Jamiu Akolade – Can the draft National Code of Corporate Governance be made applicable to all private companies?

Jamiu Akolade – Can the draft National Code of Corporate Governance be made applicable to all private companies?

By: Jamiu
Akolade MCIArb

of the FRCN                 
The FRCN was created under the Financial
Reporting Council of Nigeria Act 2011 with the legislative intent to establish
a body to be ‘charged with the responsibility for, among other things,
developing and publishing accounting and financial reporting standards to be
observed in the preparation of financial statement of public entities in
. The
duties of the FRCN are stated under section 8 of the Act[2]. With regards
to the powers of the FRCN, it is clear that it has been empowered to among
other powers, enforce and approve enforcement of compliance with accounting,
auditing, corporate governance and financial reporting standards in Nigeria.[3]Ostensibly for
the purpose of exercising this power, a Directorate of Corporate Governance was
created under the Act to, among other duties, develop principles and practices
of corporate governance.[4]

of the FRCN’s powers: Eko Hotels v FRCN
However, with regards to the extent of the
applicability of the Act and the powers of the FRCN, it is clear from the Act
that such are restricted to ‘public interest entities’[5] which by the
meaning ascribed to that phrase under the Act excludes private companies that
routinely file returns only with the Corporate Affairs Commission and the
Federal Inland Revenue Service. The extent of the powers of the FRCN has been
tested in court in the case of Eko
Hotels v Financial Reporting Council of Nigeria[6]
. In
that case, the FRCN had sought to enforce its powers against Eko Hotels Limited
(EHL). EHL instituted an action at the Federal High Court challenging the
application of the Act to it as a private company on the ground that it was
excluded from the operations of the Act. The FRCN had written to EHL requesting
for evidence of compliance with the registration requirements of the Act and
payment of statutory and renewal dues. EHL responded by informing the FRCN that
it was a private company and that it only filed returns with the FIRS and CAC
and was therefore not a public interest entity as contemplated by the Act. The
FRCN however contended that EHL was a public interest entity because it filed
returns with the Nigerian Tourism Development Corporation.
The court ruled in favour of EHL on the
grounds that there is no provision in the Act which requires private companies
to be registered with the FRCN as the registration can only be extended to
public companies and public interest entities and that FRCN cannot seek to
exercise implied, incidental or consequential powers where there are no express
provisions in the Act empowering it to do so. Crucially, the court also held
that the functions and powers of the FRCN can only be exercised over public
interest entities, public companies, professional accountants and other
professionals engaged in the financial reporting process and the FRCN cannot
enlarge its regulatory powers beyond the limit provided in the statute.
Although FRCN has appealed this decision, it is still the position of the law
until it is set aside by a superior court[7].
It is our opinion that in view of the
decision of the court in Eko Hotels, the question of the applicability
of the provisions of the Act to private companies that only file returns with
the CAC and FIRS is not in doubt. Therefore, the applicability of the Code
should also be viewed within that prism. In this regard, we hold the view that
the Code is in the nature of a subsidiary legislation because it was made
pursuant to the powers of the FRCN donated by the Act[8]. As a
subsidiary legislation, the law is clear that it cannot contain provisions
which are contrary to the provisions of the enabling statute. In Barclays Bank of Nigeria Limited v Alhaji
, the Supreme
Court held that:
 “Subordinate legislation is invalid if it is repugnant to the general law
of the    country or if it
is repugnant to the provision of a statute which delegates to the    
    body or person making it, the powers so to do.” It is, however,
not bad merely         because it deals with something
which the general law does not deal with or because it makes unlawful something
which the general law does not make unlawful, but it must not, expressly or by
necessary implication, profess to alter the general law by making something
unlawful which the general law makes lawful, or vice versa, or by adding
something inconsistent with the provisions of a statute creating the same
offence”, (see on the subject of Bye Law: Halsbury Laws of England Vol. 26, 3rd
Edition, P. 516 Para 950). Accordingly, subordinate legislation ‘is prima
facie ultra vires if it is inconsistent with the substantive provisions of the
statute by which the enabling power is conferred” (which is not the case here)
“or of any other statute” (which is alleged or submitted to be the case here)
“and equally, of course, if it purports to affect existing statutes expressly”

