SOURCES OF CORPORATE GOVERNANCE RULES AND PRACTICES
Primary sources of law, regulation and practice
What are the primary sources of law, regulation and practice relating to corporate governance? Is it mandatory for listed companies to comply with listing rules or do they apply on a ‘comply or explain’ basis?
The main sources of law relating to corporate governance are the: • Companies and Allied Matters Act (CAMA);
- Investment and Securities Act (ISA);
- Financial Reporting Council of Nigeria Act (FRCA);
- Banks and Other Financial Institutions Act;
- Central Bank of Nigeria Code of Corporate Governance for Banks and Discount Houses in Nigeria (the CBN Code);
- Insurance Act;
- National Insurance Commission Act (the NAICOM Act); • Financial Reporting Council of Nigeria Code of Corporate Governance; • CBN Code of Corporate Governance for Microfinance Banks in Nigeria;
- CBN Code of Corporate Governance for Development Finance Institutions in Nigeria;
- CBN Code of Corporate Governance for Finance Companies in Nigeria;
- NAICOM Code of Corporate Governance for the Insurance Industry in Nigeria;
- Code of Corporate Governance for Licensed Pension Operators; • Rule Book of the Nigerian Stock Exchange;
- Securities and Exchange Commission Code of Corporate Governance in Nigeria (the SEC Code);
- SEC Rules and Regulations;
- SEC Code of Conduct for Shareholders’ Associations (SCCSA); and • Nigerian Communications Commission Code of Corporate Governance for telecommunication companies.
The articles of a company should determine whether share holders have pre-emptive rights to acquire newly issued shares. Where the articles do not provide for these rights, none can be said to exist. The articles of private companies usually provide for pre emptive rights.
Restrictions on the transfer of fully paid shares
13 Are restrictions on the transfer of fully paid shares permitted and, if so, what restrictions are commonly adopted?
The transfer of shares of a private company is subject to restric tions as specified in its articles of association. Restrictions commonly employed include provisions on pre-emptive rights. The right of pre emption gives the other shareholders the first option to buy any shares a shareholder wishes to sell or transfer. Other restrictions employed are clauses in a company’s articles giving the board of directors and, in some cases, the shareholders discretion to refuse to approve or register a transfer of shares to persons or entities of whom they do not approve.
Public companies are expressly precluded from restricting the transfer of fully paid shares.
Compulsory repurchase rules
14 Are compulsory share repurchases allowed? Can they be made mandatory in certain circumstances?
There are certain situations in which a company may repurchase its shares. These are where the company does so to settle a debt or claim against the company, to eliminate fractional shares, where the company has entered into an agreement to purchase shares from an officer or employee of the company or to satisfy the claims of a dissenting shareholder, or in compliance with a court order in the course of an arrangement or compromise. The Companies and Allied Matters Act (CAMA) provides that an agreement with a company providing for the acquisition by a company of its shares is specifically enforceable against the company to the extent that the company can perform the agreement without breaching the provision of CAMA on repurchase of shares. Any public company seeking to repurchase its own shares is also required to obtain the approval of the Securities and Exchange Commission (SEC) and comply with the SEC Rules and Regulations.
Where the shares are to be repurchased by the company, the shares may only be repurchased using profits that would have been otherwise distributed as dividends or the proceeds from a fresh issue of shares made specifically for the purpose of the purchase of these shares.
Further, redeemable shares shall not be purchased at a price greater than the lowest price at which they are redeemable.
15 Do shareholders have appraisal rights?
The ISA provides that where the approval of 90 per cent of the share holders has been obtained, the shares of the dissenting shareholders (those who have not approved a scheme of merger, takeover or acquisition) may be acquired, with notice, at the value agreed by the consenting shareholders except where the dissenting shareholders apply to court to have those terms varied. Aggrieved shareholders may petition the court to make an order compelling the company to buy them out at a price to be determined by the court.
RESPONSIBILITIES OF THE BOARD (SUPERVISORY)
16 Is the predominant board structure for listed companies best categorised as one-tier or two-tier?
The board structure for listed companies can best be described as one-tier, comprising both executive and non-executive directors.
Board’s legal responsibilities
17 What are the board’s primary legal responsibilities?
The board’s legal responsibilities include directing and managing the affairs of the company, securing its assets, performing its duties in the interest of the company and furthering the purposes for which the company was formed.
