Dec 14, 2016

Suspension of FRCN Code of Corporate Governance: Lessons Learnt - Prince Ikechukwu Nwafuru

The Financial Reporting Council of Nigeria (FRCN) recently issued the National Code of Corporate Governance, 2016 (“NCCG”). The three-in-one Code provides for sector-wide Code of corporate governance for Private and Public Sectors as well as Not-for-profit Organizations. According to information on the FRCN website, the Code of Corporate Governance for the Private Sector is mandatory, the Code for the Not-for-profit entities is comply or justify non-compliance while that of the public sector will not be applicable immediately until an executive directive is secured from the Federal Government of Nigeria.

The issuance of the NCCG particularly the National Code of Corporate Governance, 2016 for private sector in Nigeria (“the Code”) which was meant to take effect from 17 October 2016, has raised a lot of concerns amongst Industrial players, stakeholders and professionals in view of its far-reaching effect on management structures of private entities coupled with the jurisprudential issue relating to its validity. The Code has therefore been criticized for its stifling provisions which run foul of existing corporate legislations and sector-based Codes of Corporate Governance.

It came therefore, as a big relief when it was reported that the Federal Government has suspended the implementation of the polemical Code. As reported in 07 November 2016 issue of Business Day Newspaper and other major Newspapers, the Minister of Industry, Trade and Investment, Okechukwu E. Enelamah, (a supervisory Minister for the FRCN) did not only suspend the Code but has gone further to issue a 3-page query to the FRCN to provide amongst others, the regulatory approach that undergirds the Code; explain the clear conflict between provisions of the Code and the FRCN establishing Legislation – Financial Reporting Council of Nigeria Act, 2011 and provide evidence of the adoption of the Code by the Board of the Council and the minutes of the meeting at which the Board adopted the Code. The crux of this piece is therefore to highlight some of the concerns raised in respect of the Code vis-à-vis the ease-of-doing business policy of the Federal Government and the lessons to be derived from the suspension.

Functions and Powers of FRCN
The FRCN is established under the FRCN Act, 2011 and saddled with the powers and functions to develop and enforce accounting and financial reporting standards to be observed in the preparation of financial statement of public interest entities; review, promote and enforce compliance with the accounting and financial reporting standards amongst other powers and functions listed in Sections 7 and 8 of the FRCN Act. The FRCN’s objectives as stated in section 11 of the FRCN Act include protecting investors and stakeholders’ interest by enhancing the credibility of financial reporting and ensuring good corporate governance practices in the public and private sectors of Nigerian economy. From the foregoing, one will appreciate the core mandate of the FRCN, which is to regulate and enforce accounting, auditing, and financial reporting standards in Nigeria and coupled with the objectives of the FRCN under section 11 of the Act which includes ensuring good corporate governance practices in the public and private sectors of the Nigerian economy.

As a corollary to its afore-referenced functions and powers, the FRCN also places much premium on the issue of Corporate Governance, and this explains the rationale behind the establishment of the Directorate/Committee on Corporate Governance in section 49 of the FRCN Act with mandate to issue the code of corporate governance and guidelines. Perhaps, it is in pursuance of this objective and functions that the FRCN issued the Code to regulate the private sectors.

Section 2.1 (a) – (c) of the Code provides that it applies to all public companies (whether listed or not), all private companies that are holding companies or subsidiaries of public companies, and regulated private companies as defined in section 40.1.14 of the Code. “Regulated private companies” was defined under the Code as those private companies that file returns to any regulatory authority other than the Federal Inland Revenue Service and the Corporate Affairs Commission, except such companies with not more than eight (8) employees. Instructively, section 40.1.15 of the code defines “regulator” or “regulatory authority” to mean the Financial Reporting Council of Nigeria and other sectoral regulators as may be appropriate;

As noted above, the Code is all-encompassing as it cuts across all private sectors and seeks to unify, harmonize and supersedes all the existing sectoral corporate governance codes in Nigeria such as those regulating the Licensed Pension Operators, Banking, Discount Houses and Insurance sectors.[1]

Some salient provisions of the Code and the attendant defects and criticisms

Board Structure and Composition:

The Code recognizes in section 5.1 thereof that the Board shall be of sufficient size relating to the scale and complexity of the company’s operations but goes further in section 5.4 to provide that the membership of the Board shall not be less than 8 members. The minimum Board Membership for regulated private companies that are not holding companies or subsidiaries of public companies is however pegged at 5 members. Not done, the Code[2] provides that not more than two members of the same or extended family shall sit on the Board of the same company at the same time and goes further to define an extended family member to mean those persons who may be reasonably expected to influence, or be influenced by, that person in his dealing with a company. Even for a student of Company law, it is not difficult to see the conflict between this Code and the section of the Companies and Allied Matters Act, Cap C20 LFN 2004 (CAMA) which provides that every company shall have at least two Directors[3]. Therefore, the 5 or 8 minimum Board membership imposed by the FRCN is clearly ultra vires. What it means, going by the provision of the Code, is that any affected company with less than 5 or 8-Board membership as the case may be will be flouting the Code and will need to appoint additional Director(s) to fill up the shortfall.

