Chapter 9 - Corporate Governance in Nigeria
Chapter 9 - Corporate Governance in Nigeria
9.0 Introduction
With a population of over 195 million1, comprising 250 ethnic groups, and a landmass of 924,000sq.km,
Nigeria is the third largest country in the Commonwealth after India and Pakistan, but the most populous
in Africa. Nigeria joined the Commonwealth in 1960 and produced the third Secretary General, Chief
Emeka Anyaoku.
The Senate believes that the introduction of these new provisions in the act will greatly improve ease of
doing business and generally enhance the business climate in Nigeria, and would have the following
economic impact7:
i. Ensure more business-friendly regulation for Micro, Small and Medium Enterprises
ii. Fewer reporting obligations for small companies
iii. Reduction in time and cost for setting up a company
iv. Promotion of financial stability
v. Increasing investor confidence in the Nigerian financial sector as well as all sectors of the
economy
These proposed amendments to the Act would have the overall effect of making Nigerian Company Law
more fit for today’s business realities, improve the business environment and performance across the
Nigerian economy as a whole, as well as reduce direct compliance costs for businesses in Nigeria8.
This is not suggesting that these principles are applied in Nigeria as they would in countries with more
sophisticated capital markets. Nevertheless, Nigeria is very keen to attract foreign investments into the
country and has put in place a robust system of corporate governance.
Duties of Directors
The major responsibility of directors is to ensure that the organization is managed in the best interest of the
stakeholders. They provide entrepreneurial insight and ethical leadership to the organization and must
ensure that they have strategies in place for the efficient management of the human, material and financial
resources entrusted to them.
Section 279(1) of CAMA states that ‘a director of a company stands in a fiduciary directors relationship
towards the company and shall observe the utmost good faith towards the company in any transaction with
it or on its behalf’’. In section 279(3), a director is required to ‘act at all times’ in what he believes to be
the best interests of the company as a whole so as to preserve its assets, further its business, and promote
the purposes for which it is formed, and in such manner as a faithful, diligent, careful and ordinary skilful
director would act in the circumstances’.
f) Promoting the highest standards among auditors and other professionals engaged in the financial
reporting process.
g) Enhancing the credibility of financial reporting; and
h) Improving the quality of accountancy and audit services, actuarial, valuation and corporate
governance standards.
Through these various arms, the FRC ensures high quality financial reporting and effective monitoring of
companies, external auditors and other professionals whose work bear upon financial reporting integrity
and corporate governance of entities.
Since the establishment of the FRC, it has issued and revised codes of corporate governance for
public listed companies (examined later), the latest being the exposure draft on the Nigerian Code of
Corporate Governance 2018. The inspection and monitoring unit has also been actively monitoring
compliance with accounting and auditing standards, including compliance with the code of corporate
governance.
9.6.1.8 Auditors
Auditors play an important role in corporate governance irrespective of the system of corporate governance
in place. Their role in lending credibility to management prepared financial statements is often a legal
requirement. In Nigeria, section 359(1) of the CAMA 1990 requires that auditors “make a report … on the
accounts examined by them…” and express their opinion on 1) whether the company whose accounts are
to be examined has kept proper books of account. 2) whether the accounts being examined by the auditor
give a true and fair view of the state of affairs of the company; and 3) whether the company has complied
with statutory and other disclosure requirements as stipulated by CAMA 1990. However, the overriding
statutory requirement is that the profit and loss account and balance sheet give a true and fair view of the
results and state of affairs of the company (Okike, 2007). Therefore, through the independent examination
of the books and records of the company, the audit function is part of the mechanism for enhancing
confidence in corporate annual reports.
Given the onerous professional, legal and social responsibility of the role of statutory auditors, they
are required to have appropriate training and experience, and are also ethically bound to conduct their audit
in accordance with recognized procedures and standards (Okike, 2007). Prior to the promulgation of the
CAMA 1990, the Institute of Chartered Accountants of Nigeria (ICAN) enjoyed the monopoly of being the
only professional accountancy body recognized to determine the standards and skill necessary to be attained
by those seeking to practice as auditors. However, following the enactment of CAMA 1990, the monopoly
enjoyed by ICAN was removed, through the provision of section 358(1) of CAMA 1990, which states “a
person shall not be qualified for appointment as an auditor of a company for the purposes of this Act, unless
he is a member of a body of accountants in Nigeria, established from time to time by an Act or Decree”.
This provision brought about some discontent within the accounting profession, as members of ICAN held
the view that members of the Association of National Accountants (ANAN) lacked the technical
competence to perform audits10. This enactment gives statutory recognition to ANAN, which in effect
means there are now two professional accounting bodies in Nigeria (Okike, 2007), both of which have two
representatives each on the Financial Reporting Council. Through their membership of the FRC, ICAN and
ANAN can collaboratively promote high standards of accountability and corporate governance in Nigeria.
The Code of Corporate Governance 2018 (Para.6.4.7) imposes additional responsibilities on the audit
committee, which are to:
6.4.7.1 Exercise oversight over management’s proceedings to ascertain the integrity of the
Company’s financial statements, compliance with all applicable legal and other regulatory requirements,
and assess the qualifications and independence of the external auditors, the performance of the Company’s
internal audit function as well as that of the external auditors.
6.4.7.2 Ensure the establishment of and exercise oversight on the internal audit function which
provides assurance on the effectiveness of the internal controls…
6.4.7.3 Ensure the development of a comprehensive internal control framework for the Company,
obtain appropriate (internal and/or external) assurance and report annually in the Company’s audited
financial report, on the design and operating effectiveness of the Company’s internal controls over the
financial reporting systems.
6.4.7.4 Oversee the process for the identification of fraud risks across the Company and ensure that
adequate prevention, detection and reporting mechanisms are in place.
6.4.7.5 Discuss the interim or annual audited financial statements as well as significant financial
reporting findings and recommendations with management and external auditors prior to recommending
same to the Board for their consideration and appropriate action.
6.4.7.6 Maintain oversight of financial and non-financial reporting
6.4.7.7 Review and ensure that adequate whistle-blowing policies and procedures are in place and
that the summary of issues reported through the whistle-blowing mechanism are highlighted to the
committee.
6.4.7.8 Review, with the external auditors, any audit scope limitations or significant matters
encountered and management’s responses to same.
