3/12/2019 CORPORATE

GOVERNANCE
NOTE
JUNE 2019 DIET

COMPILED BY FRANCIS OLAWALE. FCIS

 LECTURE 3
INTERNATIONAL HISTORY OF CORPORATE GOVERNANCE.

CORPORATE GOVERNANCE IN THE UK.

CADBURY CODE – 1992

A code issued by a committee of representatives of major financial market institutions chaired by Sir
Adrian Cadbury.

AIM

To help raise standards of corporate governance and confidence in financial reporting and auditing
by setting out what it sees as the respective responsibilities of those involved and what it believed
was expected of them.

MAJOR PROVISION OF THE CODE

1. Board of Directors
 It was appropriate for directors to retain their “essential powers” as directors of the
company but should be properly accountable to the shareholders for the way they
used the powers.
 Control over the company should be exercised by the board as a whole. There
should be no domination by a single individual
 To exercise its authority collectively, the board should meet regularly.
 It should monitor the performance of the executive management.
 Some decisions must be taken by the board and not delegated to management.
 There should be formal schedule of matters reserved for the board.
 Where directors need professional advice, he should obtain such at company’s
expense.
 There should clear division of responsibilities at the top of the company.
2. Non-executive directors
 Although not all need to be, most of the NEDs should be independent
 Independent NEDs should bring judgment and experience to the board.
 NEDs should be selected through a formal process.
 Initial interviews should be conducted by a nomination committee
 NEDs should be appointed for a fixed term and re-appointment should not be
automatic.
3. Executive directors- service contracts &remuneration
 Executive directors shall not exceed 3years without shareholders’ approval
 There should be disclosure about EDs remuneration in annual report.
 Remuneration should be decided by a remuneration committee.

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 4. Accounts
 Audit committee is a key board committee
 The relationship between the board and the external auditor should be through the
audit committee rather than through working relationship between the auditor and
management.
 The audit committee should review interim and annual financial statements before
submission to the board.

GREENBURY REPORT (1995)

The committee was chaired by Richard Greenbury.

AIM

To look into the issue of remuneration of executives at a time there was high occurrences of “fat
cow” benefits accruing to the executives of companies.

PROVISIONS/RECOMMENDATIONS

1. Directors’ remuneration and service contracts

 Remuneration committee should decide the remuneration of EDs
 The committee should contain entirely NEDs
 Maximum notice period for termination of contract should be 12 months
 Executive pay should not be excessive
 Performance related elements of remuneration should create a link between the
interest of directors with those of shareholders
 Share options granted to directors should not be issued at discount
 Share options should be granted to directors in phased amounts over time rather
than in single large awards.
 Firms should not compensate directors terminated for unsatisfactory performance.
2. Disclosures about remuneration
 Annual report should disclose for each named director, elements of remuneration –
salaries, annual bonuses, deferred bonuses, compensation for loss of office.
 Explanation should be provided whenever element of remuneration other than basic
salary is pensionable.
 There should be disclosure whenever there is a notice in excess of 12months in
service contracts
 Detailed disclosures should be checked by external directors.
3. Remuneration committee report
 All bonus scheme shall depend on satisfactory criteria
 Report on scheme should be made in annual report and account on directors’
remuneration policy
 Statement on company’s policy for granting share options and other long term
incentive scheme.

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HAMPEL REPORT (1998)

AIM.

To continue the review of corporate governance practices following reports. It suggested that all
recommendations be integrated into a single code, combined code 1998. It also aimed to restrict
regulatory burdens on companies and recommended principles rather than detailed regulations
which it regarded as “box ticking”.

PROVISIONS.

