Chapter 9

Corporate Governance in Nigeria

Elewechi Okike and Peace Okougbo

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.

9.1 Historical Background

The colonisation of Nigeria by the British started with the conquest of Lagos in 1851 and further conquests
of other strategic towns in the hinterland until the British control over the area now known as Nigeria was
ratified at the Berlin Conference in 1885, where the concept of the 'spheres of influence' was developed
(Wallace, 1989). The British stayed in Nigeria until 1960 when by mutual agreement between the Nigerian
political activists seeking self-government for the country and Her Majesty's Government, the country
became independent and a member of the British Commonwealth of Nations (Wallace, 1989).

9.2 Country Structure and Government

The country is a federal republic of 36 states including the federal capital territory, Abuja. Since Nigeria
became an independent country on 1 October 1960, the economy has been shaped by the experimentation
with different types/styles of leadership and government (parliamentary democracy, UK style; presidential
democracy, US style; and military dictatorships of different kinds (Okike, 1994, 2004). After the first
military coup in 1966, and the subsequent civil war in 1967-1970, the army remained the dominant political
player, except between 1979-1983 and for a few weeks in 1993. The sudden death of the dictatorial military
ruler, Sani Abacha, led his successor to move quickly to restore human rights, repair relations with the West
and install a democratically elected government in 1999. Under the new constitution adopted in May 1999,
a strong executive presidency appoints a Federal Executive Council, comprising government ministers and
ministers of state from each of Nigeria’s 36 states. Although the 36 states enjoy greater autonomy than
under the military administration, they remain dependent on the central government for funding. The
executive is accountable to the bicameral National Assembly, though in practice personal and ethnic ties
dominate the political process (Okike, 2004). Nigeria’s geo-political boundaries, a creation of the British
colonial government, were arbitrarily imposed, cutting across ethnic groups and cultural units and paying
little regard to the people’s history and past experiences (Barbour et al., 1982). As a result, since gaining
independence, Nigeria has grappled with the problems and crises deeply rooted in tribalism and other ethnic
tensions. These tensions have led to successive military coups, including tribal and religious unrests. In
addition, the country has had a long history of gross mismanagement of the economy and corruption at all
levels of government (Okike, 2004).

9.3 Accountability and Corruption

Undeniably, accountability in all facets of the economy is an essential ingredient to the economic
development of any nation. But various governments in Nigeria have been contending with the problem of
achieving adequate accountability in the country (Okike, 2004). This is because Nigeria is a country of
many paradoxes. On the one hand, it is deemed to be of economic relevance globally because it is one of
the world’s largest producers of oil. This equally makes the condition of the Nigerian business environment
of great importance. On the other hand, it has been ranked as one of the poorest nations in the world, being
the 5th country with a high percentage (70 per cent) of its population living below the poverty line2.
Furthermore, Nigeria has secured for itself a reputation as a country with a pervasive state of corruption in
both private and public spheres (Okike, 2004). Over the years, the state of corruption in Nigeria has reached
epic proportions (Transparency International, 2017). The latest figures released by Transparency
International shows that the Corruption Perception Index (CPI) of Nigeria is still high, 148 out of 180
countries, with a score of 27 out of 1003. This lends credence to why corporate governance remains high
on the agenda in Nigeria both as a developing country and as a member of the Commonwealth.

9.4 Background to Company Regulation

Issues relating to the regulation, control and governance of business enterprises in Nigeria are largely
contained within the provisions of company legislation. This system of legislation has its roots in Nigeria’s
colonial past (Okike, 2007). Like most former colonies of Britain, Nigeria 'inherited' its legal and corporate
structures from the UK. However, before the advent of the British Government (in Lagos in 1861) and in
Nigeria as a whole in 1914, European traders, who were mostly Portugese traded with local people along
the coasts of West Africa and kept records of their transactions for the mutual benefit of both parties
(Anibaba, 1990). This established some form of accountability between the parties. But during the colonial
period, British accounting was introduced into the country and Nigeria’s legal system mirrored the UK
pattern (see Parker, 1958). At independence, the Companies Ordinance of 1922 (based on the UK act of
1908) became Nigeria’s Companies Law, which was repealed and replaced by the Companies Act of 1968.
The Act was a marked improvement on the previous law, introducing for instance, mandatory provisions
for accounts and encouraged greater accountability of directors and more effective participation of
shareholders in the affairs of the company (Okike, 1994). Despite attempts to assert Nigeria’s political and
economic independence, the 1968 Act mirrored the UK Companies Act of 1948 to a large extent (Okike,
2007). This was because at that time, foreigners, mostly British, controlled the activities of business
enterprises and along with their economic interests brought with them their company legislation. The
consequence of simply mimicking British company legislation was that it failed to deal with company law
problems that were peculiar to Nigeria’s socio-cultural and political environment. It also did not address
the rapid economic and commercial developments of the country (Okike, 2007).
Another defect of the Companies Act 1968 was its failure to communicate with Nigerians in a
simple and comprehensible manner. The need for reform of the law became inevitable, more so, with the
introduction of the Nigerian Enterprises Promotion Acts, which were intended to promote the
indigenisation exercises. The implementation of the provision of these Acts revealed the many inadequacies
of the Companies Law and it was clear that a more relevant set of principles and legal practice was required.
These concerns impelled the Government through the Attorney General and Minister of Justice to direct
the Nigerian Law Reform Commission in 1987 to undertake a review and reform of Nigerian Company
Law4. The Committee submitted its report together with three draft decrees, which the Government
accepted and immediately referred to a National Consultative Assembly on Company law for deliberation
and recommendation for further action. The Assembly comprised leaders of thought and persons with
informed and working knowledge of company law and practice including lawyers and accountants.
The Consultative Assembly’s Report including a draft decree was submitted after one year’s
deliberation. Following this, the government promulgated the Companies and Allied Matters Decree 1990
(No.1 of 1990) (CAMD, 1990) with effect from the 2nd of January 1990. Several amendments were made
to the Decree over the years, resulting in the Companies and Allied Matters Act, Cap.C20, Laws of the
Federation of Nigeria 2004. By this time, the country had ceased to be under military rule, and was being
run by a democratically elected government.
Before highlighting the curious provisions of CAMD No.1 1990, it is worth mentioning that the
final legal document which arose from the dual and consecutive deliberations of the Law Reform
Commission and the Constituent Assembly was a carbon copy of the UK Companies Act 1985. The only
extraneous additions were the curious and contentious ones. Okike (1994) provides an interesting insight
into these curious provisions, which were an attempt to reflect Nigeria’s peculiar socio-economic and
political culture. These peculiar provisions included those relating to the appointment of auditors, auditors’
reports, the services that auditors can perform and the potential threat to the monopoly of the marketing for
auditing services by members of the Institute of Chartered Accountants of Nigeria (ICAN). On the auditor’s
report, a peculiarly Nigerian innovation was the requirement that the report should be countersigned by a
legal practitioner (sec.359(2))5. Whereas members of the accounting profession saw this latter provision as
an embarrassment, the lawyers regarded it as a step in the right direction.
Auditors, legal practitioners and the general public received the curious provisions of the CAMD
1990 with mixed feelings. Unsurprisingly, the ‘offending’ provision of section (359(2)) was repealed, after
a year of experimentation with it. The Decree was severely criticised on the grounds that it was evasive
over a number of issues in relation to the implementation of the provision of sec.359(2). The Decree did
not state what role the legal practitioner was expected to play in the actual examination of the company’s
books and records; nor did it state which legal practitioner should countersign the auditor’s report – the
client company’s or the auditor’s. In addition, by the provisions of sec.368(2) the legal practitioner is
absolved from legal liability for negligence in the issuance of the auditor’s report. For a detailed analysis
of the experimentation with the provisions of sec.359(2), see Okike (1994), and Okike (2004), for how the
accounting profession responded to the challenge to its legitimacy.

9.5 The Current Regulatory Framework for Companies

A country’s regulatory framework is critical in determining the buoyancy of the business environment and
its ability to attract foreign investment. Thus the Nigerian Senate recognises that the legal framework for
undertaking business in Nigeria must reflect the challenges of modern markets in which business and
investment decisions are increasingly determined by global conditions. This increasingly global market
place should incorporate regulatory conditions, which are modelled around international best practice.
CAMA is one of the most critical pieces of legislation, which impacts the Nigerian business climate and
Micro, Small and Medium Scale Enterprises (MSMEs). It also directly affects the influx of Foreign Direct
Investment (FDI) into Nigeria because of its relevance to ease of doing business and ease of investing in
Nigeria6. Appropriately, the Nigerian Senate on the 15th day of May 2018 passed the Companies and Allied
Matters Act (CAMA), 2004 (Repeal and Re-enactment) Bill, 2018 (“the Bill”) into law. The Bill, which
seeks to repeal and re-enact the existing Companies and Allied Matters Act 2004, is aimed at addressing
the shortcomings of CAMA 2004, and when assented to by the President, is expected to promote the ease
of doing business in Nigeria. The Senate considered that the current legislative framework was now more
than 20 years in existence with minimal amendments during the period. The consequence was that the
corporate landscape was not in tandem with developments in the global market place, and there was the
need to make necessary amendments to make the Act more contemporary and relevant.
The Bill is divided into eight (8) parts as follows:
Part A – deals with the administrative aspect of the Corporate Affairs Commission
Part B – deals with the incorporation of companies in Nigeria and incidental matters
Part C – deals with Limited Liability Partnership
Part D – deals with Limited Partnership
Part E – deals with Business Names
Part F – deals with Incorporated Trustees (non-profit organisations)
Part G – deals with establishment of Administrative Proceedings Committee
Part H – provides the Short Title of the Bill
The summary of the repeal and re-enactment of CAMA:
• Single Member Companies – a single person can form a company for the first time in Nigeria. This
provision is consistent with what obtains in other advanced countries such as the United Kingdom
and Singapore
• Limited Liability Partnerships – Limited Liability partnerships can now be formed
• Financial Assistance – companies will now be permitted to provide financial assistance to their
shareholders under the new bill
• Reduction in Share Capital – private companies can reduce their share capital if a special resolution
to that effect is passed – without the added burden of applying to court for a confirmation of the
reduction.
• Resolving Insolvency – CAMA introduces a company rescue and insolvency legal regime to save
viable businesses and to ensure that non-viable businesses can exit the market quickly, allowing the
deployment of assets to more productive firms.
 • Company Secretary – the provisions ease the regulatory burden on public companies to appoint a
Company Secretary, and make it optional for small companies with one shareholder.
• Annual General Meeting – it would no longer be mandatory for small companies to hold AGMs
• Minority Shareholder Rights – this is geared towards enhancing minority shareholder rights and
protects the rights in corporate governance
• Beneficial Ownership – mandates the disclosure of beneficial interests in a company’s shares and
prescribes punitive measures for failing to disclose such interests.
• Exemption from Audit – small companies are exempted from appointing auditors if (i) it has not
carried on business since its incorporation; or in a particular financial year; and (ii) where the
company’s turnover is not more than N10m and its balance sheet total is not more than N5m.