6.4.7.9 Develop a policy on the nature, extent and terms under which the external auditors may
perform non-audit services.
6.4.7.10 Review the independence of the external auditors in line with the policy referred to in
6.4.7.8 above prior to their appointment to perform non-audit services to ensure that where approved non-
audit services are provided by the external auditors, there is no real or perceived conflict of interest, or other
legal or ethical impediment.
6.4.7.11 Preserve auditor independence, by setting clear hiring policies for employees or former
employees of external auditors
6.4.7.12 Ensure the development of a Related Party Transactions policy and monitor its
implementation by management. The Committee should consider any related party transaction that may
arise within the Company.
6.4.8 The committee should, at least once in a year, include on its agenda, a discussion with the head of
the internal audit function and the external auditors without management being present to facilitate an
exchange of views and concerns that may not be appropriate for open discussion.
Whilst the establishment of audit committees may not be the panacea for all corporate malpractices,
nevertheless, it is expected that the presence of such a committee would encourage improved audit quality,
enhance auditor’s independence, strengthen the financial reporting process and lessen the potential for
fraudulent financial reporting (Okike, 2007). The anti-corruption initiatives of the Federal Government and
the support of other bodies like the NSE, the SEC, ICAN and ANAN, are likely to lend impetus to the
effectiveness of audit committees.
‘there is no doubt that the setting up of shareholder associations was encouraged due to the need to coordinate several
small, passive and dispersed shareholders; however the intended activism has been hijacked by individuals whose aims
are to reap personal benefits, which is truly characteristic of the broader political culture of the country. In the quest of
achieving this, several senior executives of shareholders associations bully corporate management through threats of
AGM disruptions and negative media propaganda and have thus constituted themselves “terrorist” gangs” who are now
feared by corporate executives… Given that shareholders’ associations have become constitutionally empowered to
challenge managerial and board excesses, they constitute a great threat to the status quo of traditionally unchecked
corporate corruption and governance malfunction, if their powers are applied positively’.
Unfortunately, the reality is that rather than shareholder activism playing the role of curbing management
misdemeanours and protecting the interests of shareholders, some of the executives of these shareholder
associations have become too familiar with the corporate boards of the companies in which they hold
shares. The consequence is that they have become ineffective in their activist role, which alternatively
means that corporate governance is not as effective as it could be.
In order to address the observed ineffectiveness of the shareholders’ association and the negative
impact of their activities (Adegbite, 2010), the SEC introduced a Code of Conduct for Shareholders’
Associations in Nigeria. According to a report in the Sun News (2007) (quoted in Adegbite, 2010), some
of the identified key problems necessitating the need for such a Code was the ‘proliferation of shareholder
associations, concern over behaviour of some members at Annual General Meetings, intense competition
towards getting on companies’ audit committees, governance problems and unclear succession
arrangements and the inadequate members enlightenment on shareholders rights, privileges and
responsibilities…’
Given that the quest to be on the audit committees of their investee companies is one of the reasons
for the proliferation of shareholder associations, one important recommendation of the Code is that
executive members of the shareholder associations cannot be elected as audit committee members. The
establishment of this Code of Conduct is another example of Nigeria adopting codes and passing laws that
are suited to the country’s socio-political and cultural challenges. It is described as ‘a code … designed to
ensure that association members uphold high ethical standards and make positive contributions in ensuring
that the affairs of public companies are run in an ethical and transparent manner and also in compliance
with the Code of Corporate Governance for public companies’. Whilst the UK has a Code directed at
shareholders, in this case, institutional investors, the emphasis is different. The UK Stewardship Code was
introduced in 2010 (and has been revised in 2012 and more recently in 2018), to “enhance the quality of
engagement between investors and companies to help improve long-term risk-adjusted returns to
shareholders”. It is directed at asset managers who hold voting rights on shares in UK companies. The aim
is to make institutional investors, who manage the assets of others to engage in corporate governance in the
interests of their beneficiaries.
9.7 Development of Corporate Governance Codes in Nigeria
Given the spate of corporate scandals especially in the UK (BCCI, Polly Peck, Maxwell’s Mirror Group)
in the 1990s, the need to ensure effective governance of corporations received fresh impetus within the
global business community, including Nigeria. Having been influenced by the development of corporate
governance codes in other countries, especially the Cadbury Report of 1992 and King Report 1994, the
Securities and Exchange Commission (SEC) set up The Committee on Corporate Governance of Public
Companies in Nigeria
To review the practices of corporate governance in Nigeria and thereafter, recommend a Code of Best Practices to be
followed by public companies registered in Nigeria in the exercise of power over the direction of the enterprise, the
supervision of executive actions, the transparency and accountability in governance of these companies within the
regulatory framework and market.
The Committee made up of 17 members11, headed by Mr Atedo Peterside, submitted its Report in April
2001, in which it made recommendations, after a thorough review of existing practices in Nigeria and other
countries. Their recommendations reflected global best practices and focused on transparency and
accountability of the management and boards of public companies (Okike, 2007). Acting on their
recommendations, the SEC issued the Code of Best Practices on Corporate Governance in Nigeria (SEC
Code) in October 2003.
9.7.2 Central Bank of Nigeria Code of Corporate Governance for Banks in Nigeria Post-Consolidation
2006
The Central Bank of Nigeria (CBN) was the first industry specific regulator to address the deficiencies of
the SEC Code. In 2006, the CBN issued the Code of Corporate Governance for Banks in Nigeria Post-
Consolidation (CBN Code). Compliance with the provisions of this Code was mandatory for all banks
operating in Nigeria. The consolidation of banks in Nigeria in 2005 made the issuance of the CBN Code
essential because there was the need to address the identified weaknesses in the corporate governance of
banks and the governance challenges that would arise post-consolidation. Also, the SEC 2003 Code did not
address some of the industry specific problems peculiar to the financial sector. The CBN Code was issued
to ensure that bank Chief Executive Officers were more accountable. It carried penalties for non-
compliance, including jail terms for erring CEOs. It also emphasized effective risk management measures
and highlighted the importance of the role of internal auditors. Other industry specific codes followed suit.
