The Nigerian Code Of Corporate Governance: What Reporting Entities Need To Know

INTRODUCTION

The corporate governance landscape in Nigeria has undergone a significant transformation with the enactment of the Financial Reporting Council of Nigeria (Amendment) Act, 2023 (the "Act"). This legislative update marks a pivotal step in reinforcing accountability, transparency, and compliance within the country's corporate sector.

The foundation for this evolution was laid with the introduction of the Nigerian Code of Corporate Governance 2018 (the "National Code") issued by the Honourable Minister for Industry, Trade and Investment on January 15, 2019. The National Code, implemented by the Financial Reporting Council of Nigeria (the "FRCN"), established a foundational governance framework for Nigerian businesses. Recognizing the diverse needs of different industries and sectors, the accompanying Regulation on the Adoption and Compliance introduced an important dimension of regulatory flexibility. This provision empowers sectoral regulators to:

1. Issue supplementary guidelines addressing sector-specific governance matters not fully covered by the National Code; and
2. Introduce additional provisions tailored to their industry's unique operational and administrative requirements.

The Regulation brought much-needed clarity to what corporate governance analysts had initially considered a complex and cumbersome monitoring process for implementing the National Code. The Act has further reinforced this clarity through a comprehensive set of provisions, which will be discussed below.

1. REPORTING ENTITIES

One notable feature of the Act is its expanded definition of Public Interest Entities (PIEs) regulated by the FRCN. These entities are required to submit corporate governance and financial reports in compliance with both the National Code and the Act.

These entities are:

1. Governments and government organizations;
2. all listed companies on any recognized security exchange in Nigeria;
3. all unlisted, but regulated entities, including banks, insurance companies, pension operators, and other financial institutions;
4. all public limited companies;
5. all private holding companies with a public or regulated subsidiary company;
6. all concessioned or privatised companies with government ownership or guaranteed interests;
7. all entities with annual turnover of N30 billion or more;
8. all licensees of Government; and
9. all government contractors with individual contracts in public works valued at N1 billion or more, settled from public funds.

Notably, the Act removes the previous exemption for entities that only report to the Corporate Affairs Commission (CAC) and the Federal Inland Revenue Service (FIRS). While seemingly a minor amendment, this change significantly broadens the net of reporting entities. As a result, companies must now reassess their status to determine whether they fall within the expanded category of regulated entities, thereby avoiding being penalized for non-compliance, especially with the risk of facing penalties in the tens of millions, alongside the risk of imprisonment. Among other obligations, all PIEs are required to:

1. Register with the FRCN upon incorporation or attainment/discovery of their PIE status.
2. Pay annual dues within the specified timeframe.
3. File their annual reports and audited financial statements within 60 days of board approval.
4. Submit any qualified reports within 30 days of qualification.
5. Submit any regulatory filing made to another regulatory body to the FRCN within 30 days.

2. THE STATE OF SECTORAL CODES

The National Code states that implementation of the National Code will be monitored by the FRCN through the sectoral regulators and registered exchanges that are empowered to impose appropriate sanctions based on specific deviations from the National Code. The FRCN may, in addition, conduct reviews on the implementation of the National Code where deviations recur. Under the Act, all existing sectoral codes of corporate governance have be withdrawn, cementing the National Code as the uniform and only Code of Corporate Governance in Nigeria, and empowering the FRCN to coordinate and harmonize all sectoral governance codes. According to the Act the FRCN shall adopt the reports or returns of other sectoral regulators, with the authority to decide any inconsistencies between the sectoral reports and the National Code.

This led to the engagement of the FRCN with other sectoral regulators, an effort which is continually yielding positive results and providing the needed clarity with respect to synergy in implementation and enforcement of the National Code. In matters where sector specific corporate governance requirements are not covered in the National Code, a sectoral guideline will then be issued by the relevant sector regulators. Let us review the status of a couple of existing sectoral codes and their alignment with the National Code.

