March 24, 2011 by ABIMBOLA AKEREDOLU AND ADEOLA OWOADE
Undoubtedly, the management and administration of the activities of corporate bodies occupy a central theme in the development of the economy of any Nation. Consequently, the rules and norms of corporate governance are therefore important components of the framework for successful market economies and are fundamental prerequisites for national advancement. This cannot be otherwise in view of the predominant roles that companies play in the industrial growth of any civilized society.
Noteworthy it is that the principal statute in Nigeria regulating the corporate sector, the Companies and Allied Matters Act, Cap. C 20, Laws of the Federation, 2004 (“CAMA”) clearly provides statutory guidelines regulating the management of companies and other related matters. However, it is apparent that such statutory provisions can never be said to be exhaustive of the legal framework to regulate the management of the affairs of companies, thus justifying the essential need for an all supplementary code in line with global best practices.
Consequent upon the above background and in a bid to improve corporate governance in Nigeria, the Securities and Exchange Commission (SEC), in pursuance of its regulatory and supervisory role over the securities of public companies in Nigeria vested in it by Section 13 of the Investment and Securities Act, 2007, inaugurated a National Committee in September, 2008 to review the 2003 Code of Corporate Governance for Public Companies. The objective was to identify and address the weaknesses in the 2003 Code with a view to improving the mechanism for the enforceability of the Code and recommend ways of effecting greater compliance. This review gave birth to the Code of Corporate Governance, 2011 billed to come into effect on the 1st day of April, 2011.
The Reforms introduced by the Code on the Status and Duties of Directors
It is incontrovertible that the directors of a company are the essential fulcrum upon which the management of companies rest. The roles, duties and importance of Company Directors cannot be over- emphasized. The legal sage, Lord Denning captured it graphically when he stated in Bolton (Engineering) Co. Ltd V. Graham & Sons (1957) 1 Q.B. 159 thus:
“A company may in many ways be likened to a human body. It has a brain and nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than the hands to do the work and cannot be said to represent the mind or will. Others are Directors and managers who represent the directing mind and will of the company and control what it does…”
Similarly, Farewell, L.J restating the position of the law on the status of company directors in Salmon v. Quin & Axtens Ltd (1909) 1 Ch. 311 @ 319, declared thus:
“This court decided not long since that even a resolution of a numerical majority at a general meeting of the company cannot impose its will upon the directors when the articles have confided to them the control of the company’s affairs.”
The above classic expositions of the law lords clearly espoused the overriding significance of the status of Directors in a company. In a similar vein, if the powerful dicta of Viscount Haldane L.C in Lennands Carrying Co. V. Assiatic Petroleum Ltd (1915) A.C 705 @ 713-714 as well as that of Lord Reid in Tesco Supermarkets Ltd. V Nattras (1972) A.C 153 that the directors represent the “directing mind and will” of a company are absolutely true, then we must appreciate the fact that corporate reforms and a review of the Corporate Governance Code must necessarily begin with the directors.
The Code of Corporate Governance, 2011 clearly appreciates the above background when it begins in its Part B with - “The Board of Directors”, immediately after the “Application of the code” contained in Part A thereof. The code redefines the duties and responsibilities of the Board of Directors of a company. It further affirms the duties of accountability of the Board, emphatically stipulating that the principal objective of the Board is to ensure that the company is properly managed and that the primary responsibility for ensuring good corporate governance in companies lies with the Board. This accords with the common law requirements of the board and the statutory provisions contained in CAMA. The duties of the board according to the Code ranges from formulation of policies, oversight functions and management of the company, risk management, succession planning, training and remuneration, effective communications system, integrity of financial controls and reports in respect of maintenance of ethical standards, integrity and compliance with laws.
In terms of composition and structure, the Code made some slight amendments to the 2003 Code. Thus, unlike the 2003 Code which puts the maximum number of members of the Board at fifteen (15), the 2011 Code is silent on the maximum number. This, in our opinion is appropriate as it is illogical to restrict the number of the Board members without considering what the size and complexity of the affairs of a particular company may otherwise require. Hence, the Code addressed this issue perfectly in paragraph 4.1 thus:
“The Board should be of a sufficient size relative to the scale and complexity of the company’s operations and be composed in such a way as to ensure diversity of experience without compromising independence, compatibility, integrity and availability of members to attend meetings”
The minimum number of the Board members which the Code puts at five (5) is a significant improvement to the statutory minimum of two (2) contained in the provision of Section 246 of CAMA. To this end, it is imperative for companies to incorporate this provision into their Articles of Association.