9.7.3 National Pension Commission (PENCOM) Code of Corporate Governance Practices for the
Insurance Industry in Nigeria 2008
In 2008, the National Pension Commission (PENCOM) issued the Code of Corporate Governance for
Licensed Pension Operators to guide pension fund administrators (PFAs) as well as pension fund custodians
(PFCs) on best corporate governance practices. The Code establishes rules based on best practices to guide
PFAs and PFCs on the structures and processes required to achieve optimal governance set up. It is
developed with a view to establishing overall economic performance and market integrity as it creates
incentives for the pension scheme to impact positively on the stakeholders, who are directly affected by the
pension reform, and gain their confidence.
Also, the Code promotes transparent and efficient implementation of the scheme by all the
operators. The aim is to encourage self-regulation by providing a common value system among the
operators.
The Code is based on internationally accepted principles of good corporate governance and its requirements
are consistent with the provisions of the Pension Reform Act 2004, rules, regulations and guidelines issued
by the Commission and are also considered transparent and enforceable.
9.7.4 The Code of Good Corporate Governance for the Insurance Industry in Nigeria 2009
The role of the insurance industry in the protection of the national economy is undeniable, hence the need
for an effective and efficient regulatory system to supervise the activities of the insurance industry. Such
supervision was introduced in Nigeria on a modest scale under the provisions of the Insurance Act 196112.
As the industry grew and became more sophisticated, a more robust regulatory apparatus was put in place
in the form of National Insurance Commission (NAICOM).
As part of its efforts to ensure the industry was keeping abreast of developments within the global
economy, and was being operated efficiently and effectively, in 2009 NAICOM issued the Code of Good
Corporate Governance for the Insurance Industry in Nigeria. NAICOM believes that a good code of
corporate governance will be a major recipe for unleashing the hidden potential of the industry for
maximum impact on the national economy.
9.7.6 The Code of Corporate Governance for the Telecommunication Industry 2016
In response to the emerging corporate governance challenges within their specific sectors, a number of
other corporate governance codes were issued. These include the Code of Corporate Governance for the
Telecommunication Industry 2016, issued by the Nigerian Communications Commission (NCC). This
replaced the NCC Code of 2014.
Also, the CBN Code of Corporate Governance for Banks and Discount Houses in Nigeria 2014 has
since replaced the CBN Code of 2006.
The Financial Reporting Council was saddled with the responsibility of setting up a Directorate of
Corporate Governance to handle all corporate governance issues in the country. In an effort to address the
multiplicity of overlapping legislations, this directorate made an attempt to unify the industry sector codes
and developed the National Code of Corporate Governance (NCCG), which was to take effect from 17
October 2016. This national code was more robust than the previous ones because it provided a code not
only for public entities but also private entities as well as not-for-profit organizations. However, following
stiff opposition from various stakeholders, the Federal Government suspended this National Code of
Corporate Governance on 28 October 2016. It appears that the socio-cultural and political issues examined
in Okike (1994, 2004) surfaced again, this time, also crossing religious boundaries13, hence the suspension
of the NCCG. The situation was even more precarious because not only was the NCCG suspended, the
Minister of Industry, Trade and Investment, Okechukwu Enelamah, issued a query to the Financial
Reporting Council Nigeria to explain the reason d’entre of the Code.
Given that the remit of the FRC includes developing the mechanism for the periodic assessment of
the codes and guidelines issued by the Council, on 18 January 2018, a fifteen-man committee formed by
the board of the FRC, proposed the Nigerian Code of Corporate Governance (NCCG) 2018. Companies
are required to commence financial reporting and applying the new code in their financial reports starting
in the financial year ending on or before January 1, 2020. However, earlier adoption is encouraged. This
new Code embraces all public companies, private companies that are holding companies of public
companies, concessioned and/or privatised companies as well as regulated private companies who file
returns to any other regulatory authority other than the Federal Inland Revenue Services and the Corporate
Affairs Commission. Compliance will be monitored by the FRC through the NSE, and other regulatory
bodies and associations.
The portion of the code relating to not-for-profit organizations remains suspended.
Explain Principles: Companies are required to provide explanations for those recommended practices
that have been applied, or explanations for how these or any other have yielded expected outcomes.
The NCCG consists of 7 parts and 28 principles, detailing the recommended practical application
of the Code. These are outlined below:
A) Board of Directors. This part contains 16 principles of what is expected of the Board of Directors
of a company, its composition and structure, and the roles and responsibilities of executive and non-
executive members of the Board and the Company Secretary. It also details procedures for ensuring
the smooth and effective running of the Board, including induction and training programmes for
members of the Board.
B) Assurance. This part consists of four principles, which draw attention to the importance of having
a sound framework for the management of risk and effective internal control systems, including the
role of internal and external auditors, in providing assurance as to the reliability of management’s
prepared financial statements.
C) Relationship with shareholders. The three principles contained in this part stress the importance of
good governance through the maintenance of a good relationship with shareholders. The annual
meetings provide the shareholders with the opportunity to gain a deeper understanding of the
company, its governance and performance, and also enables them exercise their rights as owners.
Regular dialogues with shareholders help balance their needs with company objectives. All
shareholders should be treated equally and the interests of minority shareholders need to be
protected.
D) Business Conduct with Ethics. This part of the Code deals with principles to ensure that companies
carry out their affairs in the most ethical manner, not only to enhance and protect their reputation,
but also to boost the confidence of investors. It also requires companies to have procedures in place
for dealing with any conflicts of interest, corrupt practices and insider trading.
E) Sustainability. This important principle emphasizes the need for companies to be socially
responsible, and to be good corporate citizens, contributing to economic development.
F) Transparency. When a company is in constant communication with key stakeholders and
transparent about its activities, it enables them make informed decisions. So also does full and
comprehensive disclosure of material matters to investors and stakeholders promote good corporate
governance. The Code requires companies to be transparent about their affairs to shareholders and
key stakeholders.
Companies must aim to create value for their shareholders by putting in place appropriate strategies and
policies that would enable them achieve their objectives. They must commit to effective management of
all human, material and financial resources, and have effective boards in place, consisting of people with
integrity and high technical competence. They must engage with their shareholders and maintain dialogue
with key stakeholders. Having these appropriate structures in place will signal to the market that these
companies are well managed, which could be attractive to potential investors.
Although NCCG 2018 is voluntary, adherence to the principles articulated in the Code, including
commitment to maintaining good governance practices increases levels of transparency, trust and integrity,
creates an environment that manages risks effectively, minimizes losses, and makes a business operation
sustainable.