2.1 The Securities and Exchange Commission's Code of Corporate Governance for Public Companies in Nigeria 2011 (the "SEC Code")

Prior to the issuance of the National Code, all public companies were mandated to comply with the SEC Code. Following the issuance of the National Code (which subsumed the SEC Code), the SEC developed additional recommended practices in its new Corporate Governance Guidelines (the "SEC Guidelines") in 2020 to replace the 2011 Code and fully account for the peculiarities in the Capital Market. The SEC Guidelines are structured along the principles of the National Code. The SEC Guidelines contains 14 (Fourteen) guidelines which are largely extracted from the SEC Code.

It is important to note also, that further to the issuance of the SEC Guidelines, the SEC also revised its previous SEC Form 01 for reporting on compliance with the SEC Code to align it with the SEC Guidelines. The revised SEC Form 01 (developed in line with the SEC Guidelines) are being used by public companies in reporting compliance with the SEC Guidelines, in addition to the template for reporting compliance with the National Code.

All public companies, therefore, are required to comply with the provisions of the National Code and SEC Guidelines. As a way of demonstrating compliance with the foregoing, SEC Form 01 (as revised) must be completed and submitted to the SEC. The SEC Guidelines stipulate that the penalty for non-compliance and violation of the provisions of the National Code and the SEC Guidelines shall be a fine of N500,000 in the first instance and a further sum of N5,000 for every day the violation persists and or any other sanction as the SEC may deem fit in the circumstance.

2.2 National Pension Commission's Code of Corporate Governance for Licensed Pension Operators 2008.

In December 2019, the National Pension Commission ("Pencom") issued a Circular on Corporate Governance for Licensed Pension Fund Operators ("Circular") which replaces the previous Code of Corporate Governance for Licensed Pension Operators 2008 and is to be used in conjunction with the National Code. Non-compliance with the provisions of the Circular will attract appropriate administrative penalties by Pencom.

2.3 National Insurance Commission Corporate Governance

Guidelines for Insurance and Reinsurance Companies in Nigeria

In alignment with the National Code, the National Insurance Commission (NAICOM) exercises its statutory authority under the NAICOM Act 1997 to issue these Corporate Governance Guidelines. These Guidelines complement the NCCG 2018 and replaced the 2009 NAICOM Code of Good Corporate Governance. Insurance and Reinsurance entities are required to simultaneously comply with both the National Code and NAICOM Guidelines, ensuring governance practices meet both national standards and insurance industry requirements.

2.4 Nigerian Communications Commission (NCC)

In December 2023, the Nigerian Communications Commission (NCC) introduced the Corporate Governance Guidelines for the Communications Sector, marking a significant update to the regulatory framework governing telecom operators in Nigeria. Issued under the Commission's statutory powers as established by the NCC Act 2023, these new Guidelines apply to all licensed communication companies operating in the country. The 2023 Guidelines build upon the foundation of two key national governance instruments - the National Code and the Companies and Allied Matters Act 2020. The NCC expressly repealed the previous sector-specific Code of Corporate Governance that had been in effect since 2016.

3. A SHIFT TO APPLY AND EXPLAIN PRINCIPLE

The National Code comprises seven (7) parts and twenty-eight (28) principles together with practices recommended by the National Code for the implementation of each principle. In simple terms, all Affected Entities must apply the 28 principles contained in the National Code and in reporting on compliance with the National Code, Affected Entities are required to establish how they have applied these principles. The explanation that is required by the National Code is on the specific practices and activities that have been adopted by individual reporting organizations to attain the intended objectives of the principles in the National Code.

Under the National Code, this "apply and explain" approach is formally enshrined as the hallmark of Nigeria's corporate governance framework. One of the benefits of the approach, is that it affords considerable flexibility in the means or process that organizations may employ in complying with the 28 principles. This is because practices can be tailored to meet specific industry or company needs, while still achieving the outcomes envisaged by the principles.

