within the board and create avoidable problems and division. All directors should provide a sounding board for the chairman and should be available to the shareholders. There is no reason for picking a director for that role. | Section 5.7 should be deleted because it will add no value but create problems for the board. |
| Section 6.1.4 – The MD/CEO should not go on to be the chairman of the same company. | The provision is silent about the other directors. The implication is that any other director can go on to be appointed as the chairman. If the other directors can, why should the CEO not be able to ascend that position if stakeholders are confident that he is competent based on his knowledge of the business. We do not think that the mere fact that it was done by fiat in the banking sector should mean that it must apply across board. If a CEO is found to have done any wrong thing during his tenure, he should be disciplined instead of the blanket general ban on their career progression. | The section should be modified as follows: “The MD/CEO who has been found wanting by a regulator or a court or stakeholders or has pending or confirmed fraudulent or corporate governance case against him should not go on to be the chairman of ANY company.” |
| Section 6.1.8 – The chairman should hold meetings with the non-executive directors without the executive present. Led by the lead independent non-executive director, the non-executive directors should meet without the chairman present at least annually…….and on such other occasions as are deemed appropriate | This will give rise to suspicion and lack of trust as the person excluded from the meeting would naturally feel that unpleasant things are likely to be discussed about him. Both the executive and non-executive directors should be encouraged to work and bond together, and be courageous to give even hard feedbacks in a respectful way to themselves openly. | The provision should be deleted or modified as follows: “Directors must demonstrate that they care for the improvement of the company and other directors by giving prompt and appropriate feedbacks to themselves at meetings of the board and committees and other fora in a respectful way.” |
| Sections 6.2.1 and 6.2.2 on lead independent non-executive director
Section 6.2.3 – The lead independent non-executive director should preside at the exclusive meetings of non-executive directors and separate meetings of independent non-executive directors |
The proposed position of lead independent non-executive director is similar to the position of caucus leader in politics which will add no value to the board. It will only encourage structures within the board and create avoidable problems and division within the board. All directors should provide a sounding board for the chairman and should be available to the shareholders and there is no reason for picking a director for the role.
The provision is discriminatory as it creates a special status for the lead independent non-executive director. In addition, this is a position that is unknown to CAMA and articles of association, and contrary to the principle of equality of directors as stated in CAMA and articles of association.
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Section 5.7 should be deleted because it will add no value but create problems for the system.
Section 6.2.3 should be deleted in order not to create a status of “born to lead” for this new class of directors. |
| Section 6.6.9 Non-executive directors should be provided with appropriate facilities and administrative support for the effective discharge of their duties. | The entitlements of a director are stated in the letter of appointment. The code does not define “appropriate facilities and administrative support” which is vague. There is no need for the code to provide for what cannot be uniformly implemented or become a burden to the company. | The section should be modified as follows: “Non-executive directors should be provided with adequate information and facilities stated in their letter of appointment to enable them effectively discharge their duties.” |
| Section 6.7.6 – At least once every year, there should be a meeting of only the independent non-executive directors of the company at which no other director or member of management of the company is present | This will give rise to suspicion and lack of trust as the person excluded from the meeting would naturally feel that unpleasant things are likely to be discussed about him. Both the executive and non-executive directors should be encouraged to work and bond together and be courageous to give even hard feedbacks in a respectful way to themselves openly. | The provision should be deleted or modified as follows: “Directors must demonstrate that they care for the improvement of the company and other directors by giving prompt and appropriate feedbacks to themselves at meetings of the board and committees in a respectful way.” |
| Section 6.7.9 The reclassification of an existing non-executive director into an independent non-executive director on the same board is not allowed. | The criteria for qualification as independent non-executive directors that are stated in Section 6.7.3 (a) to (i) are not fixed i.e. some are tied to the number of years, percentage of shareholding, years of relationship with the company, etc. Therefore, if any non-executive director subsequently satisfies the requirement, then, his status can change to the independent non-executive. Our view is supported by the provisions of Section 8.12.4(f) of the code which allows re-classification of status. Consequently, the proposed absolute prohibition should be deleted. | Section 6.7.9 should be modified as follows: “The reclassification of an existing non-executive director into independent non-executive director on the same board is only possible if the conditions stated in Section 6.7.3 (a) to (i) are satisfied.” |
