Financial Reporting Council’s new draft code: In whose interest?

The Financial Reporting Council of Nigeria (FRCN) on April 15, 2015 posted the Draft National Code of Corporate Governance in its website and called on industry stakeholders to review the draft code and send in their comments before May 14, 2015. The draft code was posted in three volumes, dealing with public companies, private companies and not-for-profit organizations.

Many things seem not to be right about this draft code. First is the unilateral way the draft code was produced. Contrary to global practices, FRCN drafted the code with no engagement whatsoever with industry operators and practitioners. It even produced the document with little or no consideration of fellow statutory regulators who already have similar regulations in existence. Such a draft anywhere in the world would have been a product of wide consultations and robust engagement of relevant stakeholders in the industry.

The second is the haste with which FRCN is going about the proposed regulation. FRCN posted the draft code on its website and gave industry operators and practitioners and other relevant stakeholders only one month to post their comments. Given the short period allowed for comments for a document proposing such major changes, one can only suspect that FRCN seeks to rush the issuance of the new code of corporate governance before May 29, 2015.

Again, this haste might not be unconnected with FRCN’s bid to prevent a robust consideration of the document due to the so many inconsistencies the draft code has that the FRC does not want stakeholders to identify and effectively challenge.

Another aspect of the draft code that is injurious to the financial reporting practice in Nigeria is the immediate take-off of the code when it is finally adopted by the council. An important document of this nature with its far-reaching implications should have given industry operators, practitioners and reporting entities some trying-out period to organize themselves and not be by immediate effect.

Let us take the issue of mandatory firm rotation. This code requires reporting entities to, as a matter of rule, change their external auditors at least every five years. This means that if this code is ratified this month, reporting entities whose external auditing firms have been in their engagement for more than five years must drop them and hire new ones irrespective of where they are on their contracts or their readiness to go through the hiring process.

Just like the process, some of the stipulations contained in the new draft code are very questionable and will be a clog in the wheel of the growth of corporate governance in Nigeria. The Private Sector Code volume of the draft of the National Code of Corporate Governance 2015 contains a number of far-reaching regulations that would impact the role of various stakeholders in the governance structure of the entities the code seeks to regulate.

First, the draft code seeks to arrogate powers that the FRCN Act has not granted it as it seeks to extend FRCN’s tentacles beyond the coverage of public interest entities which the FRCN Act stipulates it regulates. Specifically, section 2.1 purports to extend the powers of the FRCN to regulate the activities of all private companies that are holding companies or subsidiaries of public companies. It is worthy of note that public interest entities, as defined by section 77 of the FRCN Act, include governments, government organizations, quoted and unquoted companies and all other organizations which are required by law to file returns with regulatory authorities and this excludes private companies that routinely file returns only with the Corporate Affairs Commission and the Federal Inland Revenue Service.

The scope of the draft code is inconsistent with the interpretation of the mandate of the Financial Reporting Council of Nigeria Act 2011 by the Federal High Court in Eko Hotels Limited vs. FRCN. What FRCN intends to do is to seek to use the proposed code to confer on itself rights that are not conferred upon it by extant provisions of the FRCN Act.

FRCN has touted that the draft code will usher in a corporate governance code with governance safeguards that are more country-specific, contextual and environmentally-congruent and conforming to international best practices, while in actual fact most of the provisions of the code are incongruent to both the Nigerian situation and international best practices.

Is Section 5.11 of the draft code, which stipulates that no two members of the same extended family shall sit on the board of the same company at the same time, congruent with Nigeria where many companies are primarily family-owned? What is Nigerian about Section 5.10.5 of the draft code, which stipulates that directors should not be members of boards of companies in the same industry, when many of these directors serve in another board by virtue of their positions in one, especially in a group-subsidiary arrangement? Furthermore, what is global about such an overarching code that tends to be a one-size-never-fits-all and so prescriptive that it cannot be adapted to suit different industries?

Everywhere in the world such a code is produced, it is principle-driven rather than requiring specific compliance/adoption. Sector regulators can then apply the broad principle through their own regulation and determine which rules require separate legislation.

Finally, on the way forward, FRCN should put on hold this draft code and seek wider consultation with relevant industry stakeholders including regulators, trade associations, operators, practitioners, etc. It should be mindful of the spirit of the extant Act that established it which includes protecting the investor and stakeholder interest, give guidance on issues relating to financial reporting and corporate governance, etc. To do this FRCN should work with the industry regulators, operators and practitioners, especially in the present circumstance, like it is done the world over.

Ifeanyi Muonagor