(see Volume 36 Halsbury, Laws of England, 3rd Edition, Pages 491-492, Paragraph
743).” Per Idigbe, J.S.C. (Pp.19-20, Paras.G-E)”
Adopting the test laid down by the Supreme
Court in Barclays Bank above, the provisions of section 2 of the Code
which purports to make the Code applicable to (a) All public companies (whether
listed or not); (b) All private companies that are holding companies or
subsidiaries of public companies; and (c) All regulated private companies would
appear to be beyond the powers of the FRCN under the Act since the Act which is
the principal legislation has excluded private companies which only routinely
file returns with the CAC and FIRS[10]. Another
provision of the Code which conflict with the Act is Section 40.1.12 which
creates the concept of a ‘regulated private company’ which is defined as ‘private
companies that file returns to any regulatory authority other than the Federal
Inland Revenue Service and the Corporate Affairs Commission’
whereas no
such definition exists in the Act;
 The Code contradicts CAMA
Also, apart from the fact that the Code
contravenes the Act, it is also ultra vires the powers of the FRCN
because it conflicts with another statute – the Companies and Allied Matters
Act[11] (CAMA) which
regulates the operation of companies in Nigeria. For instance, the entire
provisions of section 6 of the Code regarding the election of directors and
chairman of boards of directors as well as regulating meetings of the board are
either conflicting with CAMA or alter its provisions. This would amount to an
implicit amendment or repeal of the provisions of CAMA which is beyond the
powers of FRCN.
In view of the foregoing, we are of the
view that the application of the Code to all private companies without taking
cognisance of the exceptions under the Act is unlawful and beyond the powers of
the FRCN. Also, even if the Code were applicable to all private companies the
provisions of the Code which are contrary to CAMA are likely to be declared
null and void by a court of law. The FRCN therefore needs to engage with
all stakeholders with a view to revising the Code to identify the conflicting
provisions highlighted above.
This piece represents the view of the writer and does not constitute legal
opinion. We welcome comments and questions regarding the issues raised.
See the Long Title to the Act.
“a.   Develop and
publish accounting and financial reporting standards to be observed in the
preparation of financial statement of public interest entities;
Review, promote and enforce compliance with
the accounting and financial reporting standards adopted by the Council;
Receive notices of non-compliance with
approved standards from preparers, users, other third parties or auditors of
financial statements;
Receive copies of annual reports and
financial statements of public interest entities from preparers within 60 days
of the approval of the Board;
Advise the Federal Government on matters
relating to accounting and financial reporting standards;
Maintain a register of professional
accountants and other professionals engaged in the financial reporting process;
g   Monitor
compliance with the reporting requirements specified in the adopted code of
corporate governance;
Promote compliance with the adopted standards issued by the International
Federation of Accountants and International Accounting Standards Board;
Monitor and promote education, research and training in the fields of
accounting, auditing, financial reporting and corporate governance;
j   Conduct practice reviews of registered professionals ;
k Review financial statements and reports of public interest entities;
l Enforce compliance with the Act and the rules of the Council on registered
professionals and the affected public interest entities;
m  Establish such systems, schemes or engage in any relevant activity, either
alone or in conjunction with any other organization or agency, whether local or
international, for the discharge of its functions;
n Receive copies of all qualified reports together with detailed explanations for
such qualifications from auditors of the financial statements within a period
of 30 days from the date of such qualification and such reports shall not be
announced to the public until all accounting issues relating to the reports are
resolved by the Council;
o Adopt and keep up-to-date accounting and financial reporting standards, and
ensure consistency between standards issued and the International Financial
Reporting Standards;
p. Specify, in the accounting and financial reporting standards, the minimum
requirements for recognition, measurement, presentation and disclosure in
annual financial statements, group annual financial statements or other
financial reports which every public interest entity shall comply with, in the
preparation of financial statements and reports;
Develop or adopt and keep up-to-date auditing standards issued by relevant
professional bodies and ensure consistency between the standards issued and the
auditing standards and pronouncements of the International Auditing and
Assurance Standards Board; and
Perform such other functions which in the opinion of the Board are necessary or
expedient to ensure the efficient performance of the functions of the Council.
Section 7(2) (a) Ibid.
Sections 49 and 50 Ibid.
“Public Interest Entities” under the Act means governments, government
organizations, quoted and unquoted companies and all other organizations which
are required by law to file returns with regulatory authorities and this
excludes private companies that routinely file returns only with the Corporate
Affairs Commission and the Federal Inland Revenue Service.
(Unreported: Suit No. FHC/L/CS/1430/2012 delivered on 21/03/2014)
See Vaswani v. Savalakh (1972) 12 SC 77.
Njoku v Iheanatu (2008) LPELR-3871(CA) the Court of Appeal held that:
subsidiary legislation or enactment is one that was subsequently made or
enacted under and pursuant to the power conferred by the principal legislation
or enactment. It derives its force and efficacy from the principal legislation
to which it is therefore secondary and complimentary’. 
(1978) 6-7 S.C
[10] See
section 2.1 of the Code viz Section 77 of the Act
Cap C20 LFN 2004.
Ed’s Note: This article was
originally published here.
Can a Director of a private company be appointed by a Will? by Teingo Inko-Tariah