| Section 6.7.10 – Independent non-executive directors may seek and obtain external professional advice, at the company’s expense, in the discharge of their responsibilities. | The privilege should not be limited to the independent non-executive directors but applicable to all non-executive directors subject to the approval of the board or written approval of the chairman. This is to ensure that there is justification for the external professional advice and the expenses to be incurred on behalf of the company. | “Non-executive directors may seek and obtain external professional advice, at the company’s expense, in the discharge of their responsibilities subject to the prior approval of the board or written approval of the chairman.” |
| Section 7.3 and 19.10 – Where a majority of independent non-executive directors (INEDs) dissent on an issue decided by the board and audit committee, such decision can only be valid where at least 75% of the full board (without reference to quorum) vote in favour of such decision | This provision appears to be a usurpation of the rules of proceedings of directors as stated in CAMA and the articles of association of companies. This provision will induce crisis in the board. It is our view that the procedure for voting at Board meetings as well as the determination of whether a vote is carried or not is a matter adequately addressed by CAMA and the articles of association, and it is usually by simple majority. This also applies to Paragraph 19.10 of the Code. As long as there is a quorum for the board or audit committee meeting, decision on any issue is based on simple majority of members present. If there is a tie, the chairman has a casting vote. | Therefore, we urge the FRC to delete the provisions of Sections 7.3 and 19.10 to respect the provisions of the law and articles of association. This is because, the code is expected to compliment the provisions of the law and NOT TO CONTRADICT IT AS PRESENTLY PROPOSED. |
| Section 8.11 on Minutes of meetings | This is contrary to contrary to Sections 234 and 263(8) of CAMA on written resolutions or approvals by circulation which should also be documented in the Company’s minutes book. This is because they are as valid and effectual as if it had been passed at a meeting of the shareholders and directors duly convened and held. | Section 8.11 should be deleted or amended to recognise written resolutions, resolutions by circulation and meetings held through technology e.g. Skype, video conferencing, etc. |
| Section 8.12.1; 8.12.2; 8.14.4;8.14.5; 8.13.1; 8.13.2 in respect of Nomination and Governance Committee; Remuneration Committee; Audit Committee with similar provisions for each committee on composition –The board should establish a ……..committee which shall be composed of at least three members, all of whom shall be non-executive directors, a majority of whom shall be independent non-executive directors.
The chairman of the …….committee shall be appointed by the board and must be an independent non-executive director. |
These uniform provisions relegate the non-executive directors to the position of second class or inferior directors which is not good for the unity of the board. A situation where all board committees are chaired by independent non-executive directors will create permanent disunity among members of the committees and the board, particularly, the non-executive director who can never chair a board committee. The principle of zoning chairmanship of board committees to the INEDs is discriminatory and unfair.
It should be noted that the INEDs given these enormous powers and privileges have no financial stake in the business.
The copious provisions for INED, expert consultants, several Board Committees and independent professional advice will unduly and unnecessary increase the cost of running Companies despite the worsening economic environment with attendant declining earnings.
Furthermore, Section 359(4) of CAMA, prescribes the composition of the Audit Committee. The provision of the Code inadvertently nullifies this provision by prescribing a different requirements. |
Section 8.12.1; 8.12.2; 8.14.4;8.14.5; 8.13.1; 8.13.2 should be amended as follows:
– The board should establish a ……..committee which shall be composed of at least three members, all of whom shall be non-executive directors.
– The chairman of the …….committee shall be appointed by the board and that of the statutory audit committee by the committee. |
| Section 8 stating that every board should establish nomination and governance committee, remuneration committee, audit committee, and risk management
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Nomination, Governance and Remuneration Committees can be merged at the discretion of the board since they have related responsibilities of managing issues relating to the board. The Code should only provide that a company should have the committees but not that they must be separate. This is similar to the provision of the SEC Code which provides that the board can create a “Governance / Remuneration Committee” | It is recommended that the section should be modified as follows:
“ Every board should establish nomination and governance committee, remuneration committee, audit committee, and risk management, and may merge the committees as it deems fit.”