18 Whom does the board represent and to whom do directors owe legal duties?
The board represents the company and owes its duties primarily to the company. The board is to perform its duties in the interest of the company and all its shareholders as a whole, and not in the interest of a specific shareholder or a section of the shareholders. The board is also to take into consideration the interests of the employees in general in performing its duties. However, the interests of the company must always come first, regardless of whether the actions of the board may adversely affect a shareholder.
Enforcement action against directors
19 Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed? Is there a business judgement rule?
The directors owe their duty to the company. The company can bring an action against a director to enforce any duty imposed by law or contract. A shareholder may bring an action to prevent or redress a breach of duty by the directors.
A shareholder may also, with the leave of court, bring a derivative action on behalf of the company where the wrongdoers are directors who are in control and, thus, will not redress the wrong done to the company. A shareholder may also apply for relief from the court on the grounds that the affairs of the company are being conducted in an unfairly prejudicial and oppressive manner.
Care and prudence
20 Do the duties of directors include a care or prudence element?
The directors of a company owe a duty of care and skill to the company and are to exercise the degree of care and skill that a reasonably prudent director would exercise in comparable circumstances. A director is required to exercise the powers and duties of his or her office honestly, in good faith and in the best interests of the company.
Board member duties
21 To what extent do the duties of individual members of the board differ?
The same standard of care in relation to the duties of a director is expected of all members of the board, including executive and non executive directors. The relationship is a fiduciary one, and directors
are trustees of the company’s assets and are bound to exercise their powers in the interest of the company.
However, there may be additional contractual liabilities and bene fits for executive directors under the principles of ‘master and servant’ where there is a contract to that effect.
Delegation of board responsibilities
22 To what extent can the board delegate responsibilities to management, a board committee or board members, or other persons?
The board is empowered, subject to any specific provisions in the arti cles to the contrary, to delegate any or all of its powers to a managing director or to committees made up of members of the board. The managing director or committee shall, in exercising the responsibili ties delegated to them, conform to any directions or regulations of the board. However, this delegation should not be done in such a way that it amounts to an abdication of duty. Even after delegating its powers, the overall responsibility of
directing and managing the affairs of the company still ultimately lies with the board.
Non-executive and independent directors
23 Is there a minimum number of ‘non-executive’ or ‘independent’ directors required by law, regulation or listing requirement? If so, what is the definition of ‘non-executive’ and ‘independent’ directors and how do their responsibilities differ from executive directors?
The Securities and Exchange Commission Code of Corporate Governance in Nigeria (the SEC Code) recommends that there be at least five members of the board, with a mix of both executive and non executive directors. The Central Bank of Nigeria Code of Corporate Governance for Banks and Discount Houses in Nigeria (the CBN Code) and the SEC Code provide that the number of non-executive directors on the board should exceed the number of executive directors. The CBN Code provides that for banks, at least two of the non-executive direc
tors should be independent directors, and for discount houses, at least one of the non-executive directors should be an independent director. The SEC Code provides for a minimum of one independent director.
The SEC Code describes an independent director as a non-exec utive director who:
- is not a substantial shareholder of the company; that is, one whose shareholding, directly or indirectly, does not exceed 0.1 per cent of the company’s paid-up capital;
- is not a representative of a shareholder that has the ability to control or significantly influence management;
- has not been employed by the company or the group of which it currently forms part, or has not served in any executive capacity in the company or the group for the preceding three financial years;
- is not a member of the immediate family of an individual who is, or has been in any of the past three financial years, employed by the company or the group in an executive capacity;
- is not a professional adviser to the company or group, other than in the capacity of a director;
- is not a significant supplier to or customer of the company or group; • has no significant contractual relationship with the company or group and is free from any business or other relationship that could materially interfere with his or her capacity to act in an independent manner; and
- is not a partner or an executive of the company’s audit firm, internal audit firm, legal or other consulting firm that has material association with the company and has not been a partner or an
executive of any such firm for the three financial years preceding his or her appointment.