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.

9.6 The System of Corporate Governance in Nigeria

The system of corporate governance existing in any country is often shaped by a wide array of internal as
well as external factors (Okike, 1994, 1998, 1999; Okike & Adegbite, 2012). Internal factors include the
state of maturity of the economy and the capital market, corporate and business cultures, the legal system,
government policies and vibrant professional and regulatory bodies, amongst others.
Given Nigeria’s colonial heritage, the system of corporate governance is essentially “Anglo-Saxon,
or the “outsider control system” (Franks and Meyer, 1994). Features of this system are as follows (Okike,
2007):
• The interest of shareholders is paramount in the day-to-day activities of management, and their
priority is the maximisation of shareholders’ wealth
• There is a functioning capital market, which helps to align the interests of management and
shareholders, through right to buy and sell shares at prices which reflect their value as perceived by
investors.
• There is a chain of accountability. Company executives are accountable to the board of directors,
who are in turn accountable to shareholders.
• The rights and responsibilities of key players in the corporate governance framework are embedded
in statute.

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.

9.6.1 The Corporate Governance Mechanism in Nigeria

There are several institutions and individuals charged with the responsibility for ensuring effective
accountability of public companies in Nigeria. These include:

9.6.1.1 The Government

The Government plays a key role in corporate governance through the promulgation of various laws
affecting the management and control of business enterprises in Nigeria, irrespective of their size (Okike,
2007).
The main legal framework for corporate governance is the Companies and Allied Matters Act (CAMA)
2004. Here are some key aspects of the Act as it relates to corporate governance:

Part VIII - Directors and Secretaries of the company

The board of directors provides oversight function over an organization. Section 246 (1) of CAMA requires
that all registered companies have at least two directors. The directors are re-appointed at the annual general
meeting of the company (section 248). Members of the company can by an ordinary resolution remove a
director before the expiration of his period of office. Whereas the Act (section 267(1)) states that the
remuneration of the directors shall be determined by the company in annual general meeting, in practice,
this task is now assigned to remuneration committees, as specified in the Code 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’.

Financial Statements and Audit

Directors are accountable to the shareholders who appoint them. The annual report is the means by which
directors make themselves accountable to the shareholders. Section 331 (1) of CAMA states ‘every
company shall cause accounting records to be kept …’ and ‘the accounting records shall be sufficient to
show and explain the transactions of the company’ (section 331(2). Section 334 places the responsibility
for the preparation of the company’s financial statements on its directors. They have a fiduciary duty to
prepare financial statements, which represent a true and fair view of the company’s financial operations.
The shareholders must approve these financial statements not less than 21 days before the Annual General
Meeting (AGM) of the company. The directors are also expected to prepare a director’s report, which
contains information about the entire activities of the company as well as significant changes that may have
taken place within the year.

9.6.1.2 The Financial Reporting Council (FRC)

Given the renewed emphasis on effective corporate governance and accountability in Nigeria, and the need
to have effective mechanisms for developing and monitoring corporate governance codes and guidelines,
the Federal Government passed the Financial Reporting Act, No.6, 2011. The Act established the Financial
Reporting Council (FRC) as a government parastatal under the supervision of the Federal Ministry of
Industry, Trade and Investment. In addition to developing and publishing accounting and financial reporting
standards to be observed in the preparation of financial statements by public listed companies, the FRC is
also responsible for developing and enforcing compliance with codes of corporate governance.
In section 11 of the FRC Act, the Council’s main objects are to:
a) Protect investors and other stakeholders’ interest;
b) Give guidance on issues relating to financial reporting and corporate governance to professional,
institutional and regulatory bodies in Nigeria
 c) Ensure good corporate governance practices in the public and private sectors of the Nigerian
economy
d) Ensure accuracy and reliability of financial reports and corporate disclosures, pursuant to the
various laws and regulations currently in existence;
e) Harmonize activities of relevant professional and regulatory bodies as relating to corporate
governance and financial reporting.

Additional objects include

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.

The FRC operates through the following operating arms:

• Directorate of Accounting Standards – Private Sector

• Directorate of Accounting Standards – Public Sector
• Directorate of Auditing Practice Standards
• Directorate of Actuarial Standards
• Directorate of Valuation Standards
• Directorate of Inspection and Monitoring
• Directorate of Corporate Governance

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.

9.6.1.3 The Corporate Affairs Commission (CAC)

The Corporate Affairs Commission (CAC) was established as an autonomous body by the Companies and
Allied Matters Act (CAMA) 1990 (section 1) to oversee the regulation and supervision of the formation,
incorporation, registration, management and winding up of companies. The CAC replaced the Companies
Registry because it was found to be grossly deficient in discharging its responsibilities. It was a department
of the Federal Ministry of Commerce and Tourism, responsible for the registration and administration of
the repealed Companies Act 1968.
All companies are required to submit their audited financial statements to the CAC within 42 days
of the annual general meeting. Small companies may deliver modified statements and balance sheets to the
CAC. The Registrar of Companies at the CAC monitors compliance with the requirements of the Act and
specifies penalties, albeit dated, for non-compliance by companies and their officers. In section 7(c), the
CAC is also charged with the responsibility to ‘arrange or conduct an investigation into the affairs of any
company where the interests of the shareholders and the public so demand’. The Commission can provide
information about any company on request, through its Wide Area Network System. The availability of
information to the public increases confidence in the business community and provides protection for the
individual consumer, creditor or shareholder (Okike, 2007).
 Whereas Wallace (1987); Okike (1995, 1999); ROSC, (2004) all criticized the role of the CAC as
being perfunctory and ineffective, there has been a lot of rebranding exercise within the CAC, to make it
more investor friendly, and reduce the cost of doing business in Nigeria.
Part of this rebranding is the Companies Regulation 2012, approved by the Minister of Trade and
Investment pursuant to Sections 16, 585 and 609 of the CAMA 1990. The Regulation came into effect from
1 January 2013.

9.6.1.4 The Securities and Exchange Commission (SEC)

The Securities and Exchange Commission (SEC) is a Government Agency responsible for the regulation
and development of the Nigerian Capital Market. It replaced the Capital Issues Commission, and was
established by Decree No.71 of 1979, and effective retrospectively from 1 April 1978. The SEC plays an
important role in corporate governance in relation to companies listed on the capital market (Okike, 2007).
A series of reviews of the country’s capital market and the financial system led to the promulgation of the
Investments and Securities Decree No.45 of 1999 (later referred to as the investment and Securities Act of
1999). This Act was promulgated to make the investment climate in Nigeria more appealing to foreign
investors (Okike, 2007). However, the Investments and Securities Act 2007 has repealed the Investments
and Securities Act 1999. The Investment and Securities Act 2007 came into force on 25 June 2007, and
provides for the establishment of the Securities and Exchange Commission as the apex regulatory authority
for the Nigerian Capital Market. It empowers the SEC to regulate the market to ensure the protection of
investors, maintain fair, efficient and transparent market and reduce systemic risk. The Act brings with it,
a set of new market infrastructures and wide-ranging system of regulation on investment and securities
business in Nigeria, especially in the area of mergers, acquisitions and take-overs, and collective investment
Schemes, where new provisions have been made.
The SEC was primarily established to protect the interest of investors against fraudulent and
unwholesome practices of stockbrokers and other intermediaries (Orji, 2000). It regulates securities market
participants under the Investment and Securities Act of 2007, and the Securities and Exchange Commission
Rules and Regulations 1999.
Amongst other things, the roles of the Commission include keeping and maintaining separate
registers of foreign direct investment and portfolio investments in Nigeria, promoting the education of
investors and the training of intermediaries in the securities industry.
As a member of the International Organisation of Securities Commissions (IOSCO), the SEC is
keen to promote high standards of regulation to maintain a sound and efficient securities market in Nigeria.
As a result it has an Enforcement and Compliance Department, which is responsible for administering the
Commission’s enforcement programme. There is evidence of enforcement on the Commission’s website
and in some cases defaulters are brought before the Administrative Proceedings Committee (APC), a quasi-
judicial court, with only civil jurisdiction. Appeals against decisions of the APC are made at the Investment
and Securities Tribunal (IST). Enforcement action can take many forms, including payment of fines, a ban,
suspension, or even forwarding the case to the Nigerian Police, the Economic and Financial Crimes
Commission (EFCC) or the Attorney-General of the Federation, where criminal activity is involved.

9.6.1.5 The Nigerian Stock Exchange (NSE)

The Nigerian Stock Exchange (NSE) is a registered company limited by guarantee and licensed under the
Investments and Securities Acts 2007. Originally established by the Nigerian Stock Exchange Act of 1961,
the NSE is self-regulating and plays a crucial role in the mobilisation of capital. The rules of the Stock
Exchange contain conditions for trading and admission of securities on the floor of the Exchange.
Although Nigeria has an established Stock Exchange, it cannot be described as a Stock exchange
based financial system (Demirag, 1998) because it does not play a significant role in the mobilisation of
savings. Only a few companies use it for new issues. For instance, there are currently under 300 companies
listed on the NSE, even though there are over 600,000 companies registered in Nigeria. In a typical Stock
Exchange based financial system, the stock market is a major source of equity and other finance, and
provides a market for corporate control (Okike, 2007). However, the management of the NSE aspires to
make it the ultimate Stock Exchange for championing the development of Africa’s financial markets9.
 The NSE continuously encourages and supports listed companies to establish global best practices
with respect to corporate governance for the benefit of the listed companies, the continuous development
of the Nigerian capital market and the sustainable development of the economy. Also, the NSE is committed
to adopting the highest levels of international standards and belongs to a number of international and
regional organizations that promote the development and integration of global best practices across its
operations. The NSE is a member of the international Organization of Securities Commissions (IOSCO),
the World Federation of Exchanges (WFE), Sustainable Stock Exchanges (SSE) Initiative, the SIIA’s
Financial Information Services Division (FISD) and the Inter-market Surveillance Group (ISG). It is also
a founding member of the African Securities Exchanges Association (ASEA).
With the establishment of the FRC, some of the shortcomings of the NSE in relation to monitoring
corporate disclosures (Okike, 2007) are now under control.