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| Sections 8.13.5; 8.14.9(n) and 12 on access to external consultant by audit committee– The remuneration committee may engage a remuneration consultant at the expenses of the company for the purpose of carrying out its responsibilities | There is the need to subject that discretion to the prior approval of the board or chairman in view of the fact that fees will be paid to the consultant by the company. The company should have input as to the necessity and the reasonable amount to be paid as fees.
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| Sections 8.13.5, 15.5, 17.14, 33.4(j), 33.13, 34.1 and several other provisions on External Consultants | These are attempts to create jobs for “the boys” and to unduly increase It should be modified as follows:
“The remuneration and audit committees may engage a remuneration consultant at the expense of the company subject to the prior approval of the board or written approval of the chairman for the purpose of carrying out its responsibilities.”the running cost of Companies. |
These references to Consultant should be expunged. Companies should be free to engage or not to engage Consultants. |
| Section 8.14.2 Without prejudice to the provision of CAMA every company to which this code is applicable should have a board audit committee
Section 8.14.3 All members of an audit committee (whether statutory or board) should have financial literacy….
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The proposed board audit committee (BAC) is a duplication of the duties of the statutory audit committee (SAC) created by CAMA and MUST BE OPTIONAL AS STATED IN SECTIONS 8.14.2; 18.6 and 19.1 of the code. They both have the same scope of duties, deal with the same internal and external auditors without any additional benefit. Whilst the statutory audit committee reports to the shareholders, the newly created board audit committee does not report to the shareholders. Then, the question is what is the benefit of the statutory audit committee that brings about four more meetings, additional sitting, travelling and hotel allowances for the members, increase auditors’ fees, waste of management time to make presentations to the new committee
The provision is laudable but it is not practicable as it is not possible for a company to stop the nomination of a shareholder to the statutory audit committee if they satisfy the provisions of CAMA. When will the test be conducted to confirm that members can read and interprete financial statements-before or after election by AGM? |
The section should be amended as follows:
“Without prejudice to the provision of CAMA, a company may establish a board audit committee.”
All members of an audit committee (whether statutory or board) should have financial literacy and should be able to read and interprete financial statements and have a minimum of OND or belong to a professional institute established by an Act of Parliament.
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| Section 14.5: Where an executive director is subsequently appointed as the Managing Director/Chief Executive Officer of the company,…
The company shall disclose in its annual report the courses attended by each director on a named basis (Section 10.3).
Section 15.7 relating to he result of the performance evaluation of each director should be disclosed in the annual report on a named basis
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The requirement for a maximum combined tenure of 15 years (where an ED assumes the position of a CEO) does not encourage effective succession planning, (as EDs are typically the pool from which future MDs are selected from) and prevents retention of key talents who have been groomed for CEO role.
Disclosures on director trainings, may lead to unnecessary disputes and rancor amongst shareholders
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The provision of a 15 year cumulative tenure should be removed from the Code and be limited to just a ten year tenure limit for the CEO.
Disclosures on director trainings should be limited to the company’s training policy for directors and a high-level statement confirming that directors were scheduled for and attended appropriate trainings within the period.
Disclosure on the performance evaluation should only be limited to a summary of the evaluation results for the board as a whole. Individual director attendance at board and board committee meetings should serve as sufficient information to assess director commitment.
Finally, information on directors up for re-election can be enhanced to include a comment from the Board that the results of their individual performance evaluation was considered in recommending them for re-election |
| Section 16.3 – The directors should report in annual and half-yearly financial statements that the business is a going concern, with supporting assumptions or qualifications as necessary. | This seems to imply that Companies are required to prepare financial statements half yearly. However, not all entities covered by this Code prepare financial statements half yearly.
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The provision should recognize and exempts companies who do not prepare half yearly financial statements
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| Section 17.1 on Internal Audit Function | Section 17.1 on Internal Audit Function: The requirement to have an internal audit function for companies | The requirement to have an internal audit function may not be suitable for multinational companies who may have supervisory support from their global audit functions. This provision needs to recognize that where there is an effective global audit structure, there is no need for duplication via a mandatory internal audit function. The effectiveness of such global structure can be confirmed by the Statutory Audit Committee in a PLC
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| Section 18.13: on employment issue | The concept of reinstatement of employee contained therein appears contrary to current position of case law. It is only in the case of employment with statutory flavour that reinstatement is allowed by law. | The provision should either should be reviewed or deleted |
| Sections 19.1 & 33.7(b) on External Auditors and disclosures. The Statutory and Board audit committees, either independently or jointly (where they co-exist) should have the primary responsibility for making a recommendation to the board on the appointment, reappointment and removal of external auditors.