The Code of Corporate Governance for Licensed Pension Operators (the PENCOM Code) describes an independent director as one who has no relationship with the company, its related companies or officers that could interfere, or be reasonably perceived to interfere, with the exer
cise of his or her independent business judgement. The NAICOM Code of Corporate Governance for the Insurance Industry in Nigeria (the NAICOM Code) provides that the board of insurance companies should have a minimum of seven and a maximum of 15 members and that the maximum number of executive directors should not exceed 40 per cent of the members of the board. The PENCOM Code provides that the number of non-executive members (excluding the chair) of the board shall equate to the number of executive directors. The NAICOM Code and the PENCOM Code each provide for a minimum of one independent director. The CBN Code of Corporate Governance for Microfinance Banks (MFBs) in Nigeria, the CBN Code of Corporate Governance for Development Finance Institutions (DFIs) in Nigeria and the CBN Code of Corporate Governance for Finance Companies (FCs) in Nigeria (the CBN Codes for MFBs, DFIs and FCs) and the Financial Reporting Council of Nigeria Code of Corporate Governance (the FRCN Code) also provide that the number of non-executive directors on the board should exceed the number of executive directors.
Non-executive directors are those whose roles are strictly super visory and who do not participate in the day-to-day running of affairs of the company but are, nevertheless, important members of any board in the sense that they play a key role in the transparency, integrity and credibility of the board. An independent director, on the other hand, serves the function of bringing an objective, unbiased perspective to the board in carrying out its functions.
Board size and composition
24 How is the size of the board determined? Are there minimum and maximum numbers of seats on the board? Who is authorised to make appointments to fill vacancies on the board or newly created directorships? Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?
Generally, persons of unsound mind, persons under the age of 18, persons previously convicted of fraud or breach of duty in connection with the promotion, formation or management of a company and insol vent persons are statutorily disqualified from being directors. There are criteria that must be met to be a director in a company, and any person who is or proposes to be a director of a company must meet these criteria. A company may, by its articles, require directors to hold a specified number of shares. Failure of a director of such a company to obtain the share qualification within two months of his or her appoint
ment will result in the person vacating his or her office until he or she obtains the shareholding qualification. The PENCOM Code provides that a director of a pension fund administrator (PFA) must not be a director, an employee, a principal officer or shareholder in a pension fund custo
dian (PFC) with which the PFA conducts business.
Managing directors and key management operating in certain industries may be required by the regulations and guidelines governing those industries to have specific qualifications. The SEC Code permits public companies to have a governance or remuneration committee whose function is to establish the criteria for board and board committee membership and to periodically evaluate the skills, knowl
edge and experience required on the board. The CBN Code prescribes that members of the board shall be qualified persons of proven integrity
and be knowledgeable in business and financial matters, in accordance with the extant CBN Assessment Criteria for Approved Persons’ Regime for Financial Institutions. This is the same position in the CBN Codes for MFBs, DFIs and FCs. The NAICOM Code emphasises competence and integrity.
There is no restriction on the nationality of directors.
Non-Nigerian citizens are permitted to be directors. Aside from the Financial Reporting Council of Nigeria (FRCN) and Nigerian Communications Commission Code of Corporate Governance for telecommunication companies (the NCC Code), there are no gender requirements in the composition of boards.
A person over 70 years of age who is or is to be appointed as a director in a public company is required to disclose his or her age to the members of the company in a general meeting and failure to do so amounts to an offence under the Companies and Allied Matters Act (CAMA). Special notice of the resolution approving or appointing such a director must be given by the company to its members, disclosing the age of the director. An appointee to the board of a public company is also expected to disclose his or her membership of boards of other compa nies to enable the shareholders to give full consideration to his or her other obligations and commitments in determining his or her suitability to be a board member.
CAMA requires every company to have a minimum of two directors at all times but does not provide for the maximum number of direc tors a company may have. CAMA provides, however, that the number of directors shall be determined in writing by the subscribers of the memorandum of association or a majority of them with the power of the shareholders at a general meeting to increase or reduce the board. The laws and regulations governing particular industries may also set the minimum and maximum number of board seats. The CBN Code prescribes a minimum and maximum board size of five and 20 direc
tors respectively. The SEC Code prescribes a minimum of five directors while directing that the board of a company be of a sufficient size rela tive to the scale and complexity of the operations of the company. The NAICOM Code prescribes a minimum of seven and a maximum of 15 board members for insurance companies. The PENCOM Code prescribes that the board of a company shall not exceed a size that will allow it to employ simple and effective methods of work to enable each director to feel a personal responsibility and commitment to the company, and the board is to take into account the scope and nature of the operations of the company.