9.6.1.6 The Society for Corporate Governance (SCG)

The Society for Corporate Governance in Nigeria is a not for profit organization registered to foster the
implementation of corporate governance standards in Nigeria and other emerging economies. The
organization equally aims at promoting corporate governance practices locally and internationally. They
are saddled with the responsibility of organizing seminars, trainings and workshops with the aim of
providing education on matters relating to corporate governance. They are involved in research on corporate
governance, which has culminated in certain publications such as the Bi-annual Journal of Corporate
Governance. The Society for Corporate Governance organizes the following programmes:
• Being an Effective Member of an Audit Committee
• Strategic Corporate Social Responsibility
• Company Secretaries and Board Effectiveness
• Board Enhancement Programmes
• Board Evaluation
• Leading an Effective Board
• Annual Conference on Corporate Governance
• Board Strategy Session

9.6.1.7 The Institute for Corporate Governance in Nigeria (ICGN)

The Institute of Corporate Governance in Nigeria (ICGN) is a professional body formed by a team of
experts from different fields with the aim of promoting best corporate governance practices and business
ethics standards in Nigeria, Africa and globally. The Institute was established under the Companies and
Allied Matters Act CAP 59 of 1990 of the Federal Republic of Nigeria, as approved by the Federal Ministry
of Justice, Federal Ministry of Education and the Corporate Affairs Commission. They embark on research,
organize trainings, seminars, workshops on corporate governance and provide certifications in corporate
governance. There are two classes of certifications awarded by the institute namely, the Certified Corporate
Governance Professional and the Governance Risk Management and Compliance Professional. The
Institute equally publishes a journal titled: Corporate Standards: An International Journal of Corporate
Governance Research, discussion papers and newsletters.

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.

9.6.1.9 Audit Committees

Whilst it is true that as a former colony of Great Britain, Nigeria imbibed the laws and corporate practices
of the UK, a revision of the Companies Act in 1990, provided the opportunity for Nigeria to incorporate
into law, corporate governance practices that were suited to the country’s needs. One of such peculiar
initiatives was the requirement of Section 359(3) of CAMA 1990 that auditors of public companies make
a report to an audit committee, which shall be established by all public companies. The audit committee
shall examine the auditors’ report and make recommendations thereon to the annual general meeting as it
may think fit. This requirement was made before the Cadbury Committee was established in 1991. This
influence came rather from the United States where the SEC had made a requirement that from 1988 all
SEC regulated companies should have an audit committee as part of the listing requirement in response to
the Treadway Report on Fraudulent financial reporting in 1987 (Okike, 2007).
There has been a growing interest in the use of audit committees in recent times, and it is accepted
as good business practice in many countries, with the key objective of raising the standard of corporate
governance. Effective audit committees provide assurance to shareholders that the auditors, who act on
their behalf, are in a position to do so and do safeguard their interests. In the UK, the Cadbury Report 1992
recommended that all listed companies should establish audit committees. But before this recommendation,
there was evidence that during 1991, 53 per cent of top 250 listed companies in the UK had effective audit
committees. But following the recommendation of the Cadbury Committee the percentage had risen to 85
per cent of the larger and 83 per cent of the smaller listed companies (Collier, 1992, 1996).
CAMA 1990 became effective on 2 January 1990, and companies were required to comply with its
provision by this time. But Okike (2002) provides evidence that many listed companies had still not
complied in 1993, three years after the promulgation of the Act. This was as a result of the weaknesses
identified in the corporate monitoring mechanisms in Nigeria (Okike, 2007). It is unlikely that such
weaknesses will occur in the new corporate governance era, with the establishment of the FRC, which has
ensuring good corporate governance practices in Nigeria, as one of its objectives.
Section 359(4) of CAMA 1990 stipulates that the audit committee should consist of an equal number
of directors and representatives of the shareholders of the company (subject to a maximum of six members).
By the provision of this section, the law gave a formal recognition to the body of shareholders in Nigeria
(Okike, 2007). Para.6.4 of the draft Code of Corporate Governance reiterates the provisions of CAMA 1990
about having an audit committee, all of whose members should be financially literate. Majority of the
members of the audit committee are expected to be independent non-executive directors. The Chairman
should be elected amongst its members, and the committee must meet at least once every quarter.
In section 359(6)) of CAMA 1990 and Para.6.4.6 of the Code of Corporate Governance 2018, the
responsibilities of the statutory audit committee are to:
 (a) ascertain whether the accounting and reporting policies of the company are in accordance with
legal requirements and agreed ethical practices;
(b) review the scope and planning of audit requirements;
(c) review the findings on management matters in conjunction with the external auditor and
departmental responses thereon;
(d) keep under review the effectiveness of the company’s system of accounting and internal control;
(e) make recommendations to the Board in regard to the appointment, removal and remuneration of
the external auditors of the company; and
(f) authorize the internal auditor to carry out investigations into any activities of the company which
may be of interest or concern to the committee.

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.

9.6.1.10 Shareholders’ Associations

The indigenisation exercise of 1972 (see Okike, 1995) saw the shares of many foreign nationals change
hands and many Nigerians bought shares from companies listed on the NSE. Thus the number of indigenous
shareholders increased on the stock market. This rise in shareholder numbers also gave rise to activists
shareholders, who attended annual general meetings to cause trouble. This shareholder group often
challenged corporate boards whenever they were dissatisfied with the performance of the companies in
which they held shares. They soon formed themselves into formidable groups.
As mentioned earlier, section 359(4) CAMA 1990 stipulates that the audit committee shall consist
of an equal number of directors and representatives of the shareholders of the company (subject to a
maximum of six members). Besides giving formal recognition to shareholder associations in Nigeria, the
provision of this section of the Act led to the proliferation of shareholder associations and notoriety of
shareholder activism in Nigeria. As Adegbite (2010) reports,

‘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.

9.7.1 Securities and Exchange Commission Code October 2003

This was the first corporate governance Code issued in Nigeria, and it was applicable to all publicly quoted
companies. The Code emphasised the role of the board of directors and management, shareholder rights
and privileges and the audit committee. The Code greatly impacted corporate governance in Nigeria, but
was not quick in responding to the changing economic climate that demanded that it be reviewed and
updated. The stagnation and inadequacy of the 2003 SEC Code prompted regulators in specific industry
sectors to issue industry-specific corporate governance codes, which responded to the immediate demands
of the changing business environment in their specific sectors.

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.

9.7.5 The Code of Corporate Governance in Nigeria 2011

The 2003 SEC Code did not contain adequate provisions on certain contemporary corporate governance
issues relating to independent directors, critical board committees, directors’ appointment, tenure,
remuneration and evaluation, the independence of the external auditors, whistle-blowing procedures,
sustainability issues; and general disclosure and transparency issues (Ofo, 2013). Appropriately, the SEC
2003 Code was updated and the Securities and Exchange Commission issued a new Code of Corporate
Governance in Nigeria on 1 April 2011. The Code addressed five main principles, including leadership,
effectiveness of board structures, accountability, remuneration and relations with shareholders. Shortly
after the 2011 SEC Code of Corporate Governance became functional, the Financial Reporting Council
(FRC) of Nigeria Act was promulgated.

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.

9.7.7 Nigerian Code of Corporate Governance (NCCG) 2018

The FRC describes NCCG 2018 as one that seeks to institutionalize the highest standards of corporate
governance best practices in Nigerian companies, especially those companies without industry sector codes
or regulations. The Code is also meant to promote public awareness of essential corporate values and ethical
practices that will enhance the integrity of the market and rebuild public trust and confidence in the Nigerian
economy.
Given that the Code is directed at companies of various sizes and within diverse industrial sectors,
the need for flexibility and scalability was taken into consideration in determining that a ‘principles-based’
approach is preferable to a ‘rules-based’ approach. Furthermore, the implementation of the Code is based
on ‘Apply and Explain’ principle, rather than the ‘comply and explain’ approach adopted in the UK.
Companies are required to apply the principles laid down in the Code and explain how they have applied
them. The decision to adopt this approach was influenced by practices in other countries, which require
voluntary adoption of codes of corporate governance, especially Mauritius and South Africa, two other
Commonwealth countries, which have also adopted the ‘Apply and Explain’ principle.
The Code philosophy is explained as follows:
Apply principles: These principles are those fundamental to good governance, which all companies should
strive to adopt.

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.

9.8 Summary and Conclusion

This chapter is a synopsis of the current state of corporate governance in Nigeria, Africa's largest economy
and the third largest member of the Commonwealth of Nations. There is no doubt that given Nigeria’s
wealth of physical, human and material resources the country has the potential to attract a huge amount of
foreign investments into the country. Yet it is a country with many paradoxes. On the one hand it is
presumed to be economically significant because of its rich oil wells. Yet at the same time it is classed
amongst the countries where poverty is at its height. This is because of endemic corruption in all facets of
public and private life. This notwithstanding, there are concerted efforts being made within the corporate
sector to make Nigeria the place where serious investors would give first consideration.
The passing of the Companies and Allied Matters Act (CAMA) 2004 (Repeal and Re-enactment)
Bill, 2018 and the establishment of the Financial Reporting Council (FRC) are important steps in the right
direction. The new CAMA 2018 will promote the ease of doing business in Nigeria, and ensure that
corporate developments in the country are responding to developments in the global market. Also, one of
the objectives of the FRC is to ensure high quality financial reporting and effective monitoring of
companies. Investors would be willing to invest in an economy with appropriate structures in place that
promote high standards of accountability and corporate governance. Although as a former colony of Great
Britain Nigeria's corporate sector and legal system bore great semblance with that of the UK, there is
evidence from the new Bill and the exposure draft of Nigeria Code of Corporate Governance 2018 that
there are concerted efforts to ensure that Nigeria's legal system and the regulation of the corporate sector
reflect the peculiar socio-political and cultural demands of the country and meet the aspirations of the
people. Having established the FRC and given it the mandate to ensure the integrity of the corporate sector,
the Federal Government would do well not to interfere with their work. The suspension of the NCCG
2016 is a case in point.