Officers of the Board
The Code reserves the position of the Board Chairman to non-executive Director thereby excluding the right of an executive Director to chairmanship of a company Board. While this provision may accord with the general practice in the private sector which is often encouraged as it is necessary to balance and checkmate the powers and excesses of the executive directors who are the actual managers of the company but again how valid is this provision which makes such a practice mandatory given the express provision of CAMA on the election of Company Chairman[4]. Interestingly, as stated by the Supreme Court in the case of Longe v. First Bank of Nigeria (2010) LPELR-1793(SC); (2010) 6 NWLR (Pt. 1189) 1, the statutory definition of directors under section 244 (1) of the CAMA does not recognize the nomenclature between executive and non-executive directors. Thus, one would have preferred having this provision reserving the post of company chairmanship to non-executive director in a substantive legislation and not in the Code.

Again, the Code runs foul of the CAMA provision on remuneration of the Directors by providing that the MD/CEO’s remuneration shall be determined by remuneration committee contrary to the powers vested on the Members of the company under the CAMA[5] to so determine.

Board Meeting
The Code mandates the holding of Board meeting at least once in every quarter and goes further to require every director to attend at least two-thirds of all Board meetings. This glaring conflicting provision also stares in the face of the CAMA provisions on holding of Board Meeting.[6]

On the voting powers of directors at the Board Meeting, the Code provides that where a majority of Independent directors do not agree with a decision of the board of directors, such a decision would only stand if it was supported by at least 75 percent of the entire board. As noted by one of the commentators, what this provision does is to elevate the positions of the Independent directors above the majority of the board of directors giving the impression of a fictional two-tier board system in which the executive directors are subject to the independent (non-executive) directors. It is not difficult to see the conflict between this provision and the provisions of CAMA which provide that the decisions of the Board of Directors are arrived at by a majority of votes of the Directors and every Director is entitled to a vote.[7]

Appointment of Directors and Auditor

While the first directors of the Company are usually determined by the subscribers to the Memorandum and Articles of the Company[8], the appointment of subsequent directors or confirmation of those appointed to fill casual vacancy is however reserved for the members at the General meeting. The Code in vesting the power of appointment on the Board subject to ratification by relevant industry regulator merely provides that certain particulars and information of persons to be appointed as directors shall be submitted to the shareholders without more thereby technically taking away the powers of the members in respect of appointment of directors or ratification of such appointment.

Another infraction of the CAMA is the Code provision[9] on mode of appointment of auditor which is by a show of hand in an Annual General Meeting. Section 224 (1) of CAMA expressly provides that resolution at the General Meeting shall be by show of hands except where a poll is demanded by the chairman where he is a shareholder or by at least three members present in person or by proxy, etc.
The above referenced provisions are not exhaustive of the provisions of the Code that have got stakeholders and professionals talking not only in terms of their conflict with existing Corporate legislations but also as they affect other existing sectoral Codes of Corporate Governance. Reading through the provisions of the Code, one will not help but wonder whether the makers deliberately set out to amend the existing laws regulating private corporate entities.

Importance of Code of Corporate Governance
The importance of Code of Corporate Governance is recognized all over the world as no organization can operate effectively without laid down processes, customs, policies, standards affecting the way a corporation is directed, administered or controlled. The principles that undergird Corporate Governance culture include integrity and ethical behavior, disclosure and transparency, equitable treatment of shareholders and efficient discharge of Board responsibilities and functions which are necessary for building investors’ confidence. The monumental corporate disasters witnessed in the collapse of Enron, Worldcom, and Lehman Brothers are enough pointers to the fact that no matter how big a corporation is, it can come crumbling like a house of cards if there is lacking in place a strong corporate governance culture. Expectedly, these big corporations failed because of poor management, insider abuse, fraud, laxity amongst other corporate governance infractions. Ironically, prior to their collapse, these big corporations were putting on the toga of healthy and viable entities and industrial leaders in their respective sectors. In the case of Enron, it was reported that the company kept huge debts off its balance sheets leading to the loss of $74 billion by the shareholders and thousands job lost. And this was a company which was reportedly named as “America’s Most Innovative Company 6 years in a row prior to the scandal. Same with the Lehman Brothers Scandal of 2008 where management hid over $50 billion in loans disguised as sales, the company was forced into the largest bankruptcy in U.S. history still because of the malfeasance of the executives and auditors of the company. Again, in 2007, just months before it went bankrupt, Lehman Brothers was ranked the number one Most Admired Securities Firm by Fortune Magazine.