The NCC Code requires the composition of a board to include a mix of skills, diversity, experience and gender. The number of directors should reflect the scale, size, complexity and reach of the business of the company, and the skills and resource requirements of the company have to be taken into consideration. A majority of the board should be non-executive directors, with at least one independent director holding not more than 0.1 (the FRCN Code prescribes 0.01) per cent of the shareholding directly or indirectly in the company. One-third of the non-executive directors are also required to retire yearly by rota tion subject to reappointment, and for larger companies, non-executive directors should not remain on the board for a continuous period in excess of 15 years.
The CBN Code for MFBs requires that the boards of MFBs must have a minimum of five and maximum of seven members for unit MFBs; a minimum of five and maximum of nine members for state MFBs; and a minimum of seven and maximum of 12 members for national MFBs. The Code prescribes that the managing director or CEO shall be the only executive director of a unit MFB. The board of MFBs shall consist of a minimum of one independent non-executive director (INED) for unit MFBs and state MFBs and two for national MFBs. However, a state MFB with a board size of more than seven members shall be required to have a minimum of two INEDs. The CBN Code of Corporate Governance
for Development Finance Institutions in Nigeria (the CBN Code for DFIs) requires that the board of a DFI have a minimum of seven and a maximum of 11 members or be in accordance with the law establishing the institution. The CBN Code for DFIs requires that the board of any FC be limited to a minimum of five and a maximum of nine members.
All the CBN Codes for MFBs, DFIs and FCs provide that not more than two members of a family can be on the board at the same time. The expression ‘family’ includes a director’s spouse, parents, children, siblings, cousins, uncles, aunts, nephews, nieces and in-laws. All three Codes also provide that the board must be constituted in such a way that the number of non-executive directors exceeds the number of exec
The FRCN Code does not provide for a minimum or maximum number of directors. It merely recommends that the board should be of a sufficient size to effectively undertake and fulfil its business; to oversee, monitor, direct and control the company’s activities; and to be relative to the scale and complexity of its operations.
Vacancies on the board may be filled by the shareholders of a company in a general meeting. The board of directors of a company is also empowered to appoint new directors to fill casual vacancies created by death, resignation, retirement or removal of a director. These appointments are, however, subject to ratification by the shareholders at the next general meeting.
25 Is there any law, regulation, listing requirement or practice that requires the separation of the functions of board chair and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the
The SEC Code recommends that the board of a company should not be dominated by any one person, and the positions of chair and CEO should be separate and be held by different individuals. In addition, the chair of the board should be a non-executive director to ensure the effective operation of the board. While the role of the CEO is to see to the day-to-day running and management of the company, the chair’s role is to provide overall leadership, direction and supervision of the board. The separation of the roles of board chair and CEO is considered best practice.
The CBN Code and the NAICOM Code make it mandatory that no one person shall hold or combine the office of chair of the board and that of CEO or managing director. The CBN Code further provides that no executive vice chair shall be recognised in the board structure. The PENCOM Code, the FRCN Code and the NCC Code also require the posi
tion of the chair of the board and the CEO to be occupied by two separate individuals. The CBN Codes for MFBs, DFIs and FCs maintain the same position as the CBN Code.
26 What board committees are mandatory? What board committees are allowed? Are there mandatory requirements for committee composition?
Every public company is required to set up an audit committee consisting of an equal number of directors’ and shareholders’ representatives up to a maximum of six members. Members of an audit committee are not entitled to remuneration and are subject to re-election annually. The functions of the audit committee include:
- ascertaining whether the accounting and reporting policies of the company are in accordance with legal requirements and agreed ethical practices;
- reviewing the scope and planning of audit requirements;
- reviewing the findings on management matters in conjunction with the external auditor and departmental responses thereon; • keeping under review the effectiveness of the company’s system of accounting and control;
- making recommendations to the board regarding the appoint ment, removal and remuneration of the external auditors of the company; and
- authorising the internal auditor to carry out investigations into any activities of the company that may be of interest or concern to the committee.