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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.

14.4.3 Institutions that promote Corporate Governance

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.

14.5 External Support for developing corporate

 governance capacity

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.

14.6 Global Developments in Corporate Governance and their impact on Tonga

Global development in corporate governance is an inevitable reality for countries and businesses that
participate in the international market. Alignment of accounting standards, taxation and transfer of wealth
between countries are examples of the shift towards a common set of rules for international market
participants. Although these regulations are tailored to the national agenda of each country, smaller nations
including Tonga will have limited influence on their scope and impact. Regulations and best business
practices may be mandated through legislation. The alternative is to encourage adoption through market
forces. Corporate governance as an operating model for business is not legislated in Tonga for adoption by
private businesses. Flexibility for companies to create their own constitution and operating procedures
support innovation and entrepreneurship. Tonga currently follows the process of encouraging corporate
governance practices but does not enforce it through legislation. Enforcing adoption of corporate
governance practices may speed up the process of aligning Tonga with the global markets. However,
without fully assessing the potentially negative consequences to Tongan society, culture and business
sovereignty, compulsory adoption is risky.
The efforts to continue promoting corporate governance practice (or at least a modified version of
it) should continue as part the Millennium Development Goals. Furthermore, this will help in preparing the
Tongan economy for greater participation in the international market. The strategy for promoting corporate
governance adoption should be a shared responsibility including the government, education providers,
business sectors and faith based organisations. This is because the shift towards a capital market economy
with western practices of corporate governance is a paradigm shift. The shift is not simply a case of adopting
a new way of doing business but changing the core values and beliefs that characterise Tongan society. The
process is likely to take time as shift in customs happen over long periods (Helu, 1997).

14.7 A way Forward

Developing nations in the commonwealth are faced with the challenges of developing their economy to
allow for greater prosperity and sustainability. The long-term goal is to build economies that are sustainable
and that are not reliant on foreign aid and remittances. The Millennium Development Goals have provided
a template and targets for achieving this long-term goal. The third and final report on the MDG in 2015
identified that Tonga was making progress towards achieving its goals in terms of developing a strategic
plan that captures the specific targets for each MDG domain. The targets and timeframe is optimistic.
However, they provide a starting point that can be modified as new challenges emerge and others are
addressed.
The specific focus of this chapter is to discuss the strategic adoption of corporate governance
practices in Tonga as a means of developing economic prosperity that is driven by private businesses. The
progress to date is mixed. Public sector enterprises have a documented governance structure and codes of
practice that mimic practices overseas. These practices have been weaved into the operating and governance
policies and procedures of the various ministries and crown entities. However, adoption at the practice level
is still work in progress as ongoing training and mentoring is still required.
Faith based organisations are unlikely to adopt corporate governance in its pure capitalistic form.
Instead they are likely to adopt those practices that they see at the time that promote the core objectives of
their organisation. In favour of the faith based organisation is the underlying value and belief on which they
are built. The core principles that characterise faith based organisations act as means of mitigating fraud
and corruption. Regular meetings and election of officers spread the power base and the potential for
corruption.
Overseas investors and entrepreneurs have assisted in the overall promotion of corporate
governance practices although this is unlikely to have been part of their profit-making agenda. These have
identified some of the challenges associated with running a business in Tonga. Their unfamiliarity with
Tonga’s commercial environment and language are barriers that have been overcome through partnering
with local partners and agents. These local partners act as a conduit between the business and the local
customer base and workers. It is inevitable that these agents and partners will gain hands on experience of
corporate governance and western business practices.
Local investors and entrepreneurs are among the most vulnerable in terms of making the transition to a
more western style of business practice. Part of the vulnerability extends from the lack of resources they
have that would allow them to access professional expertise in corporate governance and other associated
practices. These local entrepreneurs may benefit from a business advise bureau and or business mentor
programme.
The chamber of commerce may take a lead role in capturing and making these best practices known
through sponsored seminars, workshops and publications. These efforts will not only help to disseminate
good practice but bring the business community together for their mutual benefit, greater awareness and
social capital.

14.8 Summary and Conclusion

The process for promoting the adoption of corporate governance practices in Tonga has already been
accepted as a strategy for achieving sustained economic development. However, the initial assessment as
to how this should happen and the impact that it may have on Tongan society does not appear to have been
appropriately evaluated. The contextual evaluation that was carried out as part of the development of the
sustainable development goals and the millennium development goals correctly capture the cultural
characteristics of Tongan society. Despite this, these same cultural characteristic and nuances do not appear
to be reflected in the implementation design. The objectives of the United Nations to support the
development of emerging economies in the Commonwealth has translated to imposing western capitalistic
models with little regard to the nation’s traditions and customs. Small countries who are reliant on foreign
aid and international markets for imports are obliged to adopt foreign corporate practices or suffer the
negative economic consequences. This need not be the case if the way forward is a co-design model that
reflects the character of a country and the merits of global best practices.
As with many new projects, a good idea that is poorly implemented will have the same negative
result as a bad idea that has been well executed. Good corporate governance in Tonga is a good idea that
has the early indications of being poorly implemented. Small countries may openly accept business
practices that promise economic prosperity but then harbour an invisible resistance because the new
practices do not align with their core values. The solution is an implementation process that adopts the
principles of change management. Host nations need to take ownership of the problem and the solution and
then to co-design with their global partners a scheme that achieves the same outcome but incorporates the
cultural nuances that help identify it as a sovereign nation.

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Chapter 15
 Corporate Governance in Uganda
Juliet Wakaisuka - Isingoma and Stephen Korutaro Nkundabanyanga

15.0 A brief on Uganda

The Republic of Uganda is a land-locked country in East Africa. Uganda is bordered on the east by Kenya,
on the north by South Sudan, on the west by the Democratic Republic of the Congo, on the southwest by
Rwanda and on the south by Tanzania. The southern part of the country includes a substantial portion of
Lake Victoria, shared with Kenya and Tanzania. Uganda gained independence from Britain on 9 October
1962. The period since then has been marked by intermittent conflicts, most recently a civil war against the
Lord’s Resistance Army. According to Nkundabanyanga et al. (2014) these conflicts have often had wide-
ranging effects on corporate governance. Nevertheless, since the mid-1990s Uganda has experienced
consistent annual increase in economic growth (6.9 per cent), higher than the African average of 5.4 per
cent (World Bank, 2007), although it has slowed down due to the global economic slowdown and adverse
climatic conditions affecting agricultural activities.
There are two major sources of corporate governance in Uganda: The Companies Act, 2012 and the
Institute of Corporate Governance of Uganda (ICGU) Manual on Corporate Governance (2001)
(www.icgu.org). Corporate governance in Uganda can be traced from the commencement of the Companies
Act Cap.110, Laws of Uganda, in 1961. For example board of directors is explicitly stated under Part V of
the said Act. Among the provisions is included the number of directors, appointment and removal of
directors and age limit, directors’ duties and assignment of duties by directors. According to the Uganda -
African Peer Review Mechanism (APRM) National Commission (2007) unitary boards are the dominant
structure for public corporations, and public and private limited liability companies in Uganda. In order for
both public and private companies to be registered, the Act stipulates a minimum of two directors.
Corporate governance has become important for the survival of companies and indeed of national
economies in the increasingly global economy. Corporate governance is of particular concern in developing
economies, where the mix of international investor capital and foreign aid is essential for economic stability
and growth. Transition economies, like Uganda, are faced with the challenge of restructuring for greater
efficiency and creating a foreign investment-friendly environment. In this regard, good corporate
governance as a crucial facet for business practices in both public and private sectors becomes a necessity.
In Uganda, the institute of Corporate Governance manages corporate governance in Uganda (ICGU). The
ICGU is a not-for-profit membership based organization which was incorporated in December 1998 as a
company limited by guarantee and not having a share capital, and was launched in October 2000. The vision
and mission of ICGU is:
An enterprise sector that upholds international best practices in corporate governance by 2020
and to promote excellence in corporate governance principles and practices, respectively. The core values
of ICGU include: Excellence, Integrity, Transparency, Accountability and Responsibility.
The key activities of the institute include;
1. Conducting and coordinating training for directors and senior management, enhancing board and
management performance, with better understanding of duties and responsibilities for the benefit of
all stakeholders.
2. Publishing and disseminating information on corporate governance through public awareness
lectures, pamphlets, discussion papers, the institute journal and other documents associated with the
affairs and activities of the institute as well as other associated agencies.
The expected outcomes of the institute include:
1. Existence of a dynamic institute expected to create an enabling environment to foster trends in;
increased business efficiency, financial probity and transparency for the benefit of all stakeholders;
2. Increased economic growth and greater trade and investment in East and Central African region;
have more jobs and higher living standards; and enhance environmental sustainability
According to Kiryabwire (2014), approach to corporate governance in Uganda is broadly
categorized into mandatory and voluntary frameworks. The former is where corporate governance
standards are enshrined in legally enforceable instruments such as Laws and regulations and include
penalties for non-compliance. This is what has come to be known as ‘comply or else’ regime. The latter
includes codes and guidelines that contain best practices on particular corporate governance issues such as
treatment of shareholders, conduct of board meetings, transparency and accountability among others. These
are voluntary and do not have penalties for non-compliance. This has come to be known as ‘comply or
explain’ regime.
Because there are both advantages and disadvantages of each approach, Uganda has adopted a
hybrid approach encompassing both voluntary and mandatory frameworks. This is because such an
approach draws on the strength of both and minimizes the negative effects of each. For example a
mandatory framework for financial institutions under the Financial Institutions Act 2012, ensures that there
is a minimum mandatory standard applicable to those categories of enterprises. Nevertheless, private
companies, in particular small companies operate outside the mandatory framework and are not burdened
by any onerous mandatory requirements.
The mandatory corporate governance frameworks in Uganda include the Companies Act 2012, The
Financial Institutions Act of 2004 and the Microfinance Deposit Taking Institutions Act of 2003. These
Laws provide certain basic corporate governance requirements that are mandatory such as the requirement
to have a board of directors, to file annual returns, to hold an annual general meeting, to have a share
register, to have audited accounts and allow shareholders to inspect the company’s books of accounts. These
are contained in the Companies Act 2012.