The board is required to include in the annual report, the board’s explanation of the basis for the rejection of the audit committee’s recommendation on the appointment, reappointment or removal of an external auditor and subsequent override of the recommendation by 75% vote of board’s full membership |
This provision may lead to unwarranted rifts between the audit committee and the board. The requirement for the board to provide an explanation for not accepting a recommendation implies that the recommendation MUST be taken and usurps the authority of the Board.
The 75% rule is also contrary to the requirements of Section 264 of CAMA which states that “Unless the articles otherwise provide, the quorum necessary for the transaction of the business of directors shall be two where there are not more than six directors, but where there are more than six directors, the quorum shall be one third of the number of directors, and where the number of directors is not a multiple of three, then the quorum shall be one third to the nearest number”. |
This section of the code should be expunged. This is because the board is ultimately responsible for the integrity of the financial statements and should be permitted to approve or reject recommendations from its Committees (including that of the audit function) without the requirement to provide a written explanation.
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| Section 19.2.1 –Listed and Significant Public Interest Entities shall engage Joint External Auditors for the statutory audit. These entities are those whose market capitalization is not less than N1 billion and or whose annual turnover is not less than N10 billion. | It is our considered opinion that this requirement of a joint audit should at best be optional i.e. a decision for the Board in line with international best practices for the following reasons:
(i)In the present tough economic climate, hiring the services of two external audit firms is an avoidable cost to the company. Also, a joint audit may have the counter effect of prolonging the audit exercise of companies. (ii) There is no evidence to show that the benefit of a joint audit will outweigh the costs thereof. An audit exercise carried out by a firm of chartered competent accounts would adequately fulfil this purpose which the joint audit is meant to serve. Where the quality of the audit is not at the desired level, there are regulatory bodies including the Council who have power to query, investigate and where necessary sanction errant audit firms. The mischief which the joint audit is conceived to cure is already being taken care of by regulatory and professional bodies in Nigeria. (iii) The requirement of a joint audit should not be determined by the market capitalization or turnover of a company. The complexity of its operations, its peculiar circumstances or specific needs should be the determinant factors as to whether or not a company requires a joint audit at the discretion of the company. |
In view of the foregoing, we request the Council to expunge the provision on the joint audit requirement and make same OPTIONAL as may be decided by the board. |
| Section 19.2.2 on External Auditors | The provisions of the code are disruptive, discriminatory and biased. Segregation of some accounting firms from others is tantamount to discrimination which violates the Nigerian Constitution.
It contradicts the requirement of Section 224 of Companies and Allied Matters Act (CAMA) which gives the option of making such decisions through show of hands or a poll.
Furthermore, the Institute of Chartered Accountants of Nigeria (ICAN) issues license to members who meet the necessary requirement and therefore does not differentiate audit firms based on nationality of audit Partners. In addition, admission as members of these professional bodies after passing the professional examination is not based on nationality. This rule is not based on any established practice or operational guideline of audit practice.
Provision does not consider the quality of audit firms in the appointment of auditors and therefore promotes mediocrity and quota system.
This provision commoditizes the audit practice and adds no value to the audit practice. |
The provision should be revised to align with the provisions of CAMA.
The option of a poll must be allowed as provided by CAMA. No form of segregation and discrimination should be contained in the code |
| Sections 19.3 on External Auditors | Mandatory audit firm rotation (MFR) is not considered the best approach towards improving the quality of audits in Nigeria. In our view, rotation of audit firms will increase the ability of companies to conceal fraud or misstatements from auditors who will continue to be in perpetual ever-steepening learning curve which could lead to sustained diminution in audit quality and the consequent negative implications for investor protection and the integrity of the financial system.
Clear transitional provisions for the rotation should be outlined such as in the EU where transitional period of up to nine (9) years was available.