Can a Director of a private company be appointed by a Will? by Teingo Inko-Tariah

Mr Arrowhead, a very prominent Nigerian suffered a stroke and was flown abroad where he received medical attention for several months. Unfortunately, he died abroad and his body was flown back to the country for burial which was celebrated in grand style. Although Mr Arrowhead left a will, there was serious contention among family members over the content of the will especially as some of the family members felt disappointed over what was bequeathed to them. Typical of a polygamous family, the will was contested in court. However, that is not the main thrust of this paper. It was discovered that in the will, the testator purportedly appointed his wife as a director of one of his companies. This is a real life situation and raises the question which this paper seeks to address. Can a director of a company be appointed by a will?

Who is a director?
S 244(1) Companies and Allied Matters Act (CAMA) 2004 defines directors as “persons duly appointed by the company to direct and manage the business of the company”. s. 567 CAMA further describes the term director to “include any person occupying the position of director by whatever name he may be called and includes any person in accordance with whose directions or instructions the directors of the company are accustomed to act”. Directors are officers of a company who are appointed to operate the business for the benefit of the shareholders. According to s. 567 CAMA, ‘officer’ in relation to a corporate body includes a director, manager or secretary. There are two broad categories of directors in modern corporate practice and governance. They are executive directors and non-executive directors. Executive directors are those directly engaged in the day to day management of the business on a full time basis while non-executive directors are external board members who act as a check on the executive management. They are usually appointed on part time basis and they have become more prominent with the development of corporate governance. There are various types of directors: shadow, alternate, independent, and life director.
Appointment of directors
The authority to act as a director of a company comes from due appointment. Thus a person who acts without such appointment commits an offence under s. 244(3) & 250 CAMA and he would be personally liable for his actions. Where the company holds out a person not duly appointed as a director to carry out responsibilities in that capacity, the company will also be liable to a fine s. 244(4) CAMA. However, although a director may not have been duly appointed in accordance with the law, his actions in that capacity may still bind the company as if he were a de jure director (i.e. one who was duly appointed) if it is the company that holds him out as a director. Therefore appointment is a fundamental criterion which validates the position and authority of a director of a company.
In Nigeria, the law provides for the manner in which the director of a company may be appointed: who can appoint and how to appoint a director. For the first directors, the law provides that they should be appointed by the subscribers to the memorandum of association of the company, a majority of them or they may be named in the articles of association of the proposed company. For subsequent appointments generally, it is the shareholders in a general meeting who are empowered by law to appoint directors by ordinary resolution. The board of directors of a company could also appoint other directors subject to the approval of the shareholders at the next annual general meeting where a vacancy arises from death, resignation, removal of a director. This is referred to as filling a casual vacancy and where the newly appointed director is not approved by the shareholders in a general meeting, he would cease to be a director. Where all shareholders and directors of a company die, any of the personal representatives may apply to court to convene a meeting of all personal representatives of the shareholders entitled to attend and vote at a general meeting to appoint new directors to manage the company. Where the personal representatives of the deceased shareholders fail to do so, the creditors of the company, if any, shall be able to appoint a director.
What role does the Articles of Association play in appointment prescriptions? Life director, share qualification.
The AOA is the document that makes provision for the internal management of a company. It is a part of the constitution of the company which sets out the rules for running the company. Typically, the article of association should contain provisions relating to share capital, classes of shares, rights and restriction to each class of shares, allotment, transfer and transmission of shares, meetings, resolutions, directors, auditors, company secretary, the seal, winding up. With regards to directors, the articles of association prescribes the appointment, removal, disqualification, remuneration, tenure of office, rotation, filling of casual vacancy of directors and also provides for life director where the company so wishes. Usually, in corporate practice, where the law is silent on an issue, it is the articles of association that would provide direction on such issue thus, for instance, in Nigeria; the CAMA, 2004 is silent on the issue of alternate directors although the practice is recognised in the corporate sector. Therefore, companies that wish to have alternate directors would make such provision in the articles of association as the basis for adopting the practice. Another instance is meetings via conference calls.
What is a will and what kind of bequest can be made by a will?
A will is a voluntary expression of the intention or wishes of a person of sound mind wherein the person states or gives directives of how his property should be disposed of in event of his death. Property given by a person in a will is referred to as legacy and could either be chattels i.e. movable items such as wrist-watch or car; realty i.e. immovable items such as land or buildings; or pecuniary i.e. money.
Directorship in a company is not a type of property and does not fall under the types of properties that can be bequeathed by a will. A person who dies automatically ceases to be a Director of the Company and so loses the power to bind the company which is a separate entity from the owners & Directors. Any subsequent director can only be validly appointed by due procedures laid down by statute. Thus, any purported appointment by a will goes to no issue as it cannot be recognised except due process has been followed. At best, it can serve as an expression of intention of the deceased director as to who he wishes to be on the Board of the company. This intention can only be executed by the living Directors, if any and until so executed, it is invalid.

