A Comparative Analysis Of Salient Provisions Of The Nigerian Code Of Corporate Governance 2018 And The SME Corporate Governance Guidelines 2024: Highlights Of Similarities And Recommendations

Introduction

The Financial Reporting Council of Nigeria (FRC) issued the Nigerian Code of Corporate Governance 2018 pursuant to the power conferred on it by section 51(c) of the Financial Reporting Council of Nigeria (Amendment) Act 2023 in order to ensure good corporate governance practices in the public and private sectors of the Nigerian economy. The Nigerian Code of Corporate Governance 2018 seeks to institutionalize corporate governance best practices in Nigerian companies. The implementation of this Code is monitored by the FRC through the sectoral regulators and registered exchanges who are empowered to impose appropriate sanctions based on the specific deviation noted and the company in question.

However, the Nigerian Code of Corporate Governance (NCCG) is aimed at entities of varying sizes and complexities as defined in the Regulation that set it up and excludes Micro, Small, and Medium-Sized Enterprises (MSMEs). In an effort to make the principles of good corporate governance and ethical business administration accessible and operational by these MSMEs, the FRC has adapted the principles and tenets of the NCCG into the following SME Corporate Governance Guidelines (SME-CGG). This article aims to help business entities ascertain which of the code of corporate governance is applicable to them and help them understand salient provisions of the codes while making some general recommendations which is applicable to all.

Comparative analysis of the provisions of the Regulations

1. Applicability

The Nigerian Code of Corporate Governance 2018 is applicable to Companies that are

1. holding companies of public or regulated entities,
2. Concession entities,
3. Privatized entities in which the government retains an interest,
4. Entities engaged by any tier of government in public works with annual contract sum of N1billion and above, payable from public funds,
5. Licensees of government,
6. All other entities with an annual turnover of N30 billion and above,
7. Non-listed regulated entities which includes, entities that are regulated by the following regulators: Central Bank of Nigeria, National Insurance Commission, National Pension Commission, Nigerian Upstream Regulatory Commission, Nigerian Midstream & Downstream Petroleum Authority, National Health Insurance Authority, Nigerian Communications Commission, National Broadcasting Commission, National Universities Commission, National Board of Technical Education, National Commission for Colleges of Education, Nigerian Electricity Regulatory Commission, Securities and Exchange Commission, Nigerian Civil Aviation Authority, National Agency for Food and Drug Administration and Control, National Automotive Design and Development Council, Nigeria Shippers Council, Nigeria Port Authority, Infrastructure Concession Regulatory Commission, Estate Surveyors and Valuers Registration Board of Nigeria and Nigerian Tourism Development Corporation.

The SME Corporate Governance Guidelines is applicable to all MSMEs operating in Nigeria. According to the National Policy on SMEs issued by the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), an SME is defined by the following characteristics:

1. Micro enterprise is an entity with less than 10 employees and less than 5million in Assets (excluding land and buildings)
2. Small enterprise is an entity that has between 10 to 49 employees and between 5 to 50 million in Assets (excluding land and buildings)
3. Medium enterprise is an entity that has between 50 to 199 employees and between 50 to 500 million in Assets (excluding land and buildings)
4. Board of Directors

The NCCG provides for the existence of an effective Board which is to exercise oversight and control to ensure that management acts in the best interest of the shareholders and other stakeholders'¹.While the SME Corporate Governance Guidelines encourages SMEs to set up a formal Board of Directors to accompany the growth of the entity. However smaller entities may wish to set up an "advisory" board with no formal decision-making powers, but which offers its expertise and networks to guide and support the business.² Two to three people is a sufficient size for an advisory board for a small business.

3. Position of Chairman and MD/CEO

SME Corporate Governance Guidelines encourages Medium-sized Entities to consider separating the roles of the Chairman and the Chief Executive, however acknowledging the fact that separation may not always be possible or feasible.³ The NCCG on the other hand makes the separation mandatory⁴