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The committee should work on strengthening the auditor independence and quality reviews of auditors, as these are far more effective in achieving improved audit quality than mandatory audit firm rotation (MFR).
If MFR is adopted, then it should reflect international best practice. For instance, in EU a 10-year mandatory audit firm rotation has been recommended – with an option of additional 10years if a tender is undertaken (or additional 14years if joint audit is adopted), CBN and SEC have recommended a maximum tenure of 10 years with a cooling off period of 10 years and 7 years respectively |
| Sections 19.5 & 19.9 on External Auditors | A three year rotation will put undue pressure on audit firms and erode experience and sector specialization.
The International Federation of Accountants provides engagement partners rotation rule of 7years and to take a two-year cool-off period
This arrangement excludes at all times, at least two audit firms from participating in the audit selection process (the outgoing auditor and the auditor who was in office immediately before the outgoing auditor). Therefore, it restricts the freedom of choice and the ability of audit committees, boards and shareholders, who are appropriately charged with this responsibility, to determine which audit firm best meets their requirements from an open, competitive field. |
The committee should revise the rotation requirements in line with international best practices.
There should be no exclusion of any audit firm from the audit selection process. Companies should be allowed to exercise their right to choose a service provider that meets their requirements and defined criteria.
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| Section 20 on dialogue with stakeholders | Section 20 makes provision for “Sufficient meetings” and “range of shareholders” | This Clause is vague and thus subject to ambiguity. “Sufficient meetings” and “range of shareholders” should be clearly spelt out. |
| Section 29.2 authorizing a shareholder or group of shareholders, holding in aggregate not less than one percent of the share capital or shares of a company, shall be entitled to submit items for inclusion in the agenda of the annual general meeting of the company | The provision is CONTRARY to the provisions of Section 235 of CAMA stating that requisitionist must have one twentieth (1/20) of the total voting rights of all members OR not less than one hundred members holding shares in the company………………….. The provision must be aligned with the provision of CAMA. | “A shareholder having one twentieth (1/20) of the total voting rights of all members OR not less than one hundred members holding shares in the company shall be entitled to submit items for inclusion in the agenda of the annual general of the company.” |
| Section 31 (g): Cooling off period for Executive Management Cadre of Regulatory Authorities
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The Code provides that no member of executive management leaving the services of a regulatory body shall be appointed as Director of a company he or she has directly supervised until after two years of disengagement from such regulatory body. The cooling off period was formerly three (3) years. | This provision reducing the cooling off period is satisfactory. It should be reverted to 3 years.
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| Section 33.2: The chief executive officer (or equivalent) and chief financial officer (or equivalent) should jointly state in writing to the board that the company’s financial statements present a true and fair view, in all material respects, of the company’s financial condition and operational results and are in accordance with relevant accounting standards
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Based on the International Standards on Auditing (ISA), the financial statements should either give a true and fair view of…or present fairly in all material respects…[See ISA 700.35]; based on the jurisdiction. Therefore a combined use of “true and fair view” and “in all material respects” would result in unnecessary and confusing repetition.
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The section highlighted should be updated to be consistent with the ISAs.
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| Section 33.4 (o) & (p): on HR Issues | There should be a clear separation and demarcation between governance and HR issues lumped up in Corporate Governance Report (CGR). | The Employment related issues should be taken out of the CGR and contained in a separate report which will still form part of Directors’ Report of Annual Report. |
| Section 34.2 on Annual Corporate Governance evaluation
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Section 34.2: Requiring Companies to carry out annual Corporate Governance evaluation to be facilitated by an independent external consultant registered by Financial Reporting Council of Nigeria. The External Consultant is to be different from the External auditor or a firm related to the external auditor……. | This is not consistent with Section 44(3) of the FRCN Act which requires the professional Accountant that audits the Company financial statements to do so. What special value is this additional burden to add especially for a small private company?
It should be deleted. |
| Section 37.1 on the personal and corporate sanctions | In order to avoid arbitrariness in the imposition of sanctions by FRC and the fact that the recent Regulations of the FRC empowering it to impose fines of up to N5 billion, it is necessary for the code to specify the applicable sanctions for comments by stakeholders at the stage. This is also in line with transparency which is a major requirement of corporate governance. | The sanctions should be specified for comments by stakeholders. |
| Clause 38: Commencement | The Code shall come into force on July 1, 2016.