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Endnotes
1
www.worldometers.info/world-population/nigeria-population/
[accessed 12 August 2018]
2
https://www.indexmundi.com/g/r.aspx?v=69[accessed 15 August 2018]
3
https://www.transparency.org/country/NGA[accessed 12 August 2018]
4
In addition to the concerns, practical company litigation and procedural matters necessitated the review
of the 1968 Companies Act. For example, the paucity of Nigerian cases on Company Law meant that 30
years after independence, Nigeria still referred to England for legal inspiration. A lot of cost was involved
in obtaining English law reports and text books from Britain.
5
Nigeria is the only country in the world that has ever made such a provision.
6
https://medium.com/.../summary-benefits-of-the-companies-and-allied-matters-act-ca. [accessed 15 August
2018]
7
https://medium.com/.../summary-benefits-of-the-companies-and-allied-matters-act-ca. [accessed 15 August
2018]
8
https://medium.com/.../summary-benefits-of-the-companies-and-allied-matters-act-ca. [accessed 15 August
2018]
9
www.nse.com.ng/about-us/about-the-nse/corporate-overview
[accessed 15 August 2018]
10
Wallace, 1987 and 1992 provides background information to the establishment of ANAN and the rift
between ICAN and ANAN.
11
Members of the Committee were drawn from the public and private sectors, including representatives
from the Nigerian Stock Exchange, the SEC and the Corporate Affairs Commission.
12
Irukwu, J.O (2009) in the Foreword to the Code
https://www2.deloitte.com/content/dam/Deloitte/ng/Documents/centre-for-corporate-governance/code-of-
good-corporate-governance-for-the-insurance-industry-in-nigeria.pdf [accessed 18 August 2018]
13
The NCCG 2016 also covered the governance of not-for-profit organisations, including churches and
mosques, which is a sensitive matter in Nigeria. Therefore, it did not come as a surprise that the Code
never saw the light of day.
commerce provide training opportunities in corporate governance. These professional organisations are
only starting to emerge in Tonga and specific training in corporate governance is not currently offered.
Church organisations continue to rely on their traditional management hierarchies to operate
although there is a growing recognition that more commercial skillsets are required at the management
level. Churches to date have however been slow to make significant investment in corporate governance
and business skills.
The many small to medium enterprises in Tonga that are not supported by a foreign investor
represent the group identified in the Millennium Development Goals (MDG) as the key to sustainable
economic development. However, it is this same group who are the least informed about corporate
governance and the benefits that may arise from it. A strategy that had been used by the Ministry of Social
Development to encourage provider capacity in New Zealand was to offer funding for governance training.
The scheme was aimed at encouraging private providers of social services to grow their capacity in both
service delivery and compliance. A similar exercise may increase awareness regarding corporate
governance for private businesses in Tonga. This in turn will increase business sustainability and promote
growth.
14.4.2 Promoting the Adoption of Corporate Governance
Efforts to promote the adoption of good corporate governance in Tonga have largely been driven from the
government. This is evidenced in the governance and operational policies that pertain to public sector
services and legislation. The Code of Conduct for the Public Service (Code of Conduct for Public Service,
2004) is a detailed schedule including the purpose for the code, the underlying principles and the specific
work practices and relationships that are expected from public servants and contractors working for the
government. Although the framework for corporate governance has been developed, compliance and
enforcing these practices is work in progress.
Faith based organisations continue to follow their traditional governance and operational models
although there is growing recognition for business skills in response to increasing demands for transparency
and accountability. Although the faith based version of good governance may require modification, its long
history is testament that it has resilience and strengths that may benefit the design and implementation of
corporate governance models in Tonga.
Enterprises that have significant overseas ownership and control are generally accustomed with
western models of corporate governance. These good practices and knowledge are often not shared with
the business community. The establishment of a professional body such as an institute for corporate
governance may help consolidate and disseminate these good practices. Business mentors and a more
prominent role for the chamber of commerce will also assist in this effort as it has in other more developed
economies. These strategies may not benefit the more experienced businesses in the same way as the
smaller locally owned firms but they will promote greater commercial capacity and economic growth.
Tonga’s small market size coupled with many small traders suggests that a market structure based
on perfect competition may not work as well as one based on cooperative partnerships and managed
competition. Efforts to introduce corporate governance in Tonga may need to incorporate this social
dynamic into its design and implementation.
There are currently no specific private institution leading the charge on corporate governance education in
Tonga. The tertiary sector potentially has a role to play in this area although it requires more than simply
including corporate governance in its existing business programmes. The establishment of an institute of
business within organisations such as the University of the South Pacific will help advance the mindset
shift required to willingly adopt western models of corporate governance. The Institute of Education is a
division of the University of the South Pacific created to advance Millennium Development Goals for
education in the South Pacific including Tonga. Specific courses in entrepreneurship and small business
management will provide the educational foundation for sound business practices in the future. Greater
business related education, business incubators and mentors are likely to assist in the MDG for economic
prosperity.
Professional organisations such as the chamber of commerce, institute of chartered accountants and
other emerging professional bodies will be well positioned to encourage corporate governance practices.
These professional bodies in more developed economies currently provide this type of service and
education to its members and stakeholders. However, the funding for these professional bodies is based on
member contributions, which may be problematic for Tonga’s business community given its current make-
up and size. An alternative means of achieving the same functionality will be to establish a professional
institution that is paid for through a business levy. All businesses will therefore be entitled to the services
provided by the professional body. The Pacific Business Trust in New Zealand is an example of such a
body, set up to promote pacific business formations and growth.
The Millennium Development Goals (MDG) for Tonga has provided a clear framework and target for
developing Tonga’s economy and social structure. These goals were developed in partnership with the
government of the country in question and officials from the United Nations Development Programme.
The United Nations has provided good support for the development of the goals and the reported progress
against the targets for each goal.
The Tonga National Strategic Development Plan (2001-2004) captures the specific initiatives
within each of the MDG. Corporate governance is not a specific goal in itself, but is a necessary means for
achieving the goal to “promote sustained private sector led economic growth” (Ministry of Finance and
National Planning, 2015: 8). Introducing a western model of corporate governance needs to be
contextualised and linked to the outcome of sustained private sector led economic development. Market
participants may find it easier to accept and work towards an outcome of greater economic prosperity than
to embrace (with possibly blind faith) an operational model that is unfamiliar but is likely to generate the
desired outcome.