15.1 Efforts in Uganda to promote good standards of corporate governance and

business practices in the public and private sectors, including the Codes of
Best Practices
Corporate governance is perceived as important for companies. In Uganda, good governance is seen to
pursue eight distinguishing characteristics: discipline, transparency, independence, accountability,
responsibility, fairness, ethical conduct and good corporate citizenship. It is believed that these traits are
critical for better performing organisations which are sustainable in the long-run. There is a general
understanding that this in turn leads to Uganda’s economic development as such organisations contribute
to the economy and to society as a whole directly through the wages, salaries and taxes they pay, and
indirectly through the money they pay their supply chain, the vendors, retail outlets, service and training
firms and resellers of their products and services. In this regard, both public and private companies have
tried their best to promote good standards of corporate governance and business practices as listed above.
Public and private sectors have promoted codes of best practices in a number of ways: First, public
companies have demonstrated their commitment to good governance through compliance with regulation
by recognizing the importance of regulations, their application, interpretation, objective and rationale.
Second, regulatory requirements are expressed through duties of directors, committees like audit
committee, asset liability management committee, risk management committee, compensation committee
and the auditors. Third are the remedial measures and administrative sanctions taken.
In general companies in Uganda adopt the corporate governance framework and pay attention to
world-class standards on health and safety, climate change, and corporate governance underpinning
environmental, social and governance considerations. A number of companies have complied with most of
them broadly because regulators, customers, partners, shareholders and the public are only comfortable
with such companies that demonstrate compliance with codes of best practices. Typically, best practices
are benchmarked against international standards like the UK Corporate Governance Code and King III.
Among the organisations that are doing a great work towards promoting good standards of corporate
governance and business practices in the public sector include: the government of Uganda through Bank of
Uganda (BoU), Electricity Regulatory Authority (ERA), Insurance Regulatory Authority (IRA), Ministry
of Local governments (Districts and sub-county levels), and Ministry of Public Service, to mention but a
few. Private companies equally work hand in hand with the government. Government of Uganda liberalised
the economy by inviting the private sector to lead economic growth albeit recognising legal and institutional
frameworks to allow joint investments in the economy. This would allow full exploitation of opportunities
in different markets igniting these companies to improve their capacities and therefore compete effectively.
In the same thinking, Wakaisuka – Isingoma, et al. (2016) reveal that corporate governance is
critical especially in financial institutions since information disclosure, financial transparency, ownership
structure and board profile stimulate firm performance. It is imperative to note that in Uganda, the majority
of firms are small and do not have listed shares, yet also the large state-owned, foreign owned and private
family-owned companies whose shares are listed are not widely traded locally. This could explain why
many people still doubt the significance of corporate governance for the economy. Broadly, the following
have been crucial in promoting and demonstrating good standards of corporate governance and business
practice:

15.1.1 The Companies Act 2012

Although enacted in 2012, the Act commenced on 1st July 2013 and replaced the Companies Act
Cap 110. The New Companies Act makes a bold introduction of mandatory corporate governance in
Uganda. Section 14(1) of the Act provides that a public company shall at the time of registration of its
articles, adopt and incorporate into its articles the provisions of the code of corporate governance contained
in Table F. The manner in which section 14(1) was drafted has created some uncertainty. Some
commentators have argued that the intention of the clause was to make it mandatory for all public
companies to adopt Table F. However, the following wording of section 14(1) “…a public company shall
at the time of registration of its articles…” appears to exempt public companies that were registered prior
to the enactment of the Act. This would effectively make Table F mandatory only for new public
companies. Kiryabwire (2014) suggests that this would be absurd considering that the majority of
companies in Uganda are private which according to section 14 (2) may adopt the code on a voluntary
basis. There are a few public companies and to make Table F only mandatory for new ones seeking to
incorporate under the Act limits the application of Table F. Nevertheless for both public and private
companies that adopt the code of corporate governance in Table F, it is mandatory to file a statement of
compliance with the Registrar of Companies and the Capital Markets Authority by virtue of section 14(4)
although there is no guidance as to the nature and content of the statement of compliance. It can be expected
that the Capital Markets Authority will provide the required guidance as to the format and content of the
statement.
Table F makes provision for the following on corporate governance.
a) The Board of Directors. The code spells out the responsibilities of the board and these include providing
strategic direction, ensuring effective controls and compliance with the Laws and regulations among others.
b) Board composition. The code provides that the board shall be comprised of a balance of executive and
non-executive directors. The code also requires the nomination committee to consist entirely of non-
executive independent directors whose responsibility is to select directors in a transparent manner. Our
experience suggests that this may not be practical since most boards in Uganda are dominated by
representatives of shareholders and selection of board members is done taking into account various factors
such as shareholder representation, skills and competencies, the desire to form strategic relationships, inter
alia.
c) The relationship between the chairperson of the board and the chief executive officer. The code provides
for a separation of roles. Nevertheless, where the two positions are combined, it provides for an independent
director to be appointed as deputy chairperson.
d) Directors. The code categorises directors into executive, non-executive and independent. Executive
directors are those involved in the day-to-day management and employed by the company or its
subsidiaries. A non-executive director is one who is not an executive director. Yet an independent director
is a non-executive director who does not represent a majority shareholder, has not been employed by the
company in past 3 years, and is not an immediate family member of a person who is or was in the past 3
years employed in executive capacity, is not a professional advisor, is not a significant supplier or customer,
has no significant contractual relationship with the group, is free from any business or other relationship
which could materially interfere with his or her ability to act independently.
e) The remuneration of director. The code recognizes the importance of remuneration as incentive to retain
quality directors. It provides for a remuneration committee comprising of independent directors and for the
annual report to disclose members of the committee as well as particulars of directors’ remuneration, share
options and other benefits.
f) Board meetings. The board shall meet at least once in three months, regularly review processes and
procedures as well as ensure effectiveness of internal controls.
g) Board committees. Board committees assist the board in the performance of its duties. Nevertheless the
overall responsibility remains with the entire board. The code provides that a company should at least have
an audit committee and remuneration committee and for committees to be chaired by independent non-
executive directors.
h) Board and director evaluation. The code provides that the board should at least once a year, review its
effectiveness through self-evaluation. It is considered good practice for a board to review its performance
and there are various methods that are used including external evaluation and peer evaluation. Although
both are commonly used, according to Kiryabwire (2014), it appears there are inherent challenges with
external evaluation since the person conducting the evaluation does not attend board meetings and is not
able to track director engagement and contribution in and outside the board room as well as observe board
dynamics in different settings.
i) Dealings in securities. This is a measure to prevent insider trading and prohibits directors and officers
from trading in securities of the company in the period between the end of an accounting period and the
date on which accounts are published.
j) The office of the company secretary. The code recognizes the important role played by the company
secretary in corporate governance and requires the board to empower him or her to effectively perform the
duties expected of a company secretary.
k) Risk Management. The board has the responsibility for risk management and shall decide on risk
tolerance levels and on an on-going basis, shall identify, measure and proactively manage risks. The code
provides that the board shall decide on risks relating to physical and operational, human resources,
technology, business continuity, credit, market, compliance and disaster recovery plans.
l) Organisational integrity and code of ethics. The code requires organisations to demonstrate commitment
to ethical standards at the highest level and ensure adequacy of procedures to implement, monitor and
enforce the standards.
m) Accounting, Auditing and financial reporting. The code requires financial statements to be presented in
accordance with international financial reporting standards unless otherwise allowed by the Institute of
Certified Public Accountants of Uganda.
n) Relations with shareowners. The code encourages constructive dialogue and engagement of institutional
investors. It is not clear why the code focuses on relations with institutional investors only. We argue that
although they play a critical finance and governance role, the board should ensure that there is constructive
engagement with all shareowners including minority shareowners.

15.1.2. The Financial Institutions Act (FIA), 2004

The Financial Institutions Act, 2004 provides the regulatory framework for Banks and micro finance
deposit taking institutions in Uganda. The Act defines a Bank as any company licensed to carry out financial
institution business as its principal business, as specified in the Second Schedule to the Act and includes
all branches and offices of that company in Uganda. Part VII contains provisions on the corporate
governance requirements of commercial banks. These include appointment and removal of directors,
management of conflicts of interest, conduct of board meetings, Board committees, appointment and duties
of internal auditor, appointment and duties of the external auditor. In terms of conflict of interest, Section
54 of the Act requires directors and officers of financial institutions to disclose matters in which they have
an interest and not to take part in discussion or take decisions on any matter in which they have interest. In
terms of the audit committees, Section 59 of the Act requires the board of directors of every financial
institution to constitute an audit committee consisting of non-executive members of the board. The duties
of the audit committee includes reviewing internal audit reports, internal controls, procedures and
management information systems, ensuring that the institution’s audit function is adequate, coordinating
internal and external audits, reviewing investments and transactions that may affect an institution, and
monitoring insider transactions. In terms of the asset and liability management committee, Section 60 of
the Act requires such a committee to primarily be concerned with risk and provision of guidelines on issues
such as limits on loan to deposit ratio, loan to capital ratio, exposure to single or related customers, reliance
on a particular deposit liability category, dependence on interbank and other volatile funding instruments,
maximum and minimum maturities for newly acquired assets and liabilities, among others. For control over
management, Section 77 of the Act gives Bank of Uganda (the central bank) powers to remove from office
a chairperson, director or the chief executive of a financial institution if satisfied that it is in the public
interest or for preventing the affairs of the financial institution from being conducted in a manner
detrimental to the interests of the depositors or for securing the proper management of the financial
institution, it is necessary to do so.

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.