Directors’ and officers’ liability insurance is permitted. It is not common practice for companies to take out this insurance, though some compa nies, in keeping with international best practices, take out liability insurance for their directors and officers.
Indemnification of directors and officers
34 Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?
Companies are permitted to indemnify their directors and officers for liabilities incurred in their capacities as directors and officers of the company, except in cases of negligence, fraud or breach of trust in rela tion to the company.
Advancement of expenses to directors and officers 35 To what extent may companies advance expenses to directors and officers in connection with litigation or other proceedings against them or in which they will be a witness?
There are no specific provisions or statutory or regulatory restric tions on advancing expenses to directors or officers of a company in connection with litigation or similar proceedings where they are witnesses. The Companies and Allied Matters Act permits companies to pay directors all expenses incurred in connection with the business of a company. Therefore, arrangements for the payment of these expenses may be made contractually or be part of the policy of a company.
Exculpation of directors and officers
36 To what extent may companies or shareholders preclude or limit the liability of directors and officers?
A company may ratify the act of an officer or director even where such an act or conduct is irregular. The company may also, by its articles (or by the director’s contracts of service), limit the liability of a director except in cases of negligence, fraud or breach of trust of which a director or officer may be guilty in relation to the company.
Further, a company may also provide that the liability of a director must be unlimited, regardless of the fact that the company itself is a limited liability company, provided that the director is given notice before he or she takes up the appointment that his or her liability shall be unlimited. The company may also, by special resolution, amend its memo
randum so as to render the liability of its directors or managers unlimited. DISCLOSURE AND TRANSPARENCY
Corporate charter and by-laws
37 Are the corporate charter and by-laws of companies publicly available? If so, where?
The memorandum and articles of association and other statutory filings of companies are available to the public at the Corporate Affairs Commission. Copies can be obtained upon application and are subject to the payment of prescribed fees.
38 What information must companies publicly disclose? How often must disclosure be made?
The annual reports and accounts consisting of the directors’ report, audi tor’s report and financial statements are to be filed with the Corporate Affairs Commission after every annual general meeting of a company. These documents can be accessed by the general public upon payment of the requisite fee. Other information filed with the Corporate Affairs Commission, which is available to the public, includes any changes in the composition of the board of directors, return of allotment of shares, change of registered address, charges on the company’s assets, appoint
ment of receivers, appointment of liquidators, etc. Outside the statutory requirements, companies are encouraged to also include corporate governance reports laying out the company’s governance structure, poli cies and practices in their annual reports.
Quoted companies are required to make certain disclosures to the Nigerian Stock Exchange and the Securities and Exchange Commission from time to time. These disclosures include:
- information on acquisitions of other companies or businesses; • preliminary results for any year, half-year or quarter and compara tive figures in respect of the profits before and after taxation, even if this calls for qualification that these figures are provisional or subject to audit;
- information on any proposed changes in the capital structure of the company or redemption of securities;
- financial statements; and
- interim reports, such as first quarter, half-year and nine-month accounts.
In addition, the annual reports must disclose, among other things, the directors’ direct and indirect holdings in the issued shares, substan tial shareholdings representing 5 per cent or more of issued shares and a five-year financial summary. The Central Bank of Nigeria Code of Corporate Governance for Banks and Discount Houses in Nigeria and the Securities and Exchange Commission Code of Corporate Governance in
Nigeria also require the board to disclose its risk management policy in its annual report. The Financial Reporting Council of Nigeria Code of Corporate Governance also prescribes the inclusion of a statement on a company’s environmental, social and governance activities in its corpo
rate governance report.
39 Do shareholders have the ability to nominate directors and have them included in shareholder meeting materials that are prepared and distributed at the company’s expense?
Shareholders can nominate a director to be appointed to the board at the general meeting. The law states that a motion for nomination will be treated as a motion for his or her appointment.
A member may leave at the registered address of a company a signed notice in writing of his or her intention to propose a person for election to the office of a director in place of a retiring director at a general meeting. The notice must be given not less than three days or more than 21 days before the date appointed
for the meeting and must be accompa
nied by a notice in writing signed by that person of his or her willingness to be elected.