Foreign aid to assist in building corporate governance capability may be interpreted as a restrictive
and irrelevant form of assistance. This type of targeted funding may be well intentioned but it is often
overshadowed by the day-to-day needs of cash flow, capital investment and marketing which may be
regarded as having greater priority. Furthermore, successful implementation of good corporate governance
is part education and part practice. The education component is understandably the easier of the two parts.
Putting theory to practice is typically an iterative process that may require further training and the help of
a business mentor. Reaching a status of good corporate governance practices is a learning process that is
ongoing. Staff turnover and changing social and economic circumstances require continuous improvement
and review. Although governance practice may initially require external assistance, businesses will be
required to take on the responsibility of maintaining it in the long term.
Business mentors have been successfully used to help SME businesses in New Zealand and
Australia. A similar programme in Tonga may assist in providing Tonga’s SME sector with experience and
knowledge that they may not otherwise access through professional consultants. If the pool of potential
business mentors is insufficient in Tonga, foreign assistance may take the form of bringing them in from
overseas. It is possible that retired business entrepreneurs may appreciate the lifestyle in the Pacific Islands
while providing services they have mastered during their working career.
References
Ahlburg, D. A. (1996). Remittances and the income distribution in Tonga. Population Research and
Policy Review, 15, 391-400.
Cassar, G., & Holmes, S. (2003). Capital Structure and the Financing of SMEs: Australian Evidence.
Accounting and Finance, 43, pp 123-147.
Code of Conduct for Public Service, (2004).
Etzioni, A. (1988). The Moral Dimension: Towards a New Economics. New York: The Free Press.
Harvey, D. (2004). Keeping it in the Family. Retrieved from London:
Helu, F. (1997). Tradition and Good Governance. Discussion Paper. State Governance in Malenesia, (3).
Canberra Australia.
Hisrich, R. D., & Brush, C. (1986). Characteristics of the Minority Entrepreneur. Journal of Small
Business Management, 24(4), pp1-8.
Merz, R., Weber, P., & Laetz, V. (1994). Linking Small Business Management with Entrepreneurial
Growth. Journal of Small Business Management, 32(4), pp. 48-60.
Ministry of Finance and National Planning. (2015). Millennium Development Goals Final Report.
Retrieved from Tonga:
Perricone, P. J., Earle, J. R., & Taplin, I. M. (2001). Patterns of Success and Continuity in Family-Owned
Businesses: Study of an Ethnic Community. Family Business Review, XIV(2), pp. 105-122.
Pinfold, J. F. (2001). The Expectations of New Business Founders: The New Zealand Case. Journal of
Small Business Management, 39(3), pp 279-285.
Prescott, S. (2009). Pacific Business Sustainability in New Zealand: A Study of Tongan Experiences.
(Doctor of Philosophy), Auckland University of Technology, Auckland.
Prescott, S., & Hooper, K. C. (2009). Commons and Anti-commons: Tongan Business Experiences in
New Zealand. Pacific Accounting Review, 21(3).
Public Service Act, 34 Stat. (2002).
Romano, C. A., Tanewski, G. A., & Smyrnios, K. X. (2001). Capital Structure Decision Making: A
Model For Family Business. Journal of Business Venturing, 16(3), pp 285-310.
Vallejo, M. C. (2007). Is the Culture of Family Firms Really Different? A Value-based Model for Its
Survival through Generations. Journal of Business Ethics, pp. .
Welsch, J. H. M. (1993). The Impact of Family Ownership and Involvement on th eProcess of
Management Succession. Family Business Review, 6(1), pp 31-54.
Chapter 15
Corporate Governance in Uganda
Juliet Wakaisuka - Isingoma and Stephen Korutaro Nkundabanyanga
15.1.3 The Microfinance Deposit Taking Institutions Act, 2013 (MDI Act)
The MDI Act regulates microfinance deposit-taking institutions. Section 2 of the Act defines
microfinance business as the acceptance of deposits, employing such deposits wholly or partly by lending
or extending credit, including the provision of short term loans to small or microenterprises and low income
households, usually characterized by the use of collateral substitutes, such as group guarantees or
compulsory savings. Part IV of the Act contains provisions on ownership and corporate governance
including the requirements for appointment and removal of directors, duties and responsibilities of the
board, appointment, qualification, duties and responsibilities of the finance manager, internal and external
auditors, reporting and record keeping obligations. Some of the key corporate governance requirements for
MDIs include: Limitations on institutional ownership and control, fit and proper requirements for directors,
directors’ duties, auditor rotation and reporting obligations on external auditors.
Regarding limitations on institutional ownership and control, Section 21(1) of the MDI Act restricts
ownership of shares in a MDI to 30%. In addition, anybody who owns 10% or more of the shares in an
MDI must be fit and proper according to Section 21 (4) and (5). The criteria for fit and proper as provided
for in the second schedule to the Act, and it includes probity, competence, soundness of judgement, criminal
and track record including any convictions for fraud, causing financial loss, engaging in fraudulent
activities and defaulting on a loan of an institution in which one is a director. The FIA has similar criteria
for directors and substantial shareholders contained in the third schedule to the FIA 2004. As regards
directors’ duties, the MDI Act not only codifies some of the traditional common Law duties of directors,
such as the duty to act honestly and in good faith and the duty to act in the best interests and for the benefit
of the institution, but also broadens the scope of directors’ duties to include a duty to act independently,
free from undue influence of any person and a duty to access necessary information to enable the director
to control and discharge his or her responsibilities. In addition, to the collective responsibility of directors,
the Act requires the board of directors as an organization and each director individually to immediately
report in writing to the central bank if they have reason to believe that the institution may not be able to
conduct its business properly as a going concern; the institution appears to be or may in the near future be
unable to meet all or any of its obligations under the Act; and, the institution has suspended or is about to
suspend any payment of any kind. In terms of Auditor rotation, Section 34 of the MDI Act imposes a three-
year limit on the period that an external auditor can continuously serve. Under the Section 67 of the FIA
2004, this is a four-year limit for commercial Banks. When it comes to reporting obligations on external
auditors, although traditionally external auditors report to the person who appoints them and with whom
they have contractual relationship, the MDI Act 2013 broadens the duties of external auditors and imposes
reporting obligations on them on matters such as irregularities or illegal acts and insolvency. Section 69 of
the FIA 2004 contains similar provisions relating to auditors of commercial banks.