The Code further provides that the Board should comprise a mix of executive and non executive directors and that the non executive directors should be in the majority. Indubitably, the rationale behind this wise provision is to ensure a check on the activities of the executive directors by the non executive directors. In proposing a model structure for the Board, the Code stipulates that there should be at least, one independent director in the Board. These provisions, if fully complied with and incorporated in the Articles of companies would ensure a high level of transparency, integrity and productivity in the management of the affairs of companies by the board of directors.
Officers of the Board
The Code introduces a water tight separation of the powers, personalities, functions and duties of the Chairman of the Board and that of the Managing Director or the Chief Executive Officer of public companies, whose securities are listed on the Stock Exchange. The Code recommended that the Chairman should in no way be involved in the day-to-day running of the affairs of the company as that is within the exclusive province of the Chief Executive Officer (CEO) and the management team. The basis for this stipulation is the necessity to inculcate checks and balances in corporate governance and the need to obliterate every form of centralization of powers. We are in alignment with this provision and feel strongly that there should be a clear division of responsibilities at the top echelon of the company – the working of the Board and the executive responsibility of the company’s business. This, we believe, should not be restricted to public companies with listed securities alone as the Code dictates but should also apply to all other companies in Nigeria. This will ensure a balance of power and authority, such that no one individual represents a considerable concentration of power.
The Chairman and the Chief Executive Officer (“CEO”) should in principle be separate persons, to ensure an appropriate balance of power, increased accountability and greater capacity of the Board for independent decision making. The division of responsibilities between the Chairman and CEO should be clearly established, set out in writing and agreed by the Board. In addition, companies should disclose the relationship between the Chairman and CEO where they are related to each other. The Code further reiterates the traditional roles and duties of the Chairman and the Managing Director.
Executive and Non-Executive Directors
The Code further attempts to clear the nebula and obscurity surrounding the duties and relationship between the Executive and Non-Executive Directors of a company. It clearly spells out the working relationship between the two, while outlining the distinction between them. This is a welcome development as it tends to clarify a confusion which may otherwise arise from a shallow interpretation of the Supreme Court’s sound reasoning in Longe V. First Bank of Nigeria Plc (2010) 6 NWLR (Pt 1189) 1 that executive and non-executive directors are both directors under the law as CAMA has not made a distinction between them.
The Code recommends that executive directors should be persons knowledgeable in relevant areas of the company’s activities. They should not be involved in the determination of their remuneration and should not be entitled to sitting allowances or other directors’ fees paid to non executive directors. On the other hand, non executive directors are to be provided with a conducive environment for the effective discharge of their duties and must be given adequate and comprehensive information on all board matters in a timely manner.
One significant provision in the Code is the proposal that every public company should have at least one independent director on its Board. The Independent director is defined as a non-executive director who is neither a substantial shareholder, a representative of a controlling shareholder, an employee of the company, member of the immediate family of an individual in the employment of a company, a professional advisor to the company, a significant supplier or customer of the company nor a partner or an executive of the company’s statutory audit firm. Put differently, the independent director must have no significant affiliation directly or indirectly with the company as to impair or pervert his ability to make independent judgments. This is a sound rule aimed at ensuring good corporate governance as there would be a member on the Board who has no principal business interest other than that of ensuring good management and development.
In line with the provision of section 281 of CAMA, multiple and concurrent directorships was preserved in the Code. However, this is not without certain qualifications and restrictions. The Code provides that concurrent service on too many boards of different companies may interfere with the discharge of a director’s responsibility and that this factor should be taken into consideration. There is also the duty of disclosure on the part of a prospective nominee who is serving on the Board of another company. The Board then has a duty to consider whether the other directorship held by such a prospective nominee can affect the discharge of his duties and responsibilities. Quite categorically, the Code provides that directors should not be members of boards of other companies in the same industry. This is to avoid a conflict of interest, breach of confidentiality and a misappropriation of corporate opportunity. We confirm that this provision conforms with corporate global standards.
