An overview of the corporate governance guidelines for banks and financial holding companies vis-à-vis the code of corporate governance for public companies issued by the Securities and Exchange Commission

AELEX NOTES

Introduction

On 13th July 2023, the Central Bank of Nigeria (“CBN”) issued the Corporate Governance Guidelines for Commercial, Merchant, Non-Interest and Payment Services Banks in Nigeria (“CGGCMNIBs”) and the Corporate Governance Guidelines for Financial Holding Companies in Nigeria (“CGGFHCs”) (together referred to as “the CBN Guidelines”) pursuant to its powers under the CBN Act and Banks and Other Financial Institutions Act (“BOFIA”)2020. The CBN developed the CBN Guidelines by adapting relevant principles and recommended practices of the Nigerian Code of Corporate Governance (“NCCG”) issued by the Financial Reporting Council(“FRC”) in 2018, global corporate governance practices, and other governance codes and directives issued by the CBN.

The CBN Guidelines supersede all previous codes, circulars, and related directives on corporate governance issued by the CBN. It creates a broader scope for the oversight functions of the CBN in relation to Commercial, Merchant, Non-Interest and Payment Services Banks (“CMNIBs”) and Finance Holding Companies(“FHCs”).

On 4th April 2011, the Securities and Exchange Commission (“SEC”) issued the Code of Corporate Governance for Public Companies in Nigeria (the“ SEC Code”). The SEC Code was issued to ensure the highest standards of transparency, accountability and good governance for public companies in Nigeria.

This article is divided into 2 parts as it attempts to provide a comprehensive overview of the provisions of the CBN Guidelines, in comparison with the provisions of the SEC Code.

Applicability

The CBN Guidelines was issued to specifically apply to Commercial, Merchant, Payment Service and Non-Interest Banks as well as Financial Holding Companies. The SEC Code applies to all public companies with securities listed on a recognized stock exchange in Nigeria, companies seeking to raise funds from the capital market through the issuance of securities or seeking listing by introduction and all other public companies.

The scope of the CBN guidelines is more specific, unlike the SEC code which is more broadly applicable and recommended for various types of companies beyond the public companies for which it was originally developed.

ANALYSIS OF KEY DIFFERENCES IN THE SEC CODE vis-à-vis THE CBN GUIDELINES

1. Structure of Board

The SEC Code provides that that the membership of the board should not be less than 5. However, the CBN Guidelines establish limits on the number of board members for different types of financial institutions. CMNIBs must have between 7 and 15 directors, Payment Service Banks (PSBs) between 7 and 13 directors, and FHCs between 7 and 9 directors.

Additionally, the CBN Guidelines provide that members of the board of a bank and FHC shall be appointed by their shareholders and subject to the approval of the CBN.

2. Composition of the Board

According to the SEC Code, the board composition should include both non-executive and executive directors, a minimum of 1 independent director, and a Chairman who would head the board. However, the CBN Guidelines increase the minimum requirement for Independent Non-Executive Directors (INEDs) by providing that Banks and FHCs shall have at least 3 INEDs. This requirement applies to commercial banks with international and national authorisations, merchant banks, and non-interest banks (NIBs) with national authorization; while PSBs, Commercial Banks with regional authorization, and NIBs with regional authorization shall have a minimum of 2 INEDs.

3. Concurrent / Multiple Directorship.

By the provisions of the SEC Code, there is no limit to the number of concurrent directorships that a single director may hold. However, the provisions of the CGGCMNIBs is to the effect that the concurrent directorship by the director of a bank with its group structure or holding company structure shall be limited to 2 institutions only.

4. Roles and Responsibilities of the Board.

The SEC Code provides for a limited number of roles and responsibilities for the members of the board of directors. The Board’s responsibilities encompass:

• Establishing strategic goals and resource deployment.
• Overseeing management for shareholder value and obligations.
• Ensuring corporate governance, legal compliance, ethics, and sustainability.
• Delegating authority to management within a defined framework.
• Retaining ultimate accountability for company affairs and performance.

The CBN Guidelines provide an extended list of roles and responsibilities for the members of the Board of banks and FHCs. This covers the review of investment policies, anti-money laundry policies, enterprise risk, etc.

5. Board Charter.

The SEC code does not include a requirement for companies to have a Board Charter. Consequently, the requirement for a Board Charter is a novel provision in the CBN Guidelines as it mandates banks and FHCs to have a Board Charter which shall be reviewed once every 3 years. Furthermore, the provision mandating the submission of the Board Charter to the CBN within 30 days of its approval underscores the regulatory oversight role of the CBN outlined in the CBN Guidelines.

6. Tenure of Board Members.

The SEC Code provides that subject to the provisions of the Companies and Allied Matters Act (CAMA), directors will be submitted for re-election once every 3 years. On the other hand, the CGGMNIBs stipulates that the maximum tenure for Managing Directors/Chief Executive Officers (“MD/CEO”), Deputy Managing Director, Executive Directors and Non- Executive Directors is 12 years, except for an INED whose tenure is limited to 2 terms of 4 years each.

The CGGFHCs specifically provides that the maximum tenure of the MD/CEO of a holding company shall be 10 years.

7. Company Secretary.

The SEC Code provides that the company secretary shall be a person with relevant qualifications and competence and has the primary duty of assisting the Board in implementing the SEC Code. The CBN Guidelines specifically state that the role of the company secretary in both FHCs and banks shall not be outsourced. Additionally, it specifies that the role of company secretary shall not be combined with the role of the Head of Legal.

Finally, the removal of the company secretary is subject to ratification by the CBN in line with the oversight functions of the CBN.

8. Tenure of Board Committee Members.

The CBN Guidelines provide that the membership of the Board committee for banks and FHCs shall be reviewed at least once in 3 (three) years unlike the SEC Code which is silent on the tenure of committee members.

9. Cooling-Off Period.

The cooling-off period is a period when a key officer of an entity is prohibited from taking up a similar or different role in that entity or another.

While the SEC Code is silent on the cooling-off period for officers of public companies, the CBN Guidelines provide for different cooling-off periods for officers of banks and FHCs. For example, there is a cooling off period of 2 years where a director of a bank transitions to a sister subsidiary and it results in a change of role.

10. Access to Independent Professional Advice.

The CBN Guidelines permit banks and FHCs to resort to independent professional advice for either its directors or committees and set out the procedure for obtaining such advice whereas the SEC Code does not refer to the use of independent professional advice.

This provision ensures that the directors or committee members are well-equipped to manage the affairs of the bank or FHC using expert knowledge.

11. Location of Board and Board Committee Meetings.

The CBN Guidelines embrace technological innovations in conducting the affairs of the board and aids ease of doing business in Nigeria as it allows banks and FHCs to host their Board or committee meetings at a specified location or virtually, where the physical meeting seem difficult. The SEC Code on the other hand, made no provision for any specific location that a meeting of the Board should hold.

12. Cumulative Tenure.

While the SEC Code is silent on the cumulative tenure of a director in a public company, the CGGMNIBs provides that the directors in a bank are permitted to serve for a cumulative tenure of 24 years. This is however not provided for FHCs.

The cumulative period is calculated from the date of first appointment to the board of the bank.

Conclusion

This article has provided an initial overview of key differences between the SEC Code and the CBN Guidelines, focusing on topics such as board structure, roles, and tenure. Our next publication will continue with an in-depth analysis of additional differences, exploring areas like evaluation of the board, whistleblowing policies, external auditors, and other areas of corporate governance.

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