In Nigeria, the situation is not any better as poor corporate governance practices still rear their ugly heads in the banking and financial sector even after the Central Bank of Nigeria (CBN) consolidation exercise. This poor corporate governance culture as evidenced in poor risk management, insider abuses by management, technical incompetence, Boardroom wars, false returns and concealment of information from the regulators and examiners, inadequate financial and audit control and other corporate infractions, is the bane of corporate failures and contributes to lack of investors’ confidence in Nigeria business environment. Recently the Executive Vice Chairman/CEO, Nigerian Communications Commission (NCC), Prof. Umar Garba Danbata, re-echoed this point when he blamed the failure of companies on weak or complete absence of corporate governance structures. Nigeria’s corporate space is not new to Corporate Governance prescriptions, the challenge has always been implementation and adherence to same. To start with, CAMA has made extensive provisions on duties of Directors of a company which if strictly adhered to will go a long way to institutionalize the culture of corporate governance amongst company Board members in Nigeria. Similarly, several sector regulators have put in place sectoral Codes of Corporate Governance as can be seen in CBN Code of Corporate Governance for financial institutions, and Securities and Exchange Commission (SEC) Code of Best Practices for Public Companies in Nigeria. It is not necessarily the multiplication of Codes that will do the magic but ensuring that the managers of our companies imbibe the values of honesty, integrity, selfless service, and adherence to the existing Codes of Corporate Governance. Relatedly, the sectoral regulators equally need to beam their searchlight on corporate managers and company auditors to ensure that they comply with necessary regulations put in place to boost strong corporate governance culture.

Lessons learnt

Despite the importance of corporate governance mechanism as highlighted above, the outcry that followed the introduction of the Code is enough pointer to the fact that adequate consultations and research were not done prior to its issuance. The writer has identified the following as some of the lessons to be learnt from the reported suspension.

1.          Need for more synergy amongst policy makers and the Stakeholders: Proper consultation is required prior to crafting of rules and regulations that regulate business conducts, more so in a highly complex and sophisticated sector as the Code tends to regulate. Research has shown any law or regulation that is observed in breach is largely attributed to the failure of the makers to carry out proper consultation or work in synergy with the relevant stakeholders prior to the making of such law or regulation. In this case, the outcry that greeted the issuance of the Code is a clear evidence of lack of consultation and collaboration between policy makers and stakeholders of the affected sectors. It behoves the rule makers to do proper consultations and fly a kite before coming up with such rules.

2.          Over Regulation kills Business: As noted earlier, it is not the multiplicity of regulations that we need but adherence to and implementation of the existing ones. As noted by one of the commentators, the FRCN overreached its powers in Sections 51(c) and 77 of the FRCN Act by issuing a Code which seeks to cover the entire spectrum of corporate governance in Nigeria without limiting itself to regulating accounting and financial reporting standards of companies. One would have expected the FRCN to focus on its core mandate of regulating the accounting and financial reporting standards of companies rather than biting more than it can chew.

3.  Conflict with the Ease of Doing Business Policy of the Federal Government: There is need for harmony in government policies to avoid conflicting situation as this as it has been rightly argued that the Code is in conflict with the much-touted Federal Government policy on Ease of doing business. The Doing Business Report is a survey conducted by the World Bank, which measures the burden imposed by regulation across 190 different countries in the world and looks at 10 sub-indicators which represent regulatory processes that a typical business will face over its life cycle such as starting business, enforcing contracts, getting credit, protecting minority investors, paying taxes, registering properties, getting construction permits, getting electricity, trading across borders and resolving insolvency. Nigeria has performed poorly in this regard and is currently not sitting well on the Index of Ease of Doing Business such that any policy that makes the operating environment more stringent will not augur well with Government policy in this regard. In other words, Nigeria has refused to rise a few rungs on the ratings and has been fluctuating in the ranking over the years. The country is currently ranked 169 out of 190 countries in the World Bank Ease of Doing Business Index for 2017 same position it was in 2016 Ranking. This however, is a one-point upward movement from Nigeria ranking of 170 in 2016 Report but a further decline from Nigeria’s ranking of 147 in 2014. It follows that stringent regulations imposed on business environment as this Code seeks to do, will not achieve the desired result in the area of Ease of Doing Business but will further contribute to a difficult operating environment for businesses.