Family and Interlocking Directorships
One of the noticeable novel provisions in the Code is that relating to family and interlocking directorship. The Code, being one designed specifically for public companies, provides that not more than two members of the same family should sit on the Board of a public company at the same time and cross memberships on the board of two or more companies should be discouraged. This rule has been premised on the need to allow for objectivity and independence of the Board of directors. However, the Code in its paragraph 37 (Interpretation section) inadvertently fails to define the meaning of “family”, thereby subjecting the word to possible indiscriminate and hazy interpretations. We are therefore left in doubt as to the precise degree of consanguinity that would come within the purview of “family” as prescribed by the Code.
The Code further proposed the establishment of some board committees for public companies. It provides that the Board may in addition to the Audit committee required by CAMA, establish Governance / Remuneration Committee and Risk Management Committee or such other committees as the board may deem appropriate depending on the size, needs or industry requirements of the company. The Risk Management Committee is to assist the board of directors in its oversight of the risk profile, risk management framework and the risk reward strategy determined by the board.
The Governance / Remuneration Committee on the other hand, is a committee designed to ensure good governance system in the running of the affairs of the company by directors through the establishment of criteria for board and board committees membership as well as the periodic evaluation of the skills, knowledge and experience required on the board. The committee is also responsible for making recommendations on compensation structure for executive directors. With the various functions of these committees outlined in the Code, we are of the firm view that the driving wheels of good corporate governance would be perfectly lubricated if the proposal for the establishment of these committees is implemented by public companies.
The Code adopted international best practice on the holding of board meetings. The CAMA merely provides for the holding of board meetings and not more. Consequently, it is only the first board meeting that is statutorily required to be held within the first six (6) months of incorporation pursuant to Section 263 (1) of CAMA. Hence, the directors may decide not to hold meetings for a long period of time while keeping some members of the board in the dark as to the affairs of the company. This practice has obviously been given a befitting burial by the provision of the Code which states that the board should meet at least once every quarter. This seems to be in tune with best global practice as the board, among other things, would be able to consider and approve quarterly reports and forecasts of the company. More importantly, this would ensure that the non-executive directors remain well updated and abreast of the developments and affairs of the company.
Notably, the Code prescribes that every director should attend at least two – thirds of all board meetings and that such attendance shall be a criterion for the re- nomination of a director. The only qualification to this, being instances where there are cogent reasons for non fulfillment of this requirement and in which case the board must notify the shareholders at the general meeting. This rule is designed to prevent the continued existence of dormant directors who are merely interested in the profit of a company but less interested in its governance and management.
Paragraph 13 of the Code seems to supplement the provisions of sections 247, 248 and 249 of CAMA by filling in the fine details which hitherto were not contained in the statute. The Code makes recommendations on matters relating to appointment to the Board. It stipulates that the board should develop a written, clearly defined, formal and transparent procedure for appointment to the Board of directors. It also makes provisions for the criteria for the selection of directors while emphasizing that a section of the company’s annual report should state the processes used in relation to the appointment of all directors to the board. There is no gainsaying that this provision would ultimately promote competence and credibility of company boards.
Under common law, the directors of a company, unless otherwise provided by the Articles, are not ordinarily entitled to remuneration. (See Moriarty V Regent’s Garage Co. Ltd (1921) 1 KB 423, Exp. Beckwith (1898) 1 Ch. 324 and Nell V Atlanta etc mines (1895) 11 T.L.R. 407). This rule has been incorporated into section 267 (4) of CAMA. In essence, directors of a company would only become entitled to remuneration when same has been agreed upon by the company, in which case it becomes payable from the fund of the company. The Code improved on this and made a slight adjustment to this rule. It provides that companies should develop a comprehensive policy on remuneration for directors and senior management and that such remuneration should be sufficient to attract, motivate and retain skilled and qualified persons needed to run a company successfully. In our view, this provision has not changed the law on directors’ remuneration as it stood under common law and as it is under CAMA, rather, it has modified the law to reflect the true intention of the rule. In other words, while the Code advocates good remuneration system for directors as a form of motivation for good corporate governance, it makes provisions for the regulation of the remuneration policy by stating for instance that compensation for non-executive directors should be fixed by the board and approved by the shareholders in general meeting and that only non-executive directors should be involved in decisions regarding the remuneration of executive directors. This is in accordance with common sense as the work of directors should not be seen as a mere gratuitous exercise.
