The Nigerian Code of Corporate Governance, 2018

Principle 25 – Ethical Culture

“The establishment of policies and mechanisms for monitoring insider trading, related party transactions, conflict of interest and other corrupt activities, mitigates the adverse effects of these abuses on the Company and promotes good ethical conduct and investor confidence”

Corporate leaders have to embrace, with significant commitment, the importance of ethical culture.  At the forefront of this effort has to be the company’s Board and its Management team. A fundamental aspect of this responsibility requires corporate Boards to define the company’s culture, measure, monitor, intervene and remediate when necessary.  In the same way they adopt financial strategies designed to maximize revenue and minimise cost, companies have to deploy a similar mindset to in managing the company’s culture.  A financial strategy without consideration of ethical culture often results in less than optimal and unsustainable performance.

The Board has a fundamental duty to oversee corporate culture, to exercise its authority when needed, and to ensure that appropriate monitoring controls are in place.  A company that appropriately defines its corporate culture, aligns the culture to its overall purpose and strategic initiatives, and monitors culture, can increase its value through maximising its talent pool and its intangible assets. It has been estimated that one-half of a company’s value is its intangible assets – its culture and reputation.  Assuming this estimate is accurate, companies need to prioritize management and oversight of these assets. Boards that prioritize corporate culture, watch the red flags and set clear frameworks will encourage ethical behaviour throughout the company.

A major component of the framework as recommended by the NCCG is the conflicts of interest policy. Given that conflicts of interest may present in multiple forms, it is important that Directors are aware of the types of issues that could constitute real, perceived or potential conflicts situations. These may range from insider dealing, personal interest in transactions with the company, familiar relationships, etc. Directors are expected to identify and disclose their business or personal interest in any transaction, as disclosure affords the Board the opportunity to discuss and assess the impact of such conflict and ensure that the decisions reached are in the best interest of the company. Conflicts may also arise from receiving gratuitous gifts and as such the conflict of interest policy should detail what kind of gifts are acceptable and those that are not. It would be useful for Boards to review these policies periodically as issues of conflict are dynamic.

It is good practice to have Directors complete Declaration of Interest Questionnaires annually or as the need arises.

Apart from the requirement of disclosure by Directors in conflict of interest situations, the NCCG also recommends the adoption of a policy to guide the Board and Directors when dealing with conflict of interest situations. Such policy should require the concerned Director to recuse himself/herself from discussions and voting on any matter that the Director may have an interest in. The Director is also required to seek clarity from the Chairman of the Board or the Company Secretary when he/she is in doubt as to whether or not a conflict has arisen. When the question arises before the Board as to the existence or otherwise of a conflict of interest it should be determined by a simple majority of the Board members and recorded in the minutes of the meeting. The Code further imposes a reporting obligation on Directors other than the concerned Director when they are aware of a real, potential or a perceived conflict of interest on the part of a fellow Director.

It is however important to highlight that disclosure of a conflict of interest will not always cure the conflict as there are situations where it will be in the best interest of the company not to proceed with the underlying transaction.

The Code recommends a three-year cool off period for a former regulator before appointment as a director on the Board of an institution that has been directly supervised or regulated by the said regulator.

The Code further recommends that the Board should ensure that insiders are precluded from buying and selling any security in breach of their fiduciary duty and other relationship of trust and confidence while in possession of material, privileged, non-public and price sensitive information from the company. If for example, a company announces its quarterly earnings, a director who has access to the company’s performance in October is in possession of an inside information that is not available to the public and that could potentially put the director in a situation of disclosure or refrainment. The Nigerian Stock Exchange (NSE) has enhanced surveillance algorithms to study trading patterns and identify dealing members who trade prior to a major announcement that has an impact on the stock price and creating a nexus between the person who has the inside information and the person who traded the stocks.

To manage this situation, companies should have an insider trading policy that reminds the members of their obligation to maintain confidentiality and to follow the proper process in deciding whether to buy or sell stocks or whether they have the permission to do so. Directors should be made aware of the rules relating to insider trading so that there is no misunderstanding about their obligations. Directors must maintain confidentiality and ensure that they do not divulge any price sensitive information. When in doubt, it is important to seek advice from any officer(s) designated to deal with such matters.

Successful corporate performance is founded on commitment to basic ethical principles aligned as much as possible to the interests of all stakeholders. The responsibility for corporate ethical culture of the Board is not limited to conflict of interest and disclosure obligations. It also entails compliance with all relevant laws and regulations.

How may you obtain advice or further information on developing a Conflict of Interest Policy for your company?

The Governance team at DCSL can assist your Board develop a Conflict of Interest Policy, conduct bespoke Board training and evaluate your business practices to ensure full compliance with the provisions of the NCCG.

Bisi Adeyemi is the Managing Director, DCSL Corporate Services Limited. Kindly forward comment(s) and reaction(s) to [email protected]. DCSL provides Governance Advisory, Corporate Restructuring & Board Evaluation, Board & Senior Management Training, Retreats & Strategy Sessions, Executive Talent Recruitment, HR Outsourcing, Company Secretarial services.