Nze Sylva’s Corner: FRC, Obazee & the Contentious Code of Corporate Governance
So much has been said and written about the rather swift action taken by the President earlier this week in sacking the Chief Executive of the Financial Reporting Council of Nigeria (FRC), the contentious Code of Corporate Governance and the man at the center of it all, Jim Obazee. Unfortunately, because of the events of last Saturday in the Redeemed Christian Church of God (RCCG) where the popular and respected General Overseer, Pastor E.O Adeboye was said to have stepped down because of the provisions of a Code of Corporate Governance for Non-profits, much of the commentary has taken the rather sensitive (and less objective) colouration of religion which most of us are always emotional about.
But the ‘resignation’ of Adeboye or indeed the provisions of the Code for non-profits and the setting of tenure length for heads of such organisations are actually not the real issues here. Indeed most Nigerians were not even aware of the existence of the code until the events of last Saturday. The codes have been quite an issue of huge contention in the business community for some time now. This is because of some provisions of the code for the private sector which in many ways compound our existing challenges around the ease of doing business. These provisions also pose a threat to many family-owned businesses and increase impediments to success for small businesses.
I attended 2 out of the 3 odd public hearings hosted by the Financial Reporting Council (FRC) on the codes. While there was always the presence of a delegation from Christendom – who on both occasions raised their objections to the code for Non-profits, much of each session centered on the codes for the private sector with various interests groups, shareholders association, quoted companies, professional services firms, private business owners and the media, making presentations, comments and raising objection to the codes or at least some of its provisions. This is not surprising as the not-for-profits had a “comply or explain” enforcement rule which did not make it mandatory while that for the private sector was mandatory with attendant penalties.
I remember the third in the series tagged “final public hearing” which was intended to present stakeholders with the updated version of the proposed code with the inputs made at the earlier two hearings reflected. It was shocking how, the version shared at that hearing was nothing different from the earlier versions. Stakeholders at the event noted with dismay that their concerns were not reflected and that the FRC seemed bent on issuing the codes the way it had conceived them, thus defeating the aim of the public hearing itself. After that experience, I shared my disappointment at the tendency of public hearings being simply for the fun of it in this piece
Among the grey areas which participants at the hearing continued to pick holes in included provisions around Independent non-executive director, joint audits, audit rotation for non-quoted companies, the structure and composition of boards, board committees, application of the code to private companies and areas where the code’s provisions were in direct conflict with the Companies and Allied Matter Act (CAMA). There were also concerns raised on the transition and commencement provisions of the Code as well as its mandatory application and enforcement.
It was the overwhelming opinion of participants that the code was more of a collection of rules than a set of guiding principles. Noting that it is impossible to regulate good conduct, participants observed that the code assumed an unrealistic ‘one size fits all’ stance while lacking clarity on many fronts. This, they stated made it so glaringly different from what obtains in other countries and poses a threat to the inflow of foreign direct investment, while further complicating the ease of doing business and putting more pressure on already stretched businesses in the country.
Participants held strongly that the number of independent non-executives proposed in the code as well as the powers allocated to them – including the appointment of a lead independent non-executive director was excessive, and was liable to cause the factionalisation of boards and conflict of authority especially with the lead independent non-executive director allocated powers that could undermine the authority of the board chairman. More so, the prescription of a minimum of eight board members was identified as unrealistic for many small companies with participants advising that the code’s provision be restricted to public interest and quoted companies. By that provision, SME’s and every other business on the way side would be regulated by the FRC which was just going to compound the challenges of businesses at that level.
The issue of mandatory joint audits was another source of concern for many participants. It was noted that globally there is no consensus on the benefit of the adoption of such a policy. The sentiment generally shared was that this provision would burden companies with increased costs while also impacting the quality of audits. Shareholders, it was agreed, should be allowed to decide the number of auditors they require, based on the nature of their business and their ability to pay for their services. In addition, participants suggested that non listed companies should not be subjected to mandatory auditor rotation and that companies should have the prerogative to outsource their internal audit function in cases where there is no internal resource for the function. In addition, auditors at the forum questioned the provision of the code that required external auditors to report indictable offences to the FRCN noting that it went against the training and practice of auditing, all known statutes and international best practice.
Other concerns highlighted at the forum included the applicability of the code in its entirety to small subsidiaries of larger companies, the removal of provisions that allow for the re-classification of non-executive directors, the provision that bars former CEO’s from assuming chairmanship positions on the board, the barring of more than 2 family members on a board, conflict of application between the national code and sectorial codes and the ambiguity around the consequences of noncompliance which was still to be defined by the FRC. Given the history of the kind of ‘crazy’ fines slapped on companies by the Obazee-led FRC for minor errors in the financial statements, the unstated penalty in the code was a major source of concern because it could be exploited by the Council to witch hunt certain companies.
Furthermore, participants advised that there was the need for a sufficient transition period of at least two years to allow companies prepare and refine their processes to conform to the new code.
It was hoped that the FRC steering committee would take back the inputs made at the forum and incorporate them with a view to making the final draft of the national code of corporate governance — one that will be accepted across board, and position Nigeria as an attractive destination for foreign investment. But this was not so. Instead, as soon as they disposed of the court injunction stopping them from issuing the code, the FRCN issued it and said it took immediate effect from October 17 2016.
The minister of Industry, Trade & Investment reacting to the myriad complains about the code from the private sector swiftly wrote the Council asking it to suspend the implementation until all stakeholders could agree on the various contentious issues. This was obviously not adhered to by Obazee who went ahead with the codes. The rest as they say is history.
I just think it is important that the bar of the discussion be raised and that people take time to read the proposed codes especially for the private sector, understand their implications and see why it was quite contentious, thus requiring Governments’ intervention and not restricting the discussion to religion and the tenure of church heads. What happened was a case of gross insubordination by Mr Obazee which I understand is made worse by a history of arrogance and controversy-courting on the one hand and the fact that the codes in themselves had provisions which were sure to have negative impact on the economy in general.
Having said that, the benefits of quality Financial Reporting & Corporate governance and the administration of same for any economy cannot be overemphasized. For a country like Nigeria, it is critical for promoting much needed private sector growth and increasing confidence in our economy hence reducing volatility and the risk of financial market crises. This will in turn, drive local and foreign investments. In coming up with the codes and in enforcing them however, stakeholders must be carried along and international best practice adopted to ensure we are not creating even more problems for the system. Hopefully, the new leadership of the council will bring this about, with less controversy and unnecessary.