15.1.4 Voluntary Corporate Governance Frameworks in Uganda

 Voluntary corporate governance frameworks include the Institute of Corporate Governance of
Uganda (ICGU) Corporate Governance Guidelines of 2008, and the Capital Markets Authority (CMA)
Corporate Governance Guidelines of 2003. The Corporate Governance Code in Table F of the Companies
Act 2012 is voluntary for private companies.
The ICGU developed a manual in 2001, updated in 2008, that contains recommended guidelines
for public and private entities in Uganda. The guidelines attempt to achieve a balance between the local
environment and international standards. They cover issues such as the board of directors, internal systems
and controls, the audit committee, compliance with the Laws and regulations, communication, good faith
and confidentiality, code of ethics, shareholders and their duties to the employees and the community
among others. The guidelines go further to define the duties of employees of an entity subject to the
guidelines as well as those of external stakeholders who include the government, regulatory bodies,
suppliers of a company, lenders of a company, its customers, investors and the company at large. Extending
the reach of the guidelines to the above listed array of external stakeholders promises exceptional
performance for corporations and other entities in Uganda that adopt them. Although the guidelines are
intended to apply to most Ugandan companies and provide a basic framework for the establishment and
development of a culture of corporate governance in Uganda, their adoption is voluntary. It is projected
that the guidelines will be a living document that should be updated as regularly as possible in tandem with
international developments as well as changes in the local context.
The CMA corporate governance guidelines were developed in 2003 in response to the growing
importance of governance issues both in emerging and developing economies and in recognition of the role
of good governance in corporate performance, capital mobilization and maximization of shareholder value
as well as protection of investors’ rights. They provide a minimum standard of good corporate governance
practices by public companies and issuers of corporate debt in Uganda. The guidelines provide for: best
practices relating to the board of directors; best practices relating to the position of the chairperson and
chief executive; best practices relating to the rights of shareholders; best practices relating to the conduct
of general meetings and best practices relating to accountability and the role of audit committees.
Other noteworthy efforts are contained in:
Ø Public finance management Act 2015
Ø African Development Plan (Chapter seven – Corporate Governance)
Ø Africa Peer Review Mechanism (APRM) Country Reports
Ø Bank of Uganda
Ø Corporate governance manual with recommended guidelines
Ø Trainings conducted by the ICGU for both public and private companies
Ø Private Sector Foundation
Ø Government through Directorate of integrity and ethics
Ø Inspector General of Government
Ø Non-government organisations like anti-Corruption coalition, Civil society and others
Ø The Financial Institutions (Corporate Governance) Regulations, 2005- Statutory Instruments
Supplement No. 18
Largely, promoting good standards of corporate governance and business practices in the public
and private sectors of the Commonwealth acts as a means to achieve global standards of efficiency,
commercial probity and effective economic as well as social development. This eventually facilitates the
development of appropriate institutions that advance, teach and disseminate such standards in order to
strengthen, maintain and extend good practice in corporate governance.

15.2 How Uganda is attaining global standards of efficiency, commercial probity

and effective economic and social development

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.

15.3 Institutions advancing, teaching and disseminating corporate governance

standards in Uganda
There is a considerable amount of work that has been advanced, taught and disseminated by a number of
institutions in promoting good standards of corporate governance and business practices in Uganda. These
include:
Ø Universities like Makerere University Business School and Uganda Martyrs Nkozi
These universities have a good working relationship with ICGU. Additionally, good practices of
governance are embedded in their teaching curriculum but also, students and lecturers, subscribe to
ICGU as members: therefore do attend conferences, use different platforms to promote codes of
best practices in corporate governance to society as a whole.
Ø Association of Chartered Certified Accountants (ACCA)
ACCA disseminates corporate governance through, governance, risk and ethics that aims at making
the recipient apply relevant knowledge, skills and exercise professional judgment in carrying out
the role of the accountant relating to governance, internal control, compliance and management risk
within an organization in the context of an overall ethical framework. ACCA therefore portrays the
relevance of corporate governance in an organization setting, given its core objectives, among which
are; first, it defines governance and also explains its function in the effective management and
control of organisations, as well as, the resources for which they are accountable. Second, it
evaluates the professional accountant’s role in internal control, review and compliance. Third, it
explains the role of the accountant in identifying and assessing risk. Fourth, it explains and evaluates
the role of the accountant in controlling and mitigating risk. Finally, it demonstrates the application
of professional values and judgement through an ethical framework that is in the best interests of
society and the professional, in compliance with the relevant professional codes, laws and
regulations (Kaplan Financial Limited, 2015).
Ø Institute of Certified Public Accountants in Uganda
 The institute of Certified Public Accountant in Uganda (ICPAU) follows the Accountant Act 1992
with the aim to regulate and maintain standard of accountability in the country and prescribe or
regulate the conduct of accountants in Uganda (www.icpau.co.ug). The institute is also governed
by a council that is assisted by two statutory committee - the examination board, and the disciplinary
and ethics committee, together with seven more including: education committee, events
management committee, technical committee, members’ services committee, finance and
administration committee and lastly planning and development committee. Accordingly, ICPAU
maintain a disciplinary and ethics mechanism that is helpful to both the employees and members to
act professionally and more so, in the interest of the employer, accountant and in public interest.
Ø Public Sector Foundation - The experience over the years clearly shows that successful
privatizations and the development of vibrant private sector depend to a significant extent on the
existence of effective systems of corporate governance.
Ø Institute of Corporate Governance in Uganda–Has based its practices on three main principles
including; the Commonwealth Association for Corporate Governance (CACG) principles, the
OECD principles and the Code of corporate practices and conduct (The King’s Committee Report
of South Africa).
Ø Uganda National Bureau of Standards (UNBS) - UNBS promotes formulation and promotion of the
use of standards by administering them in protection of the public health and safety as well as the
environment against dangerous, counterfeit and substandard products. This enhances fairness in
trade and precision in industry through reliable and measurable systems thus strengthening Uganda,
as an economy. This further promotes competitiveness of local industries and therefore
improvement in the quality of exports through standardization, quality assurance, testing and
metrology.
Ø Capital Market Authority – that is committed to practise the highest level of corporate governance
and also conducts its affairs in line with the principles set out in the capital market corporate
governance guidelines 2003, and the international best practices in corporation governance.
Equally, it is responsible for regulating and promoting a fair, transparent and efficient capital
markets industry in Uganda so as to protect its investors’ interests.
Ø Uganda Securities Exchange - Increased probity, efficiency and effectiveness of the securities
exchange, increases direct and portfolio investor confidence to commit long-term funds to the
country. This requires establishing a comprehensive set of best practices to which listed companies
should adhere. If it is considered to be in the best interests of the company not to follow one or more
of these standards, the company should disclose this to its shareholders, along with the reasons for
not doing so. Otherwise, below are the guidelines of the Capital Markets Corporate Governance,
where Uganda Securities Exchange (USE), subscribes.

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.

Ø Bank of Uganda- Specifically the Financial sector

The financial sector is assigned the special position of trust held by financial institutions in Ugandan
economy and their access to government welfare nets, therefore obliged to have strong corporate
governance mechanisms. Second, with the increasing globalisation of financial markets, emergence of
conglomerate structures, technological advances and innovations in financial products, require that the
quality of corporate governance in financial institutions should be reasonably high. Third, weak
corporate governance is a basic cause of bank failures in Uganda (about 10 banks have closed down:
1996-to date) and therefore needs to be strengthened (The Financial Institutions (Corporate
Governance) Regulations, 2005). The substance of this attention certainly springs from the crisis, which
became a dominant reminder of the importance of the financial system in any economy, as a healthy
economy cannot exist without a well-functioning financial system.

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.

15.5 The impact of global developments in corporate governance on the

development of corporate governance in Uganda
Uganda has made significant strides in corporate governance. However, there are still a number of
shortcomings that need to be addressed. For example, some laws are not fully aligned with international
standards and political interference in the administration of justice, compounded by pervasive corruption,
undermines the Ugandan investment climate. Corporate financial transparency is largely lacking with the
exception of banks, insurance, and listed companies. Also, despite commendable progress made in
strengthening systems for commercial and labour dispute resolution, the judiciary remains plagued with
backlogs. In addition, the supervisory and regulatory bodies face critical shortages of human, technical, and
financial resources which render them ineffective. In this context, a number of private institutions have
been created (i.e., the Institute of Directors, the Shareholders’ Association, etc.) with a view to improve
accountability and strengthen corporations and their directors and management. Notwithstanding, these
institutions still have low acceptance and lack sufficient resources to integrate corporate governance
adoption. Similarly, there is need to also expand the institutions’ coverage to include public awareness
regarding the importance of corporate governance in Uganda. This could be the reason why African
countries rank highest on the sub-index and director liability sub-index (African Development Report,
2011). Nonetheless, various Acts have been introduced to strengthen capacity and maintenance; donor
pressure (in partnerships) has emerged and therefore extending good practices in corporate governance,
technology through information flow as well as World Bank guidelines in the different fields and
departments. In addition, the International Finance Corporation (IFC) –the World Bank’s private arm is
funding private sector projects in Africa, Uganda inclusive, and broadly considers state of corporate
governance before the funding is provided.

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

Corporate Governance in the United Kingdom

Elewechi Okike

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.

16.1 Corporate Governance and Company Regulation

Whilst company law does not provide a comprehensive framework for corporate governance, nevertheless
some elements of company law are essential in helping us to understand the key relationships in the
corporate world.
UK company law draws from both statute and common law. All companies incorporated in the UK
are subject to statutory regulation, irrespective of their size. However public interest companies are subject
to greater legislative requirements, including additional regulation within their specific industries.
The law recognises a limited company as a separate legal entity. Their Memorandum of Association
and Articles of Association dictate internal management of companies. Boards derive their powers from
their Articles of Association, or constitution. The Articles of Association make provision for directors to
delegate their powers to board committees and executive directors. Whilst directors have powers to act as
executive directors and members of the board, they also have duties to act as responsible managers of the
companies in which they are employed.
Directors are agents of their companies and consequently have certain duties and obligations to the
company, as a legal entity, and not to individual shareholders, employees or any other third party outside
of the company. Prior to the introduction of the provisions of Companies Act 2006, the main duties of
directors were duties in common law, meaning a fiduciary duty to the company, and not to its shareholders.
However, Companies Act 2006 has written these common law duties into statute law. Sections 171-177 of
the Act reveal what these duties entail:
S.171 - Duty to act within powers
S. 172 - Duty to promote the success of the company
S. 173 - Duty to exercise independent judgment
S. 174 - Duty to exercise reasonable care, skill and diligence
S. 175 - Duty to avoid conflicts of interest
S. 176 - Duty not to accept benefits from third parties
S. 177 - Duty to declare interest in proposed transaction or arrangement

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).