1. The Directors
 A company should be headed by an effective board, which should lead and control
the company.
 Two key roles: running the board and running the day to day affairs of the company
should be kept separate.
 A company should show this is carried out if performed by one person.
 There should be balance on the board between EDs and NEDs. No individual or
group should dominate the board.
 New appointments to board should be through a transparent and formal procedure.
Nomination committee should be involved.
 The board should be supplied with timely information to discharge duties.
2. Director’s remuneration
 Remuneration committee should have the responsibility for setting the pay of EDs,
no ED should be involved in setting his own pay.
 The committee should develop a policy on remuneration and devise a reasonable
package for individual director.
 Remuneration for director should be sufficient to attract and retain good people
 Element of remuneration should be structured such that rewards are linked to
individual and company performance.
 The code saw no need for remuneration policy to be approved by shareholders.
3. Shareholders
 Shareholders should be able to vote separately on issues, no “bundling”
 There should be more dialogue and communication between the company and its
shareholders
 Shareholders should be expected to make greater contributions
 Institutional investors should adopt “considered policy” on voting their shares.
 Dialogue between the company and its institutional investors should be based on
mutual understanding of objectives.
 Institutional investors should evaluate corporate governance disclosures by a
company and give due weight to all relevant factor drawn to their attention.
 Companies should use their AGM to communicate with private shareholders and
encourage participation.

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 4. Accountability and Audit
 Financial report should present a balanced and understandable assessment of
company’s position and prospect.
 Board should put in place formal and transparent arrangement for monitoring
suitable relationship with external auditors.
 Auditors should report independently to shareholders.

TURNBULL REPORT (1999)

AIM

I. To reflect sound business practice whereby internal control is embedded in the business
processes by which a company pursues its objectives.
II. Remain relevant overtime in the continually evolving business environment
III. Enable each company to apply it in a manner which takes account of its particular
circumstances.

The Turnbull report was produced by a working party of the Institute of Chartered Accountants in
England and Wales to give additional guidance to listed companies how to implement provisions of
the combined code with regard to internal control.

By making directors responsible for risk management and internal control generally, the combined
code recognizes that the objectives of the company are not simply to maximize returns to
shareholders expect their investment to be protected against unnecessary risk. Companies need to
be aware of how much risk they can handle. Risk management is therefore concerned with
developing the business as well as preventing disaster.

The turn bull guidelines are notable because:

 They require the board of directors to look forward and not just consider past performance
 They encourage companies to keep their shareholders informed about risks
 They require directors to think strategically, and to be aware that the company must
continually adapt to its changing environment.
 Risks should be reviewed regularly
 The risk control procedure should evolve as the business and its environment change.

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HIGGS REPORT (2003)

AIM

 To develop guidelines for making NEDs more effective

 To ensure roles are understood
 To ensure NEDs are suitably knowledgeable or experienced, understand the company and its
affairs sufficiently well. Have sufficient time for their duties and are given opportunity to
contribute to board decision making.

RECOMMENDATIONS

The Board

 The board should be collectively responsible for promoting success of the company by
leading and directing the company affairs.
 Annual report should provide information about how frequently board and committees have
met and individual’s attendance.
 At least half of the board excluding the chairman should be independent.

Chairman

 The role of the chairman is pivotal in creating conditions suitable for effective board and
getting effective contribution from each individual director.
 Roles of the chairman and CEO should be separate.
 CEO should not become the chairman of the same company
 On appointment, the chairman should be independent.

Non-executive Directors

 Prior to appointment, NEDs should carry out due diligence on board and the company to
satisfy themselves
 There should be a Senior Independent Director.
 The task of searching for new directors and recommending new appointment should be
delegated to nomination committee
 NEDs should be taken through induction on appointment
 Company secretary should be accountable to the board as a whole
 On appointment, NEDs should give an undertaking that they will have sufficient time to carry
out their duties.
 NEDs should be allowed take a part of their directors’ fees as a director in the form of
shares.

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THE SMITH REPORT (2003)

AIM

To give guidance to company boards on how to make suitable arrangements for their audit
committees, and individual audit committee members on how to fulfill their role and
responsibilities.

RECOMMENDATION

Establishment and role of audit committee

 The board should establish an audit committee of at least three or in case of smaller
companies two, members.
 The committee should monitor the integrity of the financial statements of the company and
any formal announcement relating to the company’s financial performance reviewing
significant financial reporting judgments contained in them.
 To preview the company’s internal financial controls and unless expressly addressed by a
separate board risk committee composed of independent directors or by the board itself,
the company’s internal control and risk management systems.
 To monitor effectiveness of the company’s internal control
 To make recommendation to the board for it to put to the shareholders for their approval in
general meeting in relation to appointment of external auditor and to approve remuneration
and terms of engagement of the external auditor.
 To review and monitor the external auditor’s independence and objectivity and
effectiveness of the audit process.
 To develop and implement policy on the engagement of the external auditor to supply non-
audit services.