The country is attaining the global standards of efficiency, commercial probity and effective economic and
social development broadly through adherence to the legal framework, especially the company’s Act
regarding registration of companies, incorporation of companies and matters incidental to incorporation.
In addition, Uganda Africa Peer Review Mechanism process (APRM) was formed and is managed by an
independent National Governing Council (NGC), which assumed office in 2014, with the National Planning
Authority (NPA) as the secretariat. Basically, the main objective is to provide leadership, guidance and
direction to the Uganda APRM process, as well as awareness and sensitization of the Ugandan public. It is
therefore important that all stakeholders participate in order to achieve this goal. Much as the APRM was
just initiated in 2014 in Uganda, it is equally important to note that it started way back in 2002 when African
leaders set forth in the African Union’s Declaration on Democracy, Political, Economic and Corporate
Governance. This was based on the principle of voluntary accession and invited African countries to assess
themselves on the basis of their performance in four thematic areas, namely: democracy and political
governance, corporate governance, economic management and governance, and socio-economic
development.
Broadly, the companies in Uganda are now profiting from a level field on which to conduct their
business competitively. This is basically because once there is an accepted set of standards by which
corporate bodies are refereed it becomes easier for individual corporations to formulate their own standards
of behaviour. Corporate governance has recognized and upheld legitimate interests of all stakeholders to a
company like shareholders, board of directors, management, employees, bankers, creditors, to mention but
a few. Corporate governance has been documented at political levels through standards of transparency,
accountability, probity and integrity in the political and administrative spheres. Corporate governance has
also been acknowledged in the sustainability and long-term wealth creation of enterprise. In addition, there
has been documentation of sound societal norms that emphasise communal responsibility through, for
example, revitalization of kingdoms. Therefore, Uganda, like any other economy in transition, now
increasingly recognizes that corporate governance is an essential tool for prosperity and economic growth
as well as improved operational and strategic competitiveness of Commonwealth enterprises operating in
the global market. Largely, Uganda cannot shield itself from the global movement that is shaping standard
principles governing corporations.
The Capital Markets Corporate Governance Guidelines (2003) embeds the following:
a) The authority developed the minimum standards for good corporate governance practices by public
companies and issuers of corporate debt in Uganda in relation to the growing importance of
governance issues in the emerging economies as well as promoting domestic and regional capital
markets growth. To this regard also, is the recognition of the role of good governance in corporate
performance, capital formation and maximization of shareholders value as well as protection of
investors’ rights.
b) In line with the guidelines, corporate governance involves the process and structure used to direct
and manage business affairs of the company towards enhancing prosperity and corporate accounting
with the aim of protecting and promoting shareholders’ rights, realizing shareholders long-term
value as well as taking into account the interests of stakeholders.
c) The guidelines are equally in line with several works that have been undertaken extensively in
several jurisdictions through many task forces and committees among which are, though not limited
to the United Kingdom, Malaysia, South Africa, the Commonwealth Association for Corporate
Governance and the OECD principles of corporate governance.
d) The Authority also adopted both the prescriptive and non-prescriptive approaches so as to provide
for flexibility and innovative dynamism to corporate governance practices by public listed
companies.
e) Good corporate governance practices are nurtured and encouraged to evolve as a matter of best
practices. In addition, certain aspects of operation in a body corporate must of necessity require
minimum standards of good governance. To this regard therefore, the Authority expects the
directors of every listed company to commit themselves to adopt good corporate governance
practices as part of their continuing listing obligations.
f) In the same reasoning, the Authority has supported and has been useful in the development of a
code of best practices for corporate governance in Uganda, which has been issued by the ICGU,
and therefore supplementary thereto.
g) Finally, the ultimate objective of these guidelines is to strengthen corporate governance practices
by listed companies, in Uganda, and promote the standards of self-regulation in order to bring the
level of governance in line with international trends.
15.4 How the transition and emerging economies within the Commonwealth have
been supported to strengthen their capacities to maintain and extend good
practice in corporate governance
Since the financial crisis in 2008, policies have been promoted, proposed, debated, and endorsed on
virtually every aspect regarding corporate governance. There is growing evidence that corporate
governance is creating steadiness between economic, social, individual and communal goals while
encouraging the efficient use of resources, accountability, the use of power and stewardship as well as
aligning the interests of individuals, corporations and society (Hartono, Subroto, Djumahir & Irianto, 2013).
The financial crisis was therefore a good reminder that many countries are operating below the required
standards of good practices in corporate governance. To this regard, in order to strengthen capacities to
maintain and extend good practices in corporate governance, the following are some of the examples that
have been implemented in Uganda: partnerships with corporate governance sister companies, African
corporate governance institutions, Companies Act, Laws coming up, for instance, are incorporating
corporate governance, corporate governance charters as well as training and write-ups in corporate
governance. In implementing corporate governance strategies in the Commonwealth, the CACG designs a
comprehensive package of activities, which act as a platform that ensures the process not only conforms
with standards of international best practice, but also, that it is directly linked to national priorities and
concerns.
References
Adotey Bing – Pappoe (2010). Reviewing Africa’s Peer Review Mechanism: A Seven Country Survey,
Partnership Africa Canada, ISBN 1-897320- 17-5.
African Development Report. 2011. Corporate Governance - Chapter seven: 133 – 148
Corporate Governance Manual (2008). Incorporating recommended guidelines for Uganda. ICGU. United
Printers Ltd, Kampala – Uganda.
Hartono, U., Subroto, B., Djumahir, G., & Irianto, G. (2013). Firm characteristics, corporate governance
and firm value. International Journal of Business and Behavioural Sciences, 3, (8), 9 -18.
http://www.icgu.org [Accessed 20/08/2016]
http:/www.icpau.org [Accessed 20/08/2016]
Kaplan Financial Limited. (2015). Governance, Risk and Ethics- Paper 1: Kaplan Publishing, Wokingham,
Berkshire, UK.
Kiryabwire, TW. (2014). ‘The Legal and Regulatory Framework for Corporate Governance in Uganda’. In
Katto J., Wanyama S and Musaali, EM. (editors), Corporate Governance in Uganda: An
Introduction to Concepts and Principles, Fountain Publishers, Kampala, 69-85.
