The future of corporate governance in Nigeria: an evolution from principles based to rules based approach.


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The subject of corporate governance in Nigeria received greater attention after the global financial crisis in 2008-2009. Corporate failures, particularly in the banking industry during the period revealed huge lapses in corporate governance in the affected organisations. Since then, there have been assiduous attempts to enhance corporate governance structures and practices in the country. Historically, corporate governance in the country did not enjoy any special attention other than the basic company law provisions that touch on the subject. The foremost corporate governance guideline was the corporate governance code for banks issued by the Bankers Committee in August, 2003 to guide banks and other financial institutions in the country. The need for the code was prompted by the financial crisis in the country in the nineties. However, the code was limited in scope being applicable to only a few corporate entities i.e. those in the banking and financial industry. Moreover, the code was not issued by a regulatory authority but by a self-regulatory voluntary association for banks and other financial institutions in the country and this limited the impact of the code[i].

Following the growing need for a formal recognition of the subject of corporate governance and provisions for effective corporate governance structure and practices, the SEC in 2003, issued the first corporate governance code in the country in its regulatory capacity which code applied to all public companies in the country. The code has been amended once, in 2011 to bring it in line with international best practices and present realities. Other regulatory bodies in the country that have issued corporate governance codes since 2003 to address peculiar industry issues not addressed by the SEC code of 2003 are the Central Bank of Nigeria (CBN), Pension Commission (PENCOM), Nigeria Deposit Insurance Corporation (NDIC) and Nigerian Communications Commission (NCC). The striking similarity of all the codes is the fact that they are all a set of principles that seek to guide the corporate entities within their various spheres of applicability and are merely persuasive in nature. The Nigerian corporate governance framework has been largely influenced by the United kingdom/Commonwealth principles based model.

 Principles-based vs. rules based corporate governance

 The principles based model of corporate governance essentially is one where provisions relating to corporate governance are persuasive in nature such that corporate organisations are encouraged to adopt the provisions. Compliance is therefore essentially voluntary with the sanctions being the exposure of corporate governance failings to the market by the regulators and ultimately, de-listing from the stock exchange. In the UK, this is approach to corporate governance is referred to as the ‘comply or explain’ model such that companies are required to explain where they cannot comply with the corporate governance codes. The role of the regulators here is to see that investors are well informed before making their investment decisions to the end that entities with poor corporate governance should naturally enjoy very low patronage in the market[ii].

 On the other hand the American rule based model is mandatory in nature and requires corporate entities to comply or face sanctions laid down by the laws relating to corporate governance[iii]. Corporate governance in the US received major attention after the colossal corporate failures of Enron, WorldCom as well as some other corporate failures and governance scandals that revealed huge lapses in the area of corporate governance. Consequently, the Sarbanes-Oxley Act of 2002 which was a product of recommendations for change by the New York Stock Exchange (NYSE) was enacted and has strengthened the emphasis on governance under penalty of law thereby making the regulators watchdogs to ensure and enforce compliance with the rules.

 The Nigerian SEC corporate governance code is closely modelled after the UK code. The responsibility for compliance with the provisions of the code is first, that of the Board of directors and then the shareholders who could demand compliance with the code. The determination as to whether or not the code has been complied with is at first instance the prerogative of the board followed by the shareholders and then the SEC. The problem with this approach is that the code has left a wide allowance for the board of directors to be umpires over their own activities. It is very unlikely that the same people who are usually at the forefront of infractions related to the governance of corporate entities would own up to their own failures or shortcomings.

 Moreover, where there is a breach of the code the only remedy provided is for the SEC to notify the affected company of the breach and actions needed to remedy same. This cannot be sufficient to deter breach of the code especially as there is no system of investor information by the SEC or publication of companies with lapses in corporate governance practices which would force companies to see that their corporate governance practices are up to standard. The code further requires companies to indicate their level of compliance with the code in their annual reports to the SEC. The question is who verifies what is written in such reports and how is this verification done? Corporate administration cannot be effective without checks and it is the shareholders of a company that can effectively check the excesses of the board of directors especially in the area of governance. However, even where this is done and report is made to the SEC, there is no provision to enforce compliance with the code. This leaves the code with a limited impact on the sphere of corporate governance in the country. Moreover, the code provides that in event of a conflict with any other corporate governance code, i.e. industry specific code, the code with stricter provision would prevail. This provision further watered down the impact of the SEC code which is wider in scope than any other corporate governance code.

 A snapshot of the future

 With the enactment of the Financial reporting Council (FRC) Act, 2011, the corporate governance directorate of the FRC has been vested with the authority to co-ordinate all matters relating to corporate governance in the country; develop principles and practices of corporate governance; promote the highest standards of corporate governance; promote public awareness about corporate governance principles and practices; issue the code of corporate governance and guidelines and develop a mechanism for the assessment of the code and guidelines among other functions. It is in line with this new enactment that the FRC has come up with a plan to produce a uniform national corporate governance code for the country by January, 2014. The new code would be a total departure from the previous model of principle based corporate governance hitherto in operation as it would provide stiff penalties for non-compliance. Thus when fully operational it would be safe to say that the corporate governance model in Nigeria has evolved from the original principles based approach to a rules based approach. It is expected that the new code, would enhance market performance and attract foreign investment into the country because it will raise the bar in terms of accountability and transparency. It is suggested that the committee should consider how effective monitoring and enforcement mechanisms would be put in place to ensure that errant corporate entities are sanctioned. Unless this is done, the effort would amount to an exercise in futility.

[i] A paradigm shift in Corporate Governance Regulation in Nigeria in 2013 available at last accessed 26th August, 2013

[ii] Bob Tricker, Corporate Governance; Principles, policies and practice Oxford University Press 2009 1st edition pp. 184-185

[iii] Id at pp. 183-184



2 thoughts on “The future of corporate governance in Nigeria: an evolution from principles based to rules based approach.

  1. Pingback: Nigerian Stock Exchange to introduce Corporate Governance Index for listed companies | Legally Yours

  2. Pingback: Sanction-backed corporate governance code for Banks and Discount Houses in Nigeria | Legally Yours

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