A review of the Financial Reporting Council’s Nigerian Code of Corporate Governance 2018

The Financial Reporting Council (FRC) has issued a draft of the Nigerian Code of Corporate Governance 2018. Times like this provide an opportunity to reflect on corporate governance and its regulation in Nigeria, given the history of corporate scandals despite the multiplicity in the existing regulatory framework. Indeed existing codes of conduct include those issued by the Nigerian Communications Commission; the Central Bank of Nigeria; the National Pension Commission; and the National Insurance Commission to regulate their different industry operators. Also, there is the Code of Corporate Governance for Public Companies in Nigeria 2011 issued by the Securities and Exchange Commission (SEC) (which replaced the 2003 SEC Code). One is therefore tempted to ask what the need for the new FRC code is, especially as there is research evidence that cast doubt on the success of existing regulations.

A 2016 research study published in the Journal of Business Ethics byOsemeke and Adegbite suggests the presence of conflict among the various codes, which contributes to reduced compliance by firms and ineffective enforceability by regulatory agencies, both impedinggood corporate governance in Nigeria. The authors note that while the problem of non-complianceis part of a wider problem of lax regulation, weakinstitutional framework and corruption in corporate Nigeria,the regulatory multiplicity and associated conflictfurther undermines enforcement, indicatingincoherence in notions of how to regulate corporategovernance and promote good behaviour. As the authors argued, the Financial Reporting Council should put together aframework to unify the existing codes into a singleapplicable code for the corporate sector.Is this what the FRC has done or does the draft 2018 FRC code simply adds to the existing multiplicity and superfluous complexity in regulation?

No doubt, the FRC code seeks to institutionalise the highest standards of corporate governance best practices in Nigerian companies, particularly among those companies that are not covered by sectoral regulations. However, the presence of sectoral codes continues to threaten the uniformity of good practices in Nigeria, as this could lead to differentiations within the corporate governance sphere, with consequent implementation and coordination problems for the industries/companies and their regulators. This is worsened by the code’s aim to induce voluntary compliance with the highest ethical standards; with the increasing multiplicity of codes, it is questionablewhether such approach to implementation can be achieved, after all.Alternatively, one can argue thatby retaining the sectoralcodes alongside the FRC code, it is expected that flexibility – the ability to apply the Code in a wide range of circumstances – and scalability – the ability to apply to companies of differing sizes, will be achieved.

In addition, the code will be based on the ‘apply and explain’ basis. This is to ensure that all principles are applied, without exceptions. This approach rather than the typical ‘comply or explain’ approach should prevent deliberate non-compliance by companies.As envisioned in the code, this mode of implementation will also assist in preventing a ‘box-ticking’ exercise by ensuring companies deliberately consider how they have (or have not) achieved the intended outcomes. In this vein, it is expected to promote a better quality in compliance, as companies can apply the principles in their own way, taking into account their contextual realities and circumstances, rather than merely following guidelines to comply which is usually the case with the comply or explain based codes.For example, the UK Financial Reporting Council published her Corporate Governance Code recently in July 2018. The revised Code recognizes that it needs to ensure that it is not operated as a rigid set of rules but encourages flexible and appropriate application.

While the code is still based on a ‘comply or explain’ approach, companies should avoid box-ticking but rather seek to justify non-compliance where necessary. Clearly, the Nigerian code appears to be in line with international developments in corporate governance monitoring and regulation, which will enable Nigerian firms to gain better integration with global financial markets, including obtaining listing statuses on international stock exchange markets.

The ‘apply and explain’ approach also assumes application of all principles. This 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 principles. This basis of implementation may be burdensome for some companies, especially small and medium-size companies, in justifying the recommendations of the code. These SMEs might also incur a disproportionately high cost in engaging the level of corporate governance expertise and mechanisms required, in this respect. Also, even though the provided transition period of on or before January 1, 2020, may provide a useful timeframeandneeded opportunity for gradual, rather than a sudden change or adoption for large firms, this grace period may not be enough for SMEs, who may be new to corporate governance compliance.

The code also requires the boards of companies to promote stakeholders’ interest alongside shareholders’ interests. This is important, given the incessant menaces of a singular focus on shareholder value maximisation by firms. Notwithstanding the stakeholder mention, the emphasis of the code in relation to the role of the board has to do with their duties to shareholders, in the main. Indeed, no principle of the code explicitly provides for stakeholders of the respective companies. The establishment of the principle on business conduct and ethics (principle 24) and Sustainability (principle 21), demonstrates a conscious effort to promote awareness not only with respect to good governance but also around business sustainability, an increasingly topical issue that corporate governance regulatory systems across the world must seek to address. The code also states that the board should be composed of ‘an appropriate mix of Executive, Non-executive and Independent Non-executive members such that majority of the Board are Non-executive Directors.’

The use of the word ‘appropriate’ might leave room for discretionary judgement by management, which may pose problems of comparability with regards to levels of compliance. The distinction between Non-executive directors and Independent directors in the code is also rather ambiguous.However, the inclusion of the corporate governance evaluation process should promote a regular review of board activities and facilitate shareholder engagement. In sum, the draft code has some merits and areas that could be improved. The foregoing has highlighted some of these areas which should be considered in revising the code, even though the situation in Nigeria may not be a matter of “lack of codes/regulations”, but that of the institutional capacity and the will to ensure enforcement, otherwise the FRC Code will simply be another costlyaddition to the existing regulatory infrastructure.

Emmanuel Adegbite

Prof. Adegbite is Professor of Accounting and Corporate Governance at the University of Nottingham, UK, and a Visiting Professor of Governance and Management at James Cook University, Singapore.