It also decisively moves companies away from a compliance-based approach where companies fail to fully engage with the spirit of applicable codes, merely seeing compliance as a "tick-the box" exercise, thereby (as observed by governance analysts), reducing governance to a set of mechanical actions, with little regard for what the goal was and whether it was achieved. By using the "apply and explain" approach, Affected Entities are required to go beyond just adopting the recommended practices/principles, but also providing further explanations as necessary to demonstrate precisely, how their practices achieve compliance with the National Code principles. This approach arguably encourages companies to take a more proactive approach to corporate governance.

4. EVALUATIONS DISCLOSURES AND REPORTING

4.1. Board Evaluation and Corporate Governance Evaluation

It is important to note that the National Code recommends that an annual board evaluation should be conducted to assess how each Director, the committees of the Board and the Board are committed to their roles, work together and continue to contribute effectively to the achievement of the Company's objectives. The board evaluation exercise should include the criteria and key performance indicators and targets for the Board, its committees, the Chairman and each individual Board member. The National Code further requires an annual corporate governance evaluation to be conducted. The evaluation should consider the extent of compliance with the National Code. Both evaluations (i.e. the board and corporate governance evaluations) are required to be facilitated by an external independent consultant at least once every three years.

4.2. Annual Corporate Governance Evaluation Reporting

All Affected Entities are required to complete their annual corporate governance reports using the online portal provided by the FRCN. The report is also required to be submitted to their sectoral regulators and relevant exchanges (for listed companies. An abridged version or summary of the information reported in the template including the summary of the board evaluation and annual corporate governance evaluation must be included in the corporate governance section of the annual report. In addition to this, FRCN requires that the report should be hosted on the reporting entities websites.

4.3. Annual Report

The Board of Affected Entities are required to ensure that their Company's annual report includes a corporate governance report that provides clear information on the Company's governance structures, policies and practices as well as environmental and social risks and opportunities. The corporate governance report should include the matters specified in clause 28 of the National Code. The annual report should also contain a statement by the Board on the Company's level of application of the National Code arising from the results of its corporate governance evaluation.

Where the Board has engaged independent experts in evaluating and reporting on the extent of application of this Code, they should name the consultant and include a summary of the report (provided by the consultant) in their company's annual report.

The annual report should furthermore contain a statement by the Board on their company's Environmental, Social and Governance activities. This should be reviewed by an appropriate Board committee and may be subject to independent review.

4.4. Directors Remuneration

The Remuneration Policy of Affected Entities as well as the remuneration of all directors, should be disclosed in the annual reports of Affected Entities.

4.5. Sustainability

Boards of Affected Entities are required to establish policies and practices regarding their social, ethical, safety, working conditions, health and environmental responsibilities as well as policies addressing corruption. The policies should include the factors specified in the National Code. The Board of Affected Entities are also required to monitor the implementation of sustainability policies and report on the extent of compliance with the policies.

4.6. Risk Management

Affected Entities are required to conduct at least annually; or more often in companies with complex operations, a thorough risk assessment covering all aspects of their business and ensure that mitigating strategies have been put in place to manage identified risks. They are also required to ensure that their risk management frameworks are disclosed in their annual reports.

4.7. Internal Audit Function

Where the Boards of Affected Entities decide not to establish such Internal Audit functions, internally or outsourced, sufficient reasons should be disclosed in their company's annual report with an explanation as to how the Boards have obtained adequate assurance on the effectiveness of the internal processes and systems such as risk management and internal control.

Furthermore, there should be an external assessment of the effectiveness of their internal audit functions at least once every three years by a qualified independent reviewer to be appointed by the Board of these Affected Entities.

5. ADDITIONAL LISTED COMPANY REQUIREMENTS

All listed companies are required to do the following:

1. Complete and submit an annual corporate governance report to the FRCN using the dedicated portal accessible through its website.
2. Submit a copy of the completed corporate governance report to The Nigerian Exchange Limited.
3. Publish the submitted corporate governance report on the Company's website.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.