16.2 The Financial Reporting Council and Company Regulation

The Financial Reporting Council (FRC) was established to help restore the confidence of investors in
corporate governance following the spate of corporate scandals, in the UK and elsewhere. It was established
as an offshoot of the numerous committees that had been set up after Cadbury 1992 to promote transparency
and integrity in business.
The FRC is responsible for setting the UK Corporate Governance and Stewardship Codes. It also
regulates auditors, accountants and actuaries. Prior to the Consultation that took place in October 2011, the
FRC operated under the following structure: The Accounting Standards Board (ASB), the Auditing
Standards Board (APB), the Board for Actuarial Standards (BAS), the Professional Oversight Board (POB)
which includes the Audit Inspection Unit (AIU), the Financial Reporting Review Panel (FRRP), and the
Accountancy and Actuarial Discipline Board (AADB). However, following the consultation that took place
in October 2011 and the responses received, the government introduced legislation restructuring the FRC,
with effect from 2 July 2012. The FRC powers originally vested in the six operating bodies is now devolved
to the FRC Board, which oversees a much-streamlined structure.
The Board is supported by three governance committees13: Audit Committee, Nominations
Committee and Remuneration Committee; two business committees: Codes & Standards Committee and
Conduct Committee, and three advisory councils: Corporate Reporting, Audit & Assurance and Actuarial.
The Corporate Reporting Review (CRR) Committee, Audit Quality Review (AQR) Committee and the
Case Management Committee support the Conduct Committee and have specific responsibilities as set
out in the FRC’s monitoring, review and disciplinary procedures. The Financial Reporting Review Panel
(FRRP) and the disciplinary Tribunal Panel are maintained pursuant to the Conduct Committee Operating
procedures and the FRC’s Disciplinary Schemes.
What protection does the law offer to shareholders against poor corporate governance? The next
section examines the system of corporate governance in the UK.

16.3 System of Corporate Governance

The U.K. adopts an Anglo-Saxon or outsider-dominated system of corporate governance in which
ownership of corporate equity is dispersed amongst a vast number of outside investors/shareholders. In this
type of system, large firms are controlled by managers/directors (also known as 'agents') but owned
predominantly by outside shareholders (often referred to as the 'principals'). Such a system of corporate
governance faces agency problems (Jensen & Meckling 1976; Shleifer & Vishny, 199); Bonazzi & Islam,
2007) because of the separation of ownership from control. This system is also prone to hostile takeovers
(Weisbach, 1993; Sullivan & Wong, 2005), which act as a mechanism for disciplining company
management. Although ownership is dispersed, the large range of shareholders, which are often
institutional investors, exercise some degree of control over management. Investors enjoy strong protection
in company law, and this system of corporate governance has potential for shareholder democracy
(Engelen, 2002; Enriques & Volpin, 2007).

16.4 Development of Corporate Governance Codes

Corporate governance issues emerged in the UK as a result of highly published corporate scandals in the
late 1989s such as Polly Peck and Maxwell giving this historic issue a new thrust. The corporate problems
which arose, consisted of many financial reporting irregularities, creative accounting, surprising business
failures, the auditors limited role and inconsistent link between directors remuneration and company
performance, to mention just this few (Agrawal & Cooper, 2017). Subsequently, the first corporate
governance committee, the Cadbury Committee was formed in 1991 in an attempt to rectify concerns over
corporate scandals, resulting in 1992 to the publication of the Cadbury Report.

16.4.1 Cadbury Report (1992)

The Financial Reporting Council, the Stock Exchange and the accountancy profession set up the Corporate
Governance Committee in May 1991, in response to continuing concern about the standards of financial
reporting and accountability, particularly in light of the BCCI and Maxwell cases.
The Committee was chaired by Sir Adrian Cadbury and had a remit to review those aspects of
corporate governance relating to financial reporting and accountability. The final report, The Financial
Aspects of Corporate Governance (known as the Cadbury Report) was published in December 1992 and
contained a number of recommendations to raise standards of corporate governance.

16.4.2 Greenbury Report (1995)

In the 1990s as investor confidence was diminishing as a result of the scandals that had erupted in the
corporate world, the issue of directors remunerating themselves above what was considered reasonable
became a topical matter. More so, investors could not see any link between company performance and
directors' remuneration.
In January 1995 the Confederation of British Industry (CBI) established the Study Group on
Directors' Remuneration under the chairmanship of Sir Richard Greenbury with a remit to identify good
practice in determining directors' remuneration and to prepare a code of practice for UK PLCs. The final
report of the group was published on 17 July 1995 and is usually referred to as the Greenbury Report.

16.4.3 Hampel Report (1998)

The Committee on Corporate Governance (the Hampel Committee) was set in November 1995 to review
the Cadbury Committee's recommendations on corporate governance and the Greenbury Report. The
Hampel Committee released a preliminary report in August 1997, followed by a final report in January
1998. It suggested that the recommendations of all three committees be integrated into a single code of
corporate governance.

16.4.4. Combined Code 1998

With the publication of the Hampel Report in 1998, the UK already had three reports looking at various
aspects of corporate governance. It was therefore decided that the recommendations of Cadbury, Greenbury
and Hampel be accepted and consolidated into a single report, from which it derived its name, The
Combined Code. The Code consisted of two sections, one aimed at companies, the other aimed at
institutional investors. Following its publication in 1998, the Code was adopted by the London Stock
Exchange and included in the appendix of the UK listing rules.
The Code established standards of best practices for companies in relation to the composition of
their boards, directors' remuneration, accountability and audit. It required companies to have sound system
of internal controls in place to safeguard shareholders' investments, and directors were to ensure these
systems were reviewed regularly to ensure their continued effectiveness.
The Code required directors to state in their annual reports whether or not they had complied with
the Code, and if they had not, whether they provided an explanation to that effect; hence the 'comply or
explain' approach adopted in the UK. It is an approach to corporate governance that is 'principles-based', in
comparison with the 'rules-based' approach adopted in the US.

16.4.5 Turnbull Report (1999, revised 2005, 2014)

In order to maximise returns for their shareholders, board of directors cannot avoid taking certain risks.
Managing such risks and having adequate systems of internal controls in place to mitigate such risks are
important. Appropriately, a Working Party of the Institute of Chartered Accountants in England and Wales
(ICAEW), the Turnbull Committee, chaired by Nigel Turnbull, was established to provide guidance on
how companies were to implement the internal control requirements of the Combined Code, including
compliance, financial, operational, and risk management. The Committee produced the Turnbull Report,
which was first published in 1999 and set out best practice on internal control for UK listed companies.
The Turnbull Guidance was fully reviewed in 2004-2005, and in October 2005 the Financial
Reporting Council (FRC) issued an updated version of the guidance with the title 'Internal Control:
Guidance for Directors on the Combined Code'. Although there were no significant changes to the scope
and content of the guidance, it was instead amended to encourage more informative disclosure. The
guidance required 'boards to confirm that necessary action has been taken to remedy any significant failings
or weaknesses identified from the annual review'.
This guidance was again superseded in September 2014 by the Guidance on Risk Management,
Internal Control and Related Financial and Business Reporting to reflect changes made to the UK
Corporate Governance Code. Its aim was to 'bring together elements of best practice for risk management;
prompt boards to consider how to discharge their responsibilities in relation to the existing and emerging
principal risks faced by the company; reflect sound business practice, whereby risk management and
internal control are embedded in the business process by which a company pursues its objectives; and
highlight related responsibilities' (FRC, 2014).

16.4.6 Myners Report (2001, 2008)

The Myners Report - Institutional Investment in the UK: A Review, was a report that looked at institutional
investment in the UK and established a best practice approach to investment decision making for pension
funds. It was a report submitted to HM Treasury in March 2001. The report suggested that institutional
shareholders should be more proactive in their role and ensure that shareholders were getting the best out
of their investments. Following the publication of the results of the National Association of Pension Funds'
(NAPF) review of compliance with the Principles recommended in the Myners Report, HM Treasury and
the Department for Works and Pensions issued a response, Updating the Myners Principles: A Response to
Consultation in 2008.

16.4.7 Higgs Report (2003)

The Higgs Committee was charged with reviewing the role and effectiveness of non-executive directors. It
was chaired by Derek Higgs, and submitted its report in January 2003. The aim was to develop guidelines
for making them more effective in fulfilling their role. NEDs needed to understand their role, be
knowledgeable, experienced and know the company and its affairs reasonably well. They should have
enough time to perform their duties and have the opportunity to contribute to board decision-making.

16.4.8 Tyson Report (2003)

A task force commissioned by the Department of Trade and Industry, led by Dean Laura D'Andrea Tyson
of London Business School submitted a report, The Tyson Report on the Recruitment and Development of
Non-Executive Directors in June 2003. The report followed the publication of the Higgs Review of the
Role and Effectiveness of NEDs in January 2003. The report highlighted how a range of board members
from different background and experiences can enhance board effectiveness. The report contained
recommendations on strategies for recruiting and developing NEDs.

16.4.9 Smith Report (2003), revised 2008)

The Financial Reporting Council (FRC) Group on Audit Committees, chaired by Sir Robert Smith, was
tasked with developing the guidance on audit committees in the Combined Code. The group's report,
commonly referred to as the Smith Report, was published on 20 January 2003 and codified the role of audit
committees. The purpose of the report was to provide guidance to company boards on how they are to put
in place adequate arrangements for their audit committees and for individual members of the audit
committees on how best to fulfil their role and responsibilities. The report was subsequently revised and is
now known as the FRC Guidance on Audit Committees.

16.4.10 Combined Code (2003)

This Code was published in June 2003, following the recommendations made in the Higgs Report, and was
a revised version of the 1998 Combined Code. It incorporated the recommendations of the Higgs
Committee, which proposed (FRC, 2003) that:
• at least half of a board (excluding the Chair) be comprised of NEDs;
• the NEDs should meet at least once a year in isolation to discuss company performance;
• a senior independent director be nominated and made available for shareholders to express any
concerns to; and
• potential non-executive directors should satisfy themselves that they possess the knowledge,
experience, skills and time to carry out their duties with due diligence.

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.

16.4.11 Combined Code (2006)

The FRC made changes to the earlier (2003) version of the Combined Code following two consultation
exercises. The first consultation held between July and October 2005 was to assess the overall impact of
the 2003 Code, and the second consultation, which was between January and April 2006 was on the draft
amendments to the Code. The revised Code was published in June 2006 and applied to financial years
beginning on or after 1 November 2006.