Membership and appointment

 All members must be independent NEDs

 The chairman of the company should not be an audit committee member
 Appointments should be for a period of up to three years.

Other areas where the report made recommendations include:

I. Meetings of the audit committee

II. Remuneration
III. Skills, experience and training
IV. Relationship with the board
V. Role and responsibilities
VI. Internal control and risk management
VII. Whistleblowing e. t.c.

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2003 COMBINED CODE

Following the Higgs responsibility for the combined code was given to FRC, who published a revised
version in July 2003. Many of the Higgs report and Smith report recommendations were written into
the revised code. It was divided into two sections, one for companies and the other for institutional
investors. The section for companies was subdivided into four areas of corporate governance.

 Directors (covering such issues as the board and its responsibilities, the chairman and the
CEO, board balance, appointment to the board)
 Directors’ remuneration
 Accountability and audit
 Relations with shareholders

There were also three schedules which provided:

 Provisions on the design of performance related remuneration

 Guidance on the liability of NEDs
 A summary of corporate governance disclosure requirements.

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THE UK CORPORATE GOVERNANCE CODE. (2010), 2014

The main Principles are:

1. Leadership
 Every company must be headed by an effective board which is collectively
responsible for the long-term success of the company.
 There should be a clear division of responsibilities at the head of the company
between the running of the board and the executive responsibility for the running of
the company’s business. No one individual should have unfettered powers of
decision
 The chairman is responsible for leadership of the board and ensuring its
effectiveness on all aspects of its role.
 As part of their role as members of a unitary board, non-executive directors should
constructively challenge and help develop proposals on strategy.
2. Effectiveness
 The board and its committee should have appropriate balance of skills; experience,
independence and knowledge of the company to enable them discharge their duties
effectively.
 There should be a formal, rigorous and transparent procedure for the appointment
of new directors to the board.
 All directors should be able to allocate sufficient time to the company to discharge
their duties effectively
 All directors should receive induction on joining the board and should regularly
update and refresh their skills and knowledge
 The board should be supplied in a timely manner with information in a form and of a
quality appropriate to enable it discharge its duties.
 The board should undertake a formal and rigorous annual evaluation of its own
performance and that of its committee and individual directors.
 All directors should be submitted for re-election at regular intervals, subject to
continued satisfactory performance.
3. Accountability
 The board should present a balanced and understandable assessment of the
company’s position and prospects.
 The board is responsible for determining the nature and extent of the significant risk
it is willing to take in achieving its strategic objectives. The board should maintain
sound risk management and internal control systems
 The board should establish formal and transparent arrangements for considering
how they should apply the corporate reporting and risk management and internal
control principles and for maintaining an appropriate relationship with the
company’s auditor.

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 4. Remuneration
 Levels of remuneration should be sufficient to attract, retain and motivate directors
of the quality required to run the company successfully, but a company should avoid
paying more than is necessary. A significant proportion of the executive director’s
remuneration should be structured so as to link rewards to corporate and individual
performance.
 There should be a formal and transparent procedure for developing policy on
executive remuneration and for fixing the remuneration packages to individual
directors. No director should be involved in deciding his or her own remuneration.
5. Relations with shareholders.
 There should be dialogue with shareholders based on the mutual understanding of
objectives.
 The board as a whole has responsibility for ensuring that a satisfactory dialogue with
shareholders takes place.
 The board should use the AGM to communicate with investors and to encourage
their participation.

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CORPORATE GOVERNANNCE IN THE US
There have been major developments in corporate governance regulations in the US since the spate
of corporate scandals in 2001 and early 2002, starting with Enron. In the US, the emphasis has been
on statutory regulation as against voluntary compliance with code and application of principle
adopted in Europe. The Sarbanes –Oxley Act was promulgated.

The Sarbanes –Oxley Act 2002.

It came into force in the US at the end of August 2002. The act itself contains specific requirements
and it also directs the Securities and Exchange Commission to issue rules implementing its measures
relating corporate governance. The SEC in turn required ensuring the US stock exchange to apply
suitable rules for corporation whose shares are traded on the exchange.

REQUIREMENTS OF SOX.