Photo Credits – rayhansobhan.com

Regulatory Compliance: A panacea to dysfunctional Corporate Governance by Opeyemi Adagbada

Regulatory Compliance: A panacea to dysfunctional Corporate Governance by Opeyemi Adagbada

Often times, ‘Governance’
refers to the action and manner of governing. Corporate governance is the
mechanism and process which companies and corporations are governed. It is
primarily concerned with balancing the interest of stakeholders- which includes
government, financiers, shareholders, management and the community at
Corporate Governance can
also be said to be the examination of the control of a company as exercised by
its directors. The directors of companies are accountable for their actions to
the company’s shareholders and other members of the company. However, in
practice, the power of the shareholders to affect the behaviour of the
directors is limited and rarely exercised.
The issues of corporate
governance have continually attracted considerable national and international
attention. The current global financial meltdowns have necessitated the need
for a critical focus on  corporate governance.

On the other hand,
Regulatory Compliance is an organization’s adherence to laws, guidelines
and regulation and specifications relevant to its business. However, violations
of regulatory compliance regulations often result in sanctions which may also
include fines. These sanctions are always imposed by regulatory bodies in
accordance to statutes.
Corporate Governance is an
increasingly significant aspect of business and organizational management,
extending to international politics and trade laws; and to globalized
economics, corporations and organizations, and markets. In Nigeria, the laws
that saddle each organization with the responsibility of corporate governance
are the Companies and Allied Matters Act 2004, Investment and
Securities Act 2007
, Securities and Exchange Commission 2011.
The major elements of
corporate governance are good board practices, control environment, transparent
disclosure, well defined shareholder rights and board commitment. The four
pillars of corporate governance are accountability, fairness, transparency and
independency (Omeiza Michael, 2009). Where any of these four pillars are
lagging, there is every tend to a fall in the organization which often results
to corporate scandals and failures.
According to Sanusi
 (Sanusi JO (2003), “Embracing Good Corporate Governance Practices in
Nigeria ”, A keynote address at the 19th Annual Bank Directors seminar
organized by the Financial Institute Training Centre, June 19, Abuja); the
widespread of corporate Scandals and failures that were witnessed in the Late
1990s and the early 2000s had their root in dishonest management decisions and
in some cases, outright cover-ups of illicit activities. These, he said, had
wrecked many companies and consequently, the lives of millions of innocent
citizens who had a stake in them. A typical example of this is
 the   gross financial misconduct committed by the former managing
directors of commercial banks. Regulatory bodies such as the Nigerian Stock
Exchange (NSE) and the Nigerian Securities and Exchange Commission (SEC) were
found to have committed serious breach of corporate governance codes.
The development of codes for
best practice and stricter regulatory regimes which corporations are subjected
to adhere was resulted to the largest extent from scandals and setbacks, where
evidence of bad corporate governance has emerged which resulted in negative
consequences in company’s share prices and the stock market generally.
The benefits of being
statutory and legally compliant include adequate disclosures and effective
decision making to achieve corporate objectives; Transparency in business
transactions; Protection of shareholders’ interests; Commitment to values and
ethical conduct of business and long-term survival of the companies.
Part of the key elements
of corporate governance also tolls down to financial reporting and auditing,
directors’ remuneration, the   balance of power on the board of
directors, risk management and communications between company and shareholders.
Often times, investors
have been concerned with governing policies of a corporation. The concerns of
investors most times are about misleading financial statements and this has
been a major factor in the development of corporate governance in recent years.
Financial statements can be misleading, due to the selection of inappropriate
accounting regulatory policies. Many companies choose not to allow their
accounts department give a transparent report on the company’s performance and
financial situation. Contrary to general opinion, directors are responsible for
the accuracy of the financial statements, not the external auditors. The
external auditors provide an opinion on whether the financial accounts appear
to provide a true and fair view of the company’s performance and financial
position (Brain Coyle (2009) Sixth Edition Institute of Chartered Secretaries
and Administrators UK Study Text in Corporate Governance).
The annual report and
accounts of a company (and the interim financial statements of a listed
company) is the principal way in which the directors make themselves
accountable to the shareholders. The financial statement shows a report on the
