In Nigeria, the various Codes of corporate governance are largely “enabling”, providing a set of rules for companies to comply with voluntarily. The only exception is the CBN Code of Corporate Governance for Banks. The “Comply or Explain” principle is a central element of most corporate governance codes particularly in the United Kingdom, Germany, and the Netherlands. Rather than setting out binding laws, regulators set out a Code, which publicly listed companies may either comply with, or if they do not comply, explain publicly why they do not.
The purpose of “comply or explain” is to “let the market decide” whether a set of standards is appropriate for individual companies. Since a company may deviate from the standard, this approach rejects the view that “one size fits all”, but because of the requirement of disclosure of explanations to market investors, anticipates that if investors do not accept a company’s explanations, then investors will sell their shares, hence creating a “market sanction”, rather than a legal one. The concept was first introduced following the recommendations of the Cadbury Report of 1992.
A review of the status of corporate governance compliance under a regime of voluntary compliance as espoused by the 2003 SEC Code of Corporate Governance reveals that failure to comply led to the wave of corporate governance failures witnessed in the recent past. Indeed, according to Clause 1.5 of the CBN Code of Corporate Governance (2006) “banks had been expected to comply” with the SEC Code issued in 2003 and the CBN Code issued the same. This was not the case.
The era of bank failures in Nigeria was characterized by poor corporate governance practices including multiple conflicts of interest scenarios, weak risk oversight and internal control systems, interlocking directorships and complacency on the part of the regulators in enforcing compliance with the Codes which had been painstakingly drafted. Perhaps the corporate governance failures witnessed between 2006 and 2010 could have been averted if compliance had been mandatory .Little wonder that the United States in the wake of high profile corporate failures enacted the Sabarnes-Oxley Act (SOX) and made compliance mandatory for all companies. In response to the perception that stricter financial governance laws are needed, SOX-type laws have been subsequently enacted in Japan, France, Italy, Australia, India and South Africa.
Compliance with the CBN Code of Corporate Governance for Banks Post Consolidation is compulsory. The SEC Code 2011 which replaces that of 2003 falls short of making compliance compulsory. Section 1.3 of the Code provides that the Code is not “intended to be a rigid set of rules. It is expected to be viewed and understood as a guide to facilitate sound corporate practices and behavior.” The proposed National Code of Corporate Governance envisaged by the Financial Reporting Council Act 2011, is expected to provide for compulsory compliance with Code provisions.
It should however be noted that a regime of mandatory compliance will not by itself achieve the desired objectives unless the regulators become more proactive, decisive and efficient in monitoring and enforcing compliance.
Adeyemi is Managing Director of Deloitte Corporate Services Limited ([email protected])