Nkundabanyanga K. S. Ahiauzu A., Sejjaaka S., and Ntayi MJ. 2014. ‘Intellectual Capital in Ugandan
service firms as mediator of board governance and firm performance’. African Journal of Economic
and Management Studies, 5 (3): 300-340.
The Capital Markets Corporate Governance Guidelines (2003): Section 102 of the Capital Markets
Authority Statute, 1996; Statute No. 1 of 1996.
The Financial Institutions (Corporate Governance) Regulations. (2005). Statutory Instrument No. 18:
Statutory Instrument Supplement, Uganda Printing and Publishing Company, Entebbe, Uganda.
Uganda APRM National Commission. (2007). The Uganda Country Self-assessment Report and Uganda
Bureau of Statistics. 2016. The National Population and Housing Census 2014 – Main Report,
Kampala, Uganda.
Wakaisuka – Isingoma J., Aduda J., Wainaina G., and Iraya CM. 2016. Corporate governance, firm
characteristics, external environment and firm performance of financial institutions in Uganda
- A Review of Literature. Cogent Business and Management, 3 (1): 1 -14.
World Bank (2007)
https://openknowledge.worldbank.org/.../Uganda000Count0valuation00200102007.t...
100005 [Accessed 16/08/2016]
Chapter 16
16.0 Introduction
The United Kingdom is an island nation in North Western Europe. It is a sovereign state and a constitutional
monarchy, with the Queen as the ceremonial head. The Prime Minister, Theresa May, exercises executive
power on behalf of the Monarch. It is a leading financial centre for the rest of the world and boasts a position
of one of the largest economies of the world.
The UK is an important member of the Commonwealth of Nations, more so, as the Queen is the
Head of the Commonwealth. Appropriately, the secretariat of the Commonwealth organisation is based in
London, the capital of England. The city played host to the most recent Commonwealth Heads of
Government Meeting (CHOGM), which took place in London, in April 2018. It is one of the developed
countries in the Commonwealth and consists of four countries, England, Scotland, Wales and Northern
Island. It currently has a population of around 66 million (based on estimates from the Office for National
Statistics)13.
In the 19th and early 20th centuries, when the British Empire spread across different continents, all
the countries that were under British rule had to adopt British company law. Whilst the company laws of
many of these countries have developed over the years to reflect their particular socio-political and cultural
environments, many of them still have some semblance of British company law, especially through their
association with the Commonwealth.
The common law duties apply to both executive and non-executive directors.
Ironically, whilst shareholders collectively own the company, their powers within the law are
limited. However, in the context of corporate governance, shareholders can take actions, which can affect
decisions taken by directors on behalf of the company.
The most significant powers of shareholders is in their power to vote at the annual general meeting
in relation to issues such as the election and re-election of directors, appointment and re-appointment of
external auditors, approving or reducing the proposed dividend and decisions on authorised share capital
of the company.
In addition to their limited powers, shareholders also have certain rights, including the right to
receive a copy of the annual report and accounts of the company and the right to attend and vote at the
annual general meetings of the company.
Directors make themselves accountable to the shareholders through the annual report (including the
interim financial statements). The annual report is important in relation to corporate governance because it
is the channel of communication between directors and shareholders. The document contains a mixture of
information required by statute, accounting standards, the Combined Code and others voluntarily provided
by the directors.
Section 471 of the Companies Act 2006 details what the "annual accounts and reports" of a quoted
company for a financial year should include:
(a) its annual accounts
(b) the directors' remuneration report
(ba) the strategic report (if any)13
(c) the directors' report, and
(d) the auditor's report on those accounts, on the auditable part of the directors' remuneration report, on the
strategic report (where this is covered by the auditor's report)13 and on the directors' report.
Section 292 of The Act requires that the financial accounts of a company give a true and fair view
of the state of the financial affairs of the company and must be prepared in accordance with international
accounting standards (Sec. 395)
Section 417 of The Act requires that the directors' report include a business review describing how
the business developed during the financial year, the nature of any risks or uncertainties it faces, any trends
that may affect its future development, an analysis of key performance indicators and also sections in
relation to employees and other social and environmental issues. The directors' report should also include
details of any gains the directors have made whilst exercising their options, income received from long-
term incentive plans, severance payments and other benefits.
Section 495 of The Act requires that auditors must state in their report which financial statements
were audited and what standards were used in the audit process. They must state whether or not the financial
statements were prepared in accordance with relevant accounting standards and with the Act, and whether
or not they give a true and fair view of the company's affairs. Their report must also state whether in their
opinion the information given in the strategic report (if any) and the directors' report are consistent with the
annual accounts, and whether any such strategic report and the directors' report have been prepared in
accordance with applicable legal requirements (Sec.496).
Other recommendations include the need for separation of the roles of chairman and the chief executive
officer; stating the number of meetings of the board, including the attendance records of individual directors
in the annual report. Chairmen and chief executives should ensure resources were in place for the training
and induction of NEDs; no one NED should sit on the three major committees (audit, nomination and
remuneration) of the board.
The FRC revised the Stewardship Code in September 2012 following consultations in April 2012
and taking into consideration all the responses received. The minor changes to the Code include:
• The need for companies to provide clarification of the stewardship responsibilities of asset managers
and asset owners, and what stewardship activities are being outsourced.
• The requirement for investors to explain how they manage conflict of interest, the circumstances in
which they will participate in collective engagement, and how they make use of the services of
proxy voting agencies.
• The need for asset managers to have their stewardship responsibilities independently verified to
provide greater assurance to their clients.
The Code sets out areas of best practices, which the FRC believes institutions should aspire to achieve.
Whilst announcing the changes, the FRC Chairman, Baroness Hogg explained13,
“The changes to the UK Corporate Governance Code are designed to give investors greater insight into what company
boards and audit committees are doing to promote their interests, and to provide them with a better basis for engagement.
The changes to the Stewardship Code are designed to give companies and savers a better understanding of how signatories
to the Code are exercising their stewardship responsibilities”.
Since December 2010 the Financial Conduct Authority's (FCA) Conduct of Business Rules requires
all UK authorised Asset Managers to produce a statement of commitment to the UK Stewardship Code or
explain why it is not appropriate for their business model.
Remuneration
• The Remuneration Committee must ensure that remuneration policies are designed with long-term
survival of the company in mind;
• Companies are to put in place arrangements that will enable them to recover or withhold variable
pay when it is appropriate to do so. They should also consider appropriate vesting and holding
period for deferred remuneration.