4. Auditing

The NCCG recognized and approved the provisions of extant law on the Statutory Audit Committee. It also encourage every Company to have a Board committee responsible for audit, who is to ascertain whether the accounting and reporting policies of the Company are in accordance with legal requirements and agreed ethical practices.⁵ An external auditor must also be appointed to provide an independent opinion on the true and fair view of the financial statements of the Company to give assurance to stakeholders on the reliability of the financial statements.⁶ The SME Corporate Governance Guidelines also encourages Medium-sized Entities to have both internal and external auditors, stating the importance of evaluating the effectiveness of the external auditor and formulate policies to preserve the independence of both the internal and external audit function. Medium-sized Entities, are to utilize the services of a reputable independent accounting firm in the audit of its financial statements⁷

5. Risk Management

According to the NCCG, companies must establish risk management framework in other to identify, assess, monitors and manages key business risks to safeguard shareholders' investments and the Company's assets. They must ensure that the risk management function is headed by a member of senior management who is a professional with relevant qualifications.⁸ The SME Corporate Governance Guidelines also encourages SMEs to document a formal process for identifying significant business risks and management should adopt formal control mechanisms. It went further to define risk in the broadest terms, encompassing not just financial matters, but also operational, strategic, and regulatory matters, covering areas such as health and safety, human resources, operations, the environment, IT security, and corporate reputation.⁹

6. Internal Audit Function

The NCCG provides that companies must have an effective internal audit function which must provide assurance to the Board on the effectiveness of the governance, risk management and internal control systems.¹⁰ SMEs are also encouraged to consider establishing an internal audit function. Internal audit's primary responsibility is to ensure that the risk management approach is being followed throughout the entity, and that appropriate internal controls are in place and are operating effectively¹¹

7. Family run entities

The SME Corporate Governance Guidelines acknowledges the fact that majority of the MSMEs in Nigeria are family-run. Which makes it often complex in terms of governance than non-family-run enterprises because of the family component. Hence the guideline proposes the formulation of a framework for Family Governance, setting out the family's relationship with the business and establishing a family governance structure such as a "family council", which institutionalizes cooperation in large families and serves as the link between the family and the business.¹²

General Recommendations

By following these recommendations, companies and SMEs can promote good corporate governance practices, build trust with stakeholders, and achieve long-term sustainability.

1. Understand Applicability: Determine which code of corporate governance applies to your entity based on size, complexity, and sector.
2. Adopt Good Corporate Governance Practices: Implement good corporate governance practices to promote transparency, accountability, and stakeholder trust.
3. Regularly Review and Update Governance Structures: Regularly review and update governance structures to ensure they remain effective and relevant.
4. Provide Training and Development Opportunities: for board members, management, and employees to enhance their knowledge and skills in corporate governance.
5. Monitor and Evaluate Governance Practices: Regularly monitor and evaluate governance practices to identify areas for improvement. Use the findings to refine and update governance structures, policies, and procedures.
6. Leverage Technology: to enhance governance practices, such as using digital platforms for board meetings, document management, and stakeholder engagement.

Ensure that technology is used in a way that promotes transparency, security, and efficiency.

Conclusion

The Nigerian Code of Corporate Governance 2018 and the SME Corporate Governance Guidelines 2024 are essential frameworks that promote good corporate governance practices in Nigeria. The comparative analysis highlights the similarities and differences between the two codes, emphasizing the need for companies and SMEs to understand their applicability and implement effective governance structures. By following the general recommendations outlined in this article, businesses can build trust with stakeholders, promote transparency and accountability, and achieve long-term sustainability. Ultimately, good corporate governance practices are crucial for the growth and development of Nigeria's economy, and it is essential for companies and SMEs to prioritize these practices to ensure their success and relevance in the market.

Footnotes

1. Principle 1 of the Nigerian Code of Corporate Governance 2018

2. Principle 3 of the SME Corporate Governance Guidelines 2024

3. Principle 4.4 of the SME Corporate Governance Guidelines 2024

4. Principle 2.7 of the Nigerian Code of Corporate Governance 2018

5. Principle 11.4.6 of the Nigerian Code of Corporate Governance 2018

6. Principle 20 of the Nigerian Code of Corporate Governance 2018

7. Principle 5.1 of the SME Corporate Governance Guidelines 2024

8. Principle 17 of the Nigerian Code of Corporate Governance 2018

9. Principle 6.1 of the SME Corporate Governance Guidelines 2024

10.Principle 18 of the Nigerian Code of Corporate Governance 2018

11.Principle 6.3 of the SME Corporate Governance Guidelines 2024

12.Principle 8 of the SME Corporate Governance Guidelines 2024

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.