financial performance of the company over the previous year and the financial
position of the company as at the end of that year. The directors’ report and
other statements published in the same document provide supporting information,
much of it in a narrative than numerical form. For larger companies, the annual
financial statements and elements of annual report are audited by a firm of
independent external auditors. Shareholders and other investors use the
information in the annual report and accounts to assess the stewardship of the
directors and the financial health of the company. 
Compliance with relevant
accounting policies eliminates the risk of misleading or false financial
reporting, enhances the integrity of the external audit process, places emphasis
on effective communication and disclosure , facilitates accountability and
transparency which have a direct impact on the company’s performance and the
calibre of investors attracted to an organization. Good corporate governance is
very important because of its role in attracting foreigners and investors to a
Succession Planning,
Induction and Training of Directors Policy
The board is required
to  put  plans in place for orderly succession for appointment to the
board and to senior management, so as to maintain an appropriate balance of
skills and experience within the company and on the board, and to ensure its
effectiveness The board is required to establish a formal orientation program
to familiarize new directors with the company’s operations, strategic plan,
senior management and its business environment, and to induct them in their
fiduciary duties and responsibilities which is beneficial to the Company’s
Operations and performance and enhances the efficiency  of the Board of
Directors (Rules 18 & 19 of the Securities and Exchange Commission ‘s Code
of Corporate Governance for Public Companies 2013.)
The board of directors
have a responsibility to govern the company in the interest of the shareholders
and other stakeholders.  A part of this responsibility is to decide the
objectives and strategic direction for the company, to approve detailed
strategic plans put forward by management, to monitor and review the
implementation of those plans. An important objective of a commercial company
is to make profit, and the company’s strategies should be directed toward this.
However, any business strategy involves taking risks and actual profit may be
higher or lower than expected. When very big risks are taken, a company might
even become insolvent and go out of business if actual event turn out much
worse than anticipated.
Bad corporate governance
can result in the insolvency and collapse of a company, and excessive
risk-taking is an aspect of poor governance. The board of directors should take
business risk into consideration when making its strategic business decisions.
The board of Directors are given the responsibility to choose policies that are
expected to be profitable, but should limit the risks to a level that is
considers acceptable. For example, when the board takes major investment
decisions itself or decides on corporate strategy, risks as well as expected
returns are properly assessed and thus are exposed to less reputational risk. A
company that is complaint with laws, rules and best practices have a higher
likelihood of achieving financial success.
“If a country does not
have a reputation for strong corporate governance practice, capital will flow
elsewhere. If investors are not confident with the level of disclosure, capital
will flow elsewhere. If a country opts for lax accounting and reporting
standards, capital will flow elsewhere. All enterprises in that country,
regardless of how steadfast a particular company’s practices, may suffer the
consequences. Markets exist by the grace of investors. And it is today’s more
empowered investors who will determine which companies and which markets stand
the test of time”
Arthur Levitt, a former chairman of the
Securities and Exchange Commission commenting on the numerous corporate
scandals in the US in 2001, 2002).
Until recently, Corporate
Scandals were unheard of in Nigeria and even where they were reported, no known
deterrent sanctions have been meted out on the culprits. This is because
Nigeria lacks the necessary political and institutional framework to enforce
good corporate governance. Corporate governance is no longer a new concept
worldwide but a norm of corporate behavior and performance expectations.
Nigeria cannot differ in ensuring compliance.
Regulatory Compliance
enhances the stability and soundness of a company through improved corporate
performances, the effectiveness of boards and has an impact on the company’s
performance. Corporate governance is not just about playing “watchdog” over
management, it is more about enhancing corporate strategic choices,
acknowledging and responding to the interests and concerns of stakeholders,
developing and bolstering managerial competencies and skills and ultimately
protecting and maximizing shareholder wealth. In order for investors and
shareholders to be rest assured of protection against the malfeasance of
corporate managers in the companies and public institutions, governance must be
compulsory and compliance must be enforced.
Opeyemi Adagbada is a
lawyer with keen interest in Corporate law and Regulatory
Photo Credit – www.1sourceohs.com