In order to ensure transparency and accountability in corporate governance, the Code established a performance evaluation system for the board. It proposes that the board should establish a system to undertake a formal and rigorous annual evaluation of the board’s performance, the committees and the individual directors. This may be done by engaging the services of external consultants and the cumulative result of the performance evaluation of the board and individual directors should be used in determining eligibility for re- election.
CONFLICT OF INTEREST
Another important matter which the Code also considered to be paramount is the issue of director’s conflict of interest. Section 280 (1) of CAMA provides that:
“The personal interest of a director shall not conflict with any of his duties as a director under this Act”
The Code provides that companies should adopt a policy to guide the board and individual directors on conflict of interest situations. It also laid down the rule of disclosure, pursuant to which directors are required to declare to the board, any real or potential interest they may have in any matter which may affect the company. It also stipulates that directors having real or apparent conflict of interest should apart from disclosing, refrain from participating in voting or discussions on matters, which are the subject matter of such conflict. In deciding whether there is a conflict situation, the board may decide on same by simple majority.
As a Code designed essentially for public companies, it did not gloss over the issue of insider trading by directors. The Code unequivocally restated the prohibition of insider dealing under Section 111 of the Investment and Securities Act, 2007 (“ISA”). The Code provides that the directors of public companies and their immediate families (which include spouse, son, daughter, mother or father) in possession of price sensitive information or other confidential information are prohibited from dealing in securities of the company where same would amount to insider trading under ISA.
TENURE AND RE-ELECTION OF DIRECTORS
The Code further provides for tenure and re- election of directors. It provides that all directors should be submitted for re- election at regular intervals of at least once every three years. It is doubtful if this provision has added anything useful to the provisions of Section 259 of CAMA. In fact, a clinical interpretation of this provision of the Code may imply a contradiction of the said Section 259 of CAMA. The section provides:
“unless the articles otherwise provides, at the annual general meeting of the company, all the directors shall retire from office, and at the annual general meeting in every subsequent year one-third of the directors shall retire for the time being, or if their number is not three or a multiple of three, then the number nearest one-third shall retire”
We are of the opinion that this statutory provision has adequately taken care of the issue of the tenure and re- election of directors. The attempt by the Code to introduce a converse rule which does not even seem to be in agreement with logic is an unwelcome one. The whole of Section 259 of CAMA has established sound principles for tenure, rotation and re-election of company directors. The Code ought to improve on these sound principles and not merely introduce a strange principle patently unknown to our corporate law through the backdoor. Indeed, the intention of the Review Committee by introducing this three (3) years rule of re-election is not quite clear.
While we believe that the emergence of the Code of Corporate Governance would herald the advent of a new era in the administration and management of our corporate sector, we have certain apprehensions about its effective implementation. This is because the Code as stated itself is “…not intended as a rigid set of rules. It is expected to be viewed and understood as a guide to facilitate sound corporate practices and behaviour. The Code should be seen as a dynamic document defining minimum standards of corporate governance expected particularly of public companies with listed securities.” We are of the opinion that the Code should have laid certain measures for the enforcement of the rules contained therein and some sanctions ought to have been prescribed for the gross violation of the rules. This would have taken the need for compliance beyond the voluntary.
One important issue worthy of mention at this stage is the process for the enactment of the Code. The Code has been enacted by the Securities and Exchange Commission (SEC). This is a radical departure from what obtained in the enactment of the 2003 Code of Corporate Governance. While we confirm the ability of the SEC to issue such code as being designed particularly for public companies, we express the view that the Code ought to have been jointly enacted by the Corporate Affairs Commission (CAC) and SEC as was the case for the 2003 Code. The reason for CAC’s exclusion in the present case is unknown and perhaps out of the province, purview and purport of this review, but it suffices to say that such collaboration would have given more efficacies to this Code. More importantly, the application of the Code would have extended fully to cover private companies as well, while its implementation would have also been more strategic.
All said and done, the Code of Corporate Governance is a useful development of our corporate management system. It will invigorate the corporate sector and yield a geometric progression in the economy of the nation. Without a doubt, the new code is a harbinger of several reforms in our corporate industry.
Abimbola Akeredolu (Mrs.) (Partner) and Adeola Owoade (Associate)
BANWO & IGHODALO