Shareholder Engagement
• When publishing the results of their annual general meeting, companies should explain their
strategy for shareholder engagement especially after majority of them have voted against a
resolution.
In addition, the FRC made the point that it is the responsibility of the board to set a good example of culture
and behaviour within the organisation. They should also encourage constructive and challenging dialogue
within the board and encourage diversity in terms of their approach and experience.
Along with the UKCG 2014, the FRC also issued three related documents13:
i) Guidance on Risk Management and Internal Control and Related Financial and Business
Reporting (the Risk Guidance) – an amalgamation of Turnbull 2005 and 2009 Going Concern
notes and incorporating the requirements of UKCG 2014;
ii) Guidance for Directors of Banks on Solvency and Liquidity Risk Management and the Going
Concern Basis of Accounting
iii) Revised Auditing Standards (extracts) – ISAs (UK and Ireland) 260, 570 and 700 – requiring
auditors to report on narrative disclosures, including risks; meaning they will need to consider
the going concern basis of accounting and the longer term viability statement and the risk
management governance.
In relation to the changes in the 2016 Code, the Executive Director of Audit, Melanie Mclaren, said13,
“The updates to the Code, Guidance and Standards implement a significant change in audit regulation in the UK which will be
overseen by the FRC as a competent authority with the support of the accountancy professional bodies. The Changes will support
further innovation by the audit profession in the UK, and ensure that auditors act in a way that is genuinely independent and seen
to be in the public interest. The UK has led the way on promoting audit transparency and competition on quality so that investors
can have confidence in corporate reporting”
Whilst the changes to the Code itself were minimal, there were more substantial changes to the Guidance
on Audit Committees and they cover audit committee activities and reporting. It is now a requirement for
audit committee members to have competence relevant to the sector in which the company operates. The
provision relating to the need to tender the external audit every 10 years has been removed, as it has been
superseded by the Competition and Markets Authority (CMA) and EU requirements for mandatory
tendering and audit firm rotation.
The Code requires companies to disclose in the audit committee report how the committee has
assessed the effectiveness of the external auditor, the approach taken to the external auditor’s appointment
or reappointment and the length of tenure of the current audit firm.
There were also some key changes to auditing standards, including the requirement for ‘enhanced
audit reporting’ for all listed companies and public interest entities (PIEs)13. The contents of the enhanced
audit reports would be substantially more, as auditors would be required to include an expansion of the
description of key audit risks and how they responded to those risks. Their report would also include a
description of how their audit was considered capable of detecting irregularities and fraud. Other
disclosures in the report include the tenure of the auditor, previous reappointments and renewals of
appointment, and a declaration of the auditor’s independence, and a confirmation that no prohibited services
were provided.
There are a few key new requirements of the 2018 UKCG Code. These include:
• An enhanced focus on corporate culture. In other words, companies are to align their strategy and
values with culture
• Having a board-monitored mechanism for whistleblowing
• Engagement with stakeholders and the disclosure of section 172 of Companies Act 2006
requirements
• The need for all boards to have a mechanism for engaging with their workforce
• The requirement that board chairs do not stay for longer than 9 years from the date of their
appointment
• Having a greater focus on gender, social and ethnic diversity in succession planning at board and
senior management levels.
• Reporting on diversity for board and senior management
• An enhanced role for the remuneration committee to oversee company-wide remuneration policies
• The requirements for executive remuneration reporting
• Vesting and holding periods for long-term incentives should be at least 5 years.
• Removal of some concessions for companies outside of FTSE 350.
In terms of its structure, the 2018 UKCG Code is more robust and compact. Compared to the 99 principles,
supporting principles and provisions of the old Codes, the 2018 Code contains 18 principles and 41
provisions. The remit of the Code includes all premium-listed companies.
Instead of the five sections containing a main principle, sub-principles and provisions (A-E), in the
2016 Code, the 2018 Code has five sections (1 – 5), with each section containing principles (A-R) followed
by provisions, numbered sequentially from 1 to 41. Most of the supporting principles in the 2016 Code
have been moved to the Guidance. The 2018 Code retains the ‘comply or explain’ principle.
The 2018 UKCG Code woulds enable companies to report how their governance structure contributes to
long-term success and achieves wider objectives. The revised Guidance on Board Effectiveness supports
the new Code.
References
End Notes
13
https://www.ons.gov.uk/about us/transparencyand
governance/freedomofinformationfoi/ukpopulation2017. Accessed 18/08/2018
13
S.471(3)(ba) inserted (with effect in accordance with reg.1(4) of the amending S.I.) by The Companies Act (Strategic Report
and Directors' Report) Regulations 2013 (S.I. 2013/1970), reg. 1(2)(3), Sch. para. 18(b)(I).
13
S.471(3)(d) inserted (with effect in accordance with reg. 1(4) of the amending S.I) by The Companies Act 2006 (Strategic
Report and Directors' Report) Regulations 2013 (S.I. 2013/1970), reg. 1(2)(3), Sch. para. 18(b)(ii)
13
https://www.frc.org.uk/about-the-frc/structure-of-the-frc. Accessed 21/08/2018
13
https://www.frc.org.uk/news/september-2012/frc-publishes-updates-to-uk-corporate-governance-code.
Accessed 21/08/2018
13
Section 463 of the 2006 Act introduces a new safe harbour in relation to directors’ liability for the
directors’ report (which includes the business review), the directors’ remuneration report and summary
financial statements. Directors are only liable to compensate the company for any loss it suffers as a result
of any untrue or misleading statement in, or omission from, such a report if the untrue or misleading
statement is made deliberately or recklessly, or the omission amounts to dishonest concealment of a
material fact.
This safe harbour addresses the concern of directors over liability for negligence when making,
for example, forward-looking statements in the directors’ report, in particular, the business review. The
directors’ liability is limited to the company rather than to third parties.
13
https://www.frc.org.uk/news/september-2012/frc-publishes-updates-to-uk-corporate-governance-code.
Accessed 25/08/2017
13
https://www.frc.org.uk/news/april-2016/revised-uk-corporate-governance-code. Accessed 25/08/2018
13
A PIE is defined in EU law as an entity governed by the law of a Member State with securities traded
on an EEA regulated market, a credit institution or insurance company.
13
https://www.frc.org.uk/news/december-2017/a-sharper-uk-corporate-governance-code