From its commencement date, the Code supersedes any corporate governance code in force in Nigeria
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July 1, 2016 commencement period for the Code is too sudden and soon. There should be transition period for current Codes especially as it affects the banking industry, pension and insurance industry. The transitional period in 39 is too short.
This commencement date is unrealistic and unfair giving that the final hearing is on 23 June, 2016. July 1 2016 date is tantamount to the Code having an immediate effect. With the volume of new introductions from the Code, the transitional arrangement is unrealistic. Organizations must be given a minimum of 1 financial year within which to comply.
We recommend that companies should familiarize themselves with the draft code and revert to the earlier communicated date for commencement of 1st January, 2018 |
| Section 38.2 on applicability | Section 38.2 provides for the applicability of the code | It raises several issues, such as: does this mean the SEC Code of Corporate Governance will no longer be applicable? This FRC code should specifically address the issue of multiple regulation on the subject of corporate governance
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| New meetings mandated by the Code that are unnecessary:
-Separate meetings of chairman with NEDs without EDs-S 6.1.8 -Meetings of NEDs without chairman –S. 6.1.8 -Exclusive meetings of INEDs –S. 6.2.3 -Meetings of Lead INEDs with shareholders S.20.4 -Separate meetings of BAC with management, internal auditor and external auditors-S8.14.9(h) -BAC to meet at least quarterly- S. 8.14.6 |
These are meetings that will polarize the board; create suspicion among members; increase annual cost of organizing meetings (sitting allowances, travel and hotel accommodation for members, increase professional fees of external auditors) and add no value to the company. | These sections should be deleted from the code as we already have sufficient meetings for the governance of the company such as quarterly meetings of the board, governance & nomination, remuneration, audit, risk management committees. |
| Alignment of the provisions of the code with the provisions of CAMA
Creation of the position lead independent non-executive directors with special powers in Sections 7.3 and 19.10, minimum number of directors in Section 5.6, percentage of shareholders that can submit items for incorporation in the Section 29. |
The provisions of the code must not contradict the provisions of the law such as CAMA. If the FRC feels that some provisions of CAMA are obsolete, it could propose to the National Assembly amendments to CAMA where all stakeholders would be given the opportunity to contribute to the debate. This is because regulation should not be upgraded to the status of legislation or to contradict legislation. The code can only close the gap between the law and the practice, but not to contradict the law.
The code can close the gap between the law and the practice but not to contradict the law. |
All sections in the code that are conflicting with the provisions of CAMA and other laws should be amended to bring them in line with the provisions of the laws. |
| Replacement of the word “should” with the word “shall” in the entire document
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The use of the word “shall” instead of “should” is a further indication of the mandatory effect of the provisions of the Code.
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We will like to reiterate that we believe that a “comply or explain” regime is more in line with global practices/ trends than a mandatory system. Examples of Codes that contain the “comply or explain” system are the 2014 UK Corporate Governance Code and the South African King Report on Corporate Governance. |
CONCLUSION
Although, the Minister of Trade and investment (MT&I) is vested with power to make regulations under the Act, a directive is not sufficient to make the Code mandatory or confer power on the FRC to impose sanctions. It is clear that any sanction to be imposed for breach of the Code is at the sole discretion of the FRC, as the Code contains no penalties for breach. We urge Government to enact or put in place Business Friendly Regulations/ Policies etc. in the interest of the Economy.
Typically, Codes of Corporate Governance are either legislated or made voluntary for companies to sign up for. The Code, in its current form, is an attempt by the FRC to legislate a code of corporate governance, and also rehashed the provisions of some laws (including CAMA and the Investment and Securities Act) and in the process attempt to amend the said laws. The Code should either be issued as a regulation consistent with existing laws or made voluntary for companies.
Finally, the Government should not be seen to be increasing the burdens of companies when they should be making them lighter. A few provisions in the draft code have the implications of increasing the burdens with the appointment of more external consultants including auditors and assessors. This code should not be seen as an avenue to create more work for consultants at the expense of companies and shareholders.
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