One or more members representing not less than 5 per cent of the total voting rights of members entitled to vote at a general meeting or 100 or more members holding shares on which there has been paid up an average sum per member of at least 500 naira, may requisition the company to circulate notice of a resolution they intend to be moved at a general meeting. The proposed resolution can suggest the appointment of a new director. The company has a duty to give notice of the resolution to members entitled to receive notice of the next annual general meeting when the resolution is intended to be moved. The notice of the resolu tion shall be given in the same manner and, so far as practicable, at the same time as notice of the meeting; where not practicable, notice shall be given soon thereafter. The company is, however, not bound to give notice of any requisition unless a duly signed copy is deposited at the regis
tered address of the company, and a sum is deposited or tendered that is reasonably sufficient to meet the company’s expenses in giving effect to it. The company may also decide to bear the expenses of circulating notice of the proposed resolution.
40 Do companies engage with shareholders? If so, who typically participates in the company’s engagement efforts and when does engagement typically occur?
The process of engaging with the shareholders is typically led by the directors and senior management of the company. Generally, compa nies engage with their shareholders through holding general meetings. It is usual for directors, senior management, external counsel, auditors and other specialists or consultants engaged in relation to matters to be discussed or decided during a general meeting of the company to be involved in these engagements. Some quoted companies also organise pre-annual general meeting forums or dinners for directors, manage
ment, investors and major customers, etc, to interact.
The Securities and Exchange Commission Code of Corporate Governance in Nigeria (the SEC Code) provides that the general meetings of the company should be the primary avenue for meeting and interac tion between the shareholders, management and board of a company. It further requires that general meetings should be conducted in an open manner allowing for free discussions on all issues on the agenda such that sufficient time is allocated to shareholders to participate fully and contribute effectively at the meetings.
The NAICOM Code of Corporate Governance for the Insurance
Industry in Nigeria provides that directors should always communicate
information that is understandable and accessible to shareholders in
a timely manner and on a regular basis and encourage shareholders
to participate in annual general meetings. Under the Central Bank of
Nigeria Code of Corporate Governance for Banks and Discount Houses
in Nigeria (the CBN Code), banks are encouraged to communicate with
their shareholders via their website. Information to be provided through this means shall include major developments in the bank, risk manage ment practices, executive compensation, local and offshore branch expansion, establishment of investment in subsidiaries and associates, board and top management appointments, and sustainability initiatives and practices.
The CBN Code of Corporate Governance for Microfinance Banks in Nigeria, the CBN Code of Corporate Governance for Development Finance Institutions in Nigeria, the CBN Code of Corporate Governance for Finance Companies in Nigeria are in tandem with the position under the CBN Code. These codes, however, add that the operators are encour
aged to communicate with shareholders via the website, newsletters, annual general meetings and extraordinary general meetings. The Financial Reporting Council of Nigeria Code of Corporate Governance (the FRCN Code) provides that the board should develop a policy that ensures appropriate engagement with shareholders. The policy should be posted on the company website.
The Nigerian Communications Commission Code of Corporate Governance for telecommunication companies provides that there should be dialogue and engagement between the board and the share holders to align appreciation and attain the mutual understanding of the corporate objectives of telecoms companies.
41 Are companies required to provide disclosure with respect to corporate social responsibility matters?
While some of the codes encourage corporate social responsibility, they do not all have specific disclosure requirements. The SEC Code requires companies to pay attention to the interests of its employees, host community, consumers and the general public. It further requires that companies demonstrate sensitivity to local social and cultural diversity issues. The SEC Code mandates that the board report annually on the nature and extent of its social, ethical, safety, health and environmental policies and practices, including the application of options with the most benefit or least damage to the environment, opportunities created for physically challenged persons or disadvantaged individuals, the nature and extent of the company’s social investment policy, and the company’s policies on corruption and related issues. The CBN Code requires that banks demonstrate a good sense of corporate social responsibility to their customers, employees, host communities and the general public and encourages banks to make robust disclosures beyond the statutory requirements of the Companies and Allied Matters Act and the Banks and Other Financial Institutions Act.
The FRCN Code requires highlights of sustainability policies and programmes covering social issues, such as corruption, community service (including environmental protection, serious diseases and matters of general environmental), social and governance initiatives, to be included in the corporate governance report in the company’s annual report.