Corporate governance is necessary to curb the powers of the founders. These individuals take up top executive roles and also the chairmanship of companies. They may also partake in activities that are not in the best interest of the company and its shareholders. As a result, stock market companies and capital market operators are expected to comply with the corporate governance code.
In Nigeria, the FRCN is responsible for establishing a code of corporate governance (CG). However, with the changes to the Investment and Security Act 2025, the SEC (Securities and Exchange Commission) is also responsible for providing the code of CG for companies listed in the Nigerian stock exchange market, as well as other operators in the capital market. Below, we explain the reasons why a corporate governance code is important.
Executive remuneration
Executive directors are responsible for the daily activities of the entity. They oversee senior management and other supervisors. And ensures the smooth running of the company. Therefore, issues arise about their pay. Should it be salary payments? Or a mixture of fixed and variable pay? Should their pay be tied to the business growth?
Board composition, balance, and diversity
Another reason for a corporate governance code is the board members' composition, balance, and diversity. Where there is no guidance on board composition, the company's management will decide it themselves and might be partial in doing so. Or may not have investors at heart while setting board composition, balance, and diversity.
However, a code ensures that the board of directors is made up of executive directors and non-executive directors (NED). FRCN (Financial Reporting Council of Nigeria) encourages that the NED should be made up of independent directors, and there should be a senior independent director to checkmate the chairman's actions.
The role and responsibilities of the board of directors
There should be matters reserved for the board of directors. Things like setting the company's policies, approval of material projects, and so on should be reserved for the board members. The Code of CG allows company directors to decide on their roles and responsibilities. But also set a limit to the extent to which the directors can be involved in the daily business activities.
For banks, in many cases, the central bank has an influence on what the roles and responsibilities of the board should be and might place a restriction on them. For example, recently, the Central Bank of Nigeria released a circular to stop directors from receiving bonuses and paying dividends till all loans relating to regulatory forbearance are cleared. Also, some years back, the apex bank set out minimum requirements for the composition of board members and board committees for banks, as well as the number of years a chairman and CEOs can be in office.
Financial and narrative reporting
The code of corporate governance ensures that the board is responsible for the financial reporting of the entity to stakeholders, including investors and the government. In addition, narrative reporting is encouraged. Here, the board is expected to comply with certain narrative reporting to explain the reason for not doing so.
Risk and internal control
One of the core responsibilities of the board is internal control and risk management. Where they fail to establish proper risk management and controls in key areas of the business, it can lead to pure risks and other speculative risks that might lead to business failures. Therefore, codes of corporate governance are in place to ensure that the board takes responsibility for these areas.
Cybersecurity
The use of the internet in business has resulted in cybersecurity risks. The board of directors is thereby positioned to ensure that the company has a good IT infrastructure in place that can prevent or reduce the impact of cyber threats.
Sustainability issues
Environmental, Social, and Governance (ESG) has become an important aspect of business reporting over the last decade. Companies are now expected to report their environmental footprint in developing countries. There are also global institutions that are championing the drive for such reporting.
Recently, the IFRS Foundation has set up a separate board to handle sustainability issues to enable accountants and auditors to manage the process and reporting. The International Sustainability Standard Board (ISSB) has published two standards in this regard, and more IFRS sustainability standards will be established from time to time.
The board is responsible for matters relating to ESG. They decide if the company's business activities affect the environment and how to minimize their environmental footprint in the community in which they operate.
7. Shareholders activism
The opposite is shareholders' detachment. That is when shareholders' rights are ignored. The main shareholders' right is to vote. In many cases, shareholders might give the chairman their rights to vote in general and extraordinary meetings. As a result, when there are decisions that might affect them negatively, they may not be able to use these rights to their advantage. The code of corporate governance ensures that their rights are protected.
In Nigeria, stock market companies are mandated to publish any board meetings and allow local and foreign shareholders to fully participate either by themselves or by proxies.
Conclusion
In final words, regulators have to set up a code of corporate governance to protect investors and prevent the company's failure. In some cases, the goal might be to protect customers. Therefore, regulators ensure that the above areas of CG issues are monitored closely to ensure the independent and good corporate practices in the boardroom.
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