16.4.12 Combined Code (2008)

Following consultations in 2007, the FRC issued a revised version of the Combined Code to reflect EU
requirements in relation to Audit Committees and corporate governance statements. There were also
changes in relation to the appointment of board chairman and membership of the audit committee.

Turner Review March (2009)

The financial crisis caused mayhem across the global business community. As a result the government was
keen to identify the cause of the crisis and what needed to be done to avoid a repeat of such in the future.
Appropriately, the Chancellor of the Exchequer commissioned the Chairman of the Financial Services
Authority (FSA), to carry out this exercise and make recommendations. His recommendations focused on
the need for the banking sector to be "a shock absorber in the economy, and not a shock amplifier". He
described his recommendations as 'profound, and the banking system of the future will be different from
that of the last decade. The world's economy will be better served as a result'.

16.4.13 Walker Review (2009)

The financial crisis caused mayhem across the global business community, especially within the financial
sector. As a result the UK government commissioned Sir David Walker to examine corporate governance
in UK banks and other financial industry entities and come up with some recommendations. His review
covered the role and constitution of board of directors; the size and composition of the board, the role of
institutional investors, how banks managed their risks, and the remuneration of directors, and qualification
of Board members; the functioning of the board and the evaluation of their performance. The preliminary
conclusions and recommendations were published in a consultation document on 16 July 2009, and the
final report was published on 26 November 2009.
His recommendations were comprehensive, having taken into consideration the comments received
during the period of consultation. In relation to the board size, composition and qualification, the report
suggested that non-executive directors needed to commit more time to their roles in the banking and other
financial institutions (BOFI). They required proper training to enable them carry out their responsibilities
effectively. The board of BOFI must be well balanced with members having appropriate skills and
experience in the sector. The chairman of the BOFI needs to devote at least two-thirds of his/her time to
the work of the board, and must have the experience and skill necessary for the role. There should be a
rigorous evaluation of the performance of the board and the relationship between the board and institutional
shareholders should be more consolidated and formalised through the Stewardship Code. The report
suggests that ‘the board of a FTSE 100-listed bank or life insurance company should establish a board risk
committee separately from the audit committee’. The board risk committee will be responsible for advising
the board about the various potential risks, taking into consideration all macroeconomic and
microeconomics issues and the overall financial environment. The board risk committee should submit a
separate report, which should be included in the annual report and accounts. Sir Walker recommended that
the remuneration committee should have sufficient understanding of the company’s approach to pay and
employment conditions to ensure that its approach is commensurate with the work undertaken by bank
employees. In relation to “high end” employees, ‘the remuneration committee report should confirm that
the committee is satisfied with the way in which performance objectives and risk adjustments are reflected
in the compensation structures..’ For FTSE 100-listed banks and comparable unlisted entities, the
remuneration committee report should disclose in bands, the number of “high-end” employees and
executive board members whose total expected remuneration in the year under report is in a range of £1
million to £2.5 million, in a range of £2.5 million to £5 million and in £5 million bands thereafter (showing
within each band the components of salary, cash bonus, deferred shares, performance-related long-term
awards and pension contribution). Implementation of this recommendation, amongst others, should
strengthen accountability within this sector.

16.4.14 UK Corporate Governance Code 2010

Following the financial crisis of 2008 this Code became applicable for reporting periods beginning on or
after 29 June 2010 and applies to companies with Premium Listing of equity shares, whether or not
registered in the UK. Like previous Codes, the main principles centre around leadership, board
effectiveness, accountability, remuneration and relations with shareholders. The Code suggests that it is the
responsibility of the board to determine the nature and the extent of the risks it is willing to take to achieve
its strategic objectives.

16.4.15 The UK Stewardship Code (2010) (revised 2012)

A credible investment climate is crucial to the success of the UK economy, especially in the highly
competitive global market. Institutional investors are key participants in UK corporate governance. In order
to ensure they engage meaningfully and strategically with the company and its management, the
Stewardship Code was instituted. The Code aims to improve the quality of communication between the
company and the institutional investors and sets out good practice on engagement to ensure dialogue is
meaningful and addresses issues that could be contentious at annual meetings, including management of
risks, performance and corporate strategy. The idea is to build a critical mass of UK and overseas investors,
who are keen to engage in high quality dialogue with companies and help create a stronger link between
governance and the investment process. It would form the basis for complying with the Code or for
providing an explanation for non-compliance. The FRC sees the Stewardship Code as complementary to
the UK Corporate Governance Code, and it is addressed firstly to firms who manage assets on behalf of
institutional shareholders (e.g. pension funds, insurance companies, investment trusts and other collective
investment vehicles).
Institutional investors can choose whether or not to engage with their investee companies,
depending on their investment approach. Disclosures made by institutions under the Code help companies
to better understand the approach and expectations of their major shareholders, and also those issuing
mandates to fund managers are better informed. These disclosures help in the efficient functioning of the
market and improving relations between companies and their institutional shareholders.
Institutions are to apply the Code on a 'comply or explain' basis and provide a statement on their
website that contains:
- a description of how the principles of the Code have been applied, and
• Disclosure of specific information listed under principles 1,5,6 and 7; or
• An explanation if these elements of the Code have not been complied with.

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.

16.4.16 UK Corporate Governance Code (2012)

The FRC updates the UK Corporate Governance (UKCG) Code every couple of years, the last revision
being in 2010. Following a period of short consultation, the FRC issued the UKCG Code 2012, in which
minor changes were made to both the Code and the Stewardship Code. The application of both codes still
remains the ‘comply or explain’ basis. The minor changes to the UKCG Code include:
• Attempts to improve the quality and effectiveness of the external audit function, by requiring FTSE
350 companies to put out their external audit contract on tender every 10 years. Incumbent audit
firms can also compete in the bid
• The requirement that audit committees provide information about how they carried out their
responsibilities and how they assessed the effectiveness of the audit process
• The need for boards to confirm that their annual reports and accounts are fair, balanced and
understandable, and that there was consistency between the narrative parts of their reports and the
information contained in their financial statements, and reflect the company’s performance.
• The requirement for companies to explain and report on the progress made in relation to their
policies on diversity in the boardroom.
 • The need for companies to fully explain to shareholders any deviation from the provision of the
Code.

Companies are required to apply the Code from 1 October 2012.

16.4.17 UK Corporate Governance Code (2014)

On 17 September 2014, the FRC issued an updated version of the UKCG Code, following a period of
extensive consultation and based on the feedback received. The Code significantly improves the quality of
information that shareholders receive about the long-term health and financial strategy of their investee
companies, and pays greater attention to risk management, and aligning remuneration with sustained value
creation.
The following are the key changes to the Code:
Going concern, risk management and internal control
• Companies are required to state whether they consider the appropriateness of adopting a going
concern basis of accounting and they should identify any material uncertainties that might preclude
them from continuing to do so;
• The need for companies to assess the principal risks they face and how they are being managed or
mitigated;
• Companies are required to state whether they have the ability to continue operation and meet their
current obligations, taking into account their current position and principal risks, and to specify the
period to which their statement relates, and why they feel this is appropriate.
• Companies should monitor their risk management and internal control systems, review the
effectiveness of these systems at least annually and report the outcome of this review in their annual
report.
• Companies can choose in what part of the annual report they would like to put their risk and viability
disclosures. If placed within the Strategic Report, the directors will be covered by the ‘safe harbour’
provisions in Companies Act 200613.

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.

16.4.18 UK Corporate Governance Code (2016)

The FRC issued an updated version of the UKCG Code in April 2016, with minimal changes. The changes,
which affect auditing and ethical standards and company law, saw the implementation of the EU Audit
Regulation and Directive, including an updated Guidance on Audit Committees. These were effective on
or after 17 June 2016.

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.

16.4.19 UK Corporate Governance Code (2018)

The FRC has released a new Corporate Governance Code in the UK, which it describes as 'A Code Fit for
the Future'. The new Code was released on 16 July 2018. According to the FRC, the new Code 'puts the
relationship between companies, shareholders and stakeholders at the heart of long-term sustainable growth
in the UK economy'. The Code applies to all premium-listed companies for the financial years beginning
on or after 1 January 2019.
In this new Code, the FRC took on board the UK corporate governance framework recommended
in the Government’s August 2017 Response Paper, and builds on the findings from the FRC’s Culture
Report published in 2016. The FRC also issued a completely reworked version of its Guidance on Board
Effectiveness, which replaces the 2011 version.

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.

Sir Win Bischoff, Chairman of the FRC, said13,

“The UK is globally renowned for its corporate governance framework, which is underpinned by the UK Corporate
Governance Code. At this critical time as the country approaches Brexit, a revised Code will be essential to restoring trust
in business, attracting investment and ensuring the long-term success of companies for members and wider society”.

He stated further that

“A Principle promoting the importance of the intrinsic value of corporate culture is a new addition to the Code. Building
trust in business has to start in the organisation and forming a healthy corporate culture is integral to the credibility of a
company. Engaging with and contributing to wider society must not be seen as a tick-box exercise but imperative to
building confidence among stakeholders and in turn the long-term success of a company”.

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.

16. 5 Summary and Conclusion

In the light of the different corporate scandals that swept across Europe and the United States of America
in the 1980s and the 1990s, the importance of effective corporate governance is not in doubt. The UK has
been at the forefront of corporate governance reforms especially following Cadbury 1992. Since then, the
corporate environment has been evolving, and the quality of corporate governance in the UK has been
greatly enhanced and globally acknowledged. Investors are attracted to UK listed companies because of
the trust and confidence the Code engenders (FRC, 2017). The Code’s ‘comply or explain’ approach
significantly, has allowed the UK to respond positively and effectively to evolving market circumstances,
which hard rules often cannot (Biscoff, 2017). It is over 25 years ago that the Cadbury Report was
published, and there is evidence (Grant Thorton, 2017) of improvements in the quality of corporate
governance reporting in the UK, including an increase in the level of compliance with various aspects of
the Code of Corporate Governance.
 Whilst it is understood that corporate governance institutions cannot be perceived in isolation from
the governance culture in which they are embedded, nevertheless, developments in corporate governance
in the UK have had an impact on the corporate governance practices in other countries.

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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