CEO/CFO Certifications (section 302)

It requires that all companies with a listing in the US must provide in annual or quarterly reports of
the company a signed certificate to the SEC vouching for the accuracy of the company’s financial
statements. The certificates must be signed by the principal executive officer or the principal
financial officer who are therefore required to take direct responsibility for the accuracy for their
financial statements.

The assessment of Internal controls (section 404)

Section 404 of SOX requires companies to include in their annual report, a report on “internal
control over financial reporting”. This report should set out:

 A statement of management’s responsibility for establishing and maintaining adequate

internal controls over the company’s financial reporting.
 A statement identifying the framework used by management for evaluating the efficiency
and effectiveness of the internal control over financial reporting.
 An assessment by management of the effectiveness of the internal control over financial
reporting as at the end of the most recent fiscal year.( and material weakness in internal
control)
 Disclosure of any material weakness in the company’s internal control over financial
reporting that management has identified.
 A statement that external has issued an attestation report on management assessment of
the company’s internal control over financial reporting.


Loans to executives.

 It is unlawful for any public company to loan money to directors and executive officers, or to
modify or renew existing loans. (section 402)

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Forfeiture of bonuses.

 The CEO and CFO must give up previous bonuses in the past twelve months, including equity
or incentive compensation awards, if their company’s accounts are restated due to material
non-compliance with accounting rules and standards (s.304)

Dealing in shares

 Dealing in a company’s shares by “insiders” must be reported within two business days.
(s.403).
 All notifications of beneficial ownership must be filed electronically, and either posted on or
linked to the company’s web site.
 Insiders are not allowed to trade in shares of the company during “blackout periods”
imposed on any retirement or pension fund (section 306).

Increased disclosures.

 The company must disclose in its financial reports filed with SEC the material facts and
circumstances of its off-balance sheet transactions, and their material effects.
 There should be accuracy and completeness of pro-forma financial information appearing in
financial reports.
 Material changes should be disclosed on a “rapid and current “basis.

Audit committee

 Every member of the audit committee should be independent of the company

 The audit committee must have responsibility for the appointment and compensation of the
external auditors and for oversight of their work.
 The committee must establish procedures for whistleblowers who raise concerns about
questionable accounting or auditing matters.

Auditors and the audit.

Restrictions have been placed on the types of non-audit work that can be carried out by the audit
firm for a client company. (s. 201 and 202). Prohibited services include:

 Book keeping services and other services related to the accounting records or financial
statement of the company
 The design and implementation of financial information system
 Actuarial services
 Valuation services
 Internal auditing
 Legal services
 Management functions
 Broker/dealer or investment advice services.

Protection for whistleblowers

 The act prohibits termination of employment of whistleblowers and prohibits forms of

retaliation.

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Fraud and document shredding

 Severe criminal penalties have been introduced for executives involved in financial fraud and
document shredding, which can also lead to a prison of up to 25 years.

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CORPORATE GOVERNANCE IN SOUTH AFRICA.
THE KINGS REPORTS.

The King committee issued its first report was first issued in November 1994. That was later
superseded by the second King Report (King II) which was published by the Southern African
Institute of Directors and came into force in March 2002.

The main features are:

The Board of Directors.

The King Report states its belief that a unitary board structure is appropriate for companies in South
Africa, with a mix of executive and non-executive directors.

Board Responsibilities.

The board should be responsible for the exercise of power and authority, and is accountable for the
performance and affairs of the company.

 The board should provide strategic direction and retain full and effective control, at the
same time complying with laws and regulations.
 The board should delegate certain powers to management but retain powers over material
issues to itself. A charter should be prepared.
 The board should have access to company information and should agree a procedure for
enabling directors to obtain independent professional advice
 The board is responsible for risk management and should identify and monitor key risk and
key performance areas
 The board should encourage shareholders to attend general meetings
 The board should determine a balance between governance constraints and entrepreneurial
performance.

Balance of powers.

There should be a suitable balance of executive and non-executive directors on the board, but with
non-executives making up a majority. Sufficient non executives should be independent. There should
be a nomination committee whose responsibility is to select new directors in a transparent manner.
The report defines independent director as a non-executive director who:

 Does not represent a major shareholder

 Has not been employed by the company in the past three years
 Is not a professional adviser
 Is not a significant supplier, does not have a significant contractual relationship with it or
does not have any business or other relationship with the company that could affect his or
her independence.