4.  Need for conflict-check and more consultation with independent legal experts in formulating policy guidelines and regulations: The inherent conflict highlighted in the Code above is a clear evidence of lack of necessary due diligence and expert advice and scrutiny on the part of FRCN. The tendency amongst policy and rule makers in Nigeria is to rely on internal legal team who most of the times do not have the necessary legal skills and experiences. It is therefore advisable that policy and rule makers should engage professionals and external solicitor(s) who will conduct a proper legal due diligence and cross check their policies and regulations with existing laws to avoid clear conflict as this. It is a common place in Nigeria to see regulations, rules and Practice Directions that run contrary to the substantive laws or even superior rules. This writer had earlier raised these concerns over what appears to be a trend in Nigeria's rule making processes where the rule and regulation makers purport to act in ignorance of the existing laws with the attendant consequence of making rules or regulations that run contrary to the substantive or parent legislation or even another superior regulations. For instance, the Chief Judge of one of the Federal Courts issued a Practice Directions sometime in 2013 which provisions are clearly in conflict with the superior Rules of Court and that Practice Directions is currently being challenged in Court. This trend is equally seen even in most government parastatals and agencies where regulations are made which are clearly contrary to the provisions of the parent legislations establishing the Agencies or even entirely different statutes. The Code is undoubtedly a subsidiary legislation and is akin to a Practice Direction or Rules of Court often made by Heads of Courts in Nigeria which under normal circumstances should not contain provisions that are in conflict with Statutes made by Legislatures. And the law is fairly settled that where there is a conflict between a subsidiary legislation and a law made by State or Federal legislature, the latter prevails. Thus, our policy and regulation makers should be guided by the admonition of Niki Tobi JSC (as he then was) in the case of Buhari v. INEC (2009) All FWLR Pt 459 p.419 when His Lordship was confronted with a conflict situation similar to what is being discussed here and the learned jurist had this to say on the position of subsidiary legislation and practice directions in the hierarchy of our jurisprudence:

”Practice Directions have the force of law in the same way as rules of court. Rules of court include Practice Directions. Practice Directions will however, not have the force of law if they are in conflict with the Constitution or the statute which enables them. See Abubakar v. Yar’ Adua 2008 All FWLR pt404 1409. In the hierarchy of our jurisprudence, Practice Directions come last in terms of authority in the area of conflict. If there is a conflict between the Constitution and Practice Directions, the former will prevail. This is too obvious to be mentioned. If there is a conflict between an enabling statute and Practice Directions, the former will also prevail. This is also an obvious one. Perhaps the less obvious one is where there is a conflict between enabling rules of court and Practice Directions. In my view, even here, the enabling rules of court will prevail. This is because in certain cases, rules of court empower the head of court to make Practice Directions. And so in the event of any conflict, the authority of the mother who gave birth to the child (putting it on the lighter side) should be recognized first as the first and foremost authority”.

Similarly, the Supreme Court in the more recent case of NNPC v. FAMFA Oil (2012) LPELR-7812 (SC) (per Rhodes-Vivour JSC) has also pronounced on effect of conflict between subsidiary legislation and the principal Act when the apex Court held that the former must conform with and not derogate from the latter.

In conclusion, it is hoped that the Federal Government will do the necessary panel-beating and tinkering on the Code to align it with the existing laws as the Code cannot amend the provisions of statute made by the National Assembly notwithstanding the good intention of the makers. It is even difficult when it is realized that CAMA is a specific legislation and the Code which has wider application cannot derogate on specific provision of the CAMA or other sectoral legislation. The principle has always been that where there is a conflict between a general provision/legislation and a specific provision/legislation, the latter will prevail.[10] Perhaps the aftermath of this imbroglio will steer relevant agencies and institutions of government through the right part in their future rule making process. If a thing is worth doing, it’s worth doing well.


[1] Section 38.3 of the Code equally recognizes the power of sectoral regulator to issue sectoral supplementary guidelines on sector specific matters relating to corporate governance without prejudice to overriding provisions of this Code.

[2] Section 5.12 of the Code

[3] Section 246 (1) of CAMA

[4] Section 263(4) and (5) of CAMA

[5] 267(1) of CAMA. Section 267(3) also provides that where the Article of the Company has provided for the remuneration, it shall only be alterable by special resolution of members.

[6] Section 263(1) of CAMA provides that Directors may meet for the dispatch of business, adjourn and regulate their meetings as their deem fit provided that the first meeting of the directors shall be held not later than 6 months after the incorporation of the company. Section 263(8) of CAMA also provides for written resolution of directors which shall be as valid as if it has been passed at a physical meeting.

[7] Section 263(2) and (9) of CAMA

[8] Section 247 of CAMA

[9] Sections 19.2.2 and 19.2.3 of the Code

[10] ADEDAYO & ORS. v. PDP & ORS  (2013) LPELR-20342(SC)

Prince Ikechukwu Nwafuru
Prince is an associate at Paul Usoro & Co. Since joining the firm, he has worked in various complex matters with particular focus on Energy and Environment, Maritime, Banking, Solid Minerals, Election Petitions, white-collar crime and Communications, in most of which he has worked directly with the Firm's Senior Partner, Mr. Paul Usoro SAN.

Ed's Note - This article was originally published here