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Board meetings and committees

 The board should meet at least once every three months.

 Non-executive directors should have access to management without any executive directors
being present.
 Committees of the board should have written terms of reference, and there should be
transparency and full disclosure of committee matters.
 A board committee possibly the nomination committee should out a review at least once a
year of effectiveness of the board itself.
 The company should have rules prohibiting the directors from trading in its shares between
the end of its financial year and the publication of its annual results.

Remuneration of Directors

 The remuneration of directors should be sufficient to attract and retain quality directors.
 Details of the remuneration of directors should be included in the annual report.
 The grant of share options o NEDs is permissible but should be subject to approval of
shareholders normally at AGM.

Risk Management

 The board should authorize an internal audit charter and internal audit work plan should be
approved by the audit committee.

Sustainability Reporting.

Matters requiring attention include:

 Issues relating to safety and occupational health objectives, including those for HIV/AIDS
 Environmental reporting and following the business options with least damaging effect on
the environment
 Social investment policies, including black economic empowerment.
 Human capital development including training and also opportunities for women and the
previously disadvantaged.

Accounting and external auditing.

 The external auditors should be independent of the company and its management.
 The audit committee should establish a principle for the use of external auditors for non-
audit services.
 There should be a disclosure to shareholders of the non-audit services that the auditors have
provided.
 There should be an audit committee majority of whose members should be NEDs.

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Relations with shareholders.

The board has a responsibility to report to shareholders on significant and relevant matters. Reports
should be transparent, objective and comprehensive, and should reflect accountability.

KING REPORT AND THE COMPANY SECRETARY

Some particular functions of the Company Secretary were suggested:

 Providing directors individually and collectively with detailed guidance on carrying out their
responsibilities.
 Having a role in the induction of new and relatively inexperienced directors
 Assisting the chairman or CEO in deciding matters of an administrative nature, such as how
board plan should be determined.
 Giving advice to the board on matters of good governance and business ethics.

HISTORY CORPORATE GOVERNANCE IN NIGERIA

1. SEC Code of Corporate Governance issued in 2003 by Atedo Peterside committee.

But was repealed.
2. CBN code of Corporate Governance issued in 2006 after consolidation and change in
capital requirement for banks
3. Code of Corporate Governance for Licensed Pension Fund Operators issued in 2008
4. NAICOM Code of Corporate Governance for Insurance Industry issued in 2009
5. SEC Code of Corporate Governance for Public Companies in Nigeria issued in 2011 to
replace the repealed one
6. CBN code of Corporate Governance for Banks and Discount houses in Nigeria issued
in 2014 to replace the 2006 code
7. NCC Code of Corporate Governance issued in 2014
8. Code of Corporate Governance for the Telecommunication Industry issued by the
NCC in 2016 to replace the 2014 code.
9. National code of Corporate Governance issued in 2017 but suspended
10. National Code of Corporate Governance 2018, issued in January 2019.

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National Code of Corporate Governance 2018 – PRINCIPLES AT A GLANCE

1. Principle 1 – Role of the Board

2. Principle 2- Board Structure and Composition
3. Principle 3- Chairman
4. Principle 4- Managing Director / Chief Executive Officer
5. Principle 5- Executive Directors
6. Principle 6- Non-Executive Directors
7. Principle 7- Independent Non -Executive Directors
8. Principle 8- Company Secretary
9. Principle 9 – Access to independent Advice
10. Principle 10 – Meetings of the Board
11. Principle 11 – Board Committees
12. Principle 12 – Appointment to the Board
13. Principle 13 – Induction and Continuing Education
14. Principle 14 – Board Evaluation
15. Principle 15 – Corporate Governance Evaluation
16. Principle 16 – Remuneration Governance
17. Principle 17 – Risk Management
18. Principle 18 – Internal Audit Function
19. Principle 19 – Whistle blowing
20. Principle 20 – External Auditors
21. Principle 21 – General Meetings
22. Principle 22 – Shareholder Engagement
23. Principle 23 – Protection of shareholder rights
24. Principle 24 – Business Conduct and Ethics
25. Principle 25 – Ethical Culture
26. Principle 26 – Sustainability
27. Principle 27 – Stakeholder Communication
28. Principle 28 – Disclosures.

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