INTRODUCTION
The Code of Corporate Governance for Banks and Discount Houses was released by the Central Bank of Nigeria (CBN) in 2014 to regulate Banks and Discount Houses (“The 2014 Code”). Subsequently, in 2018, the CBN released the Code of Corporate Governance for other Financial Institutions in Nigeria (“The 2018 Code”).
The 2014 and 2018 Codes set out guidelines to enhance Corporate Governance practices for Banks and Financial institutions in Nigeria and were in operation until 2019 when the Financial Reporting Council (FRC) of Nigeria issued the Nigerian Code of Corporate Governance, 2018 (“NCCG 2018”) as the single corporate governance code regulating private and public entities in Nigeria. NCCG 2018 replaced all sectoral codes in Nigeria including the 2014 and the 2018 Codes.
However, following the issuance of the NCCG 2018, the FRC mandated sector regulators to issue sector-specific guidelines on corporate governance for institutions in their sector and under their regulatory purview.
Consequently, on July 13, 2023, the CBN released Corporate Governance Guidelines for Commercial, Merchant, Non-Interest and Payment Service Banks in Nigeria (“the Guidelines”). The Guidelines were developed in line with the Principles and Recommendations of NCCG 2018, and supersedes all previous codes, circulars, and related directives on corporate governance issued by the CBN.
The Guidelines which aim at strengthening governance practices in the Banking industry in Nigeria by outlining industry-specific corporate governance standards for banks was issued pursuant to powers of the CBN under the provisions of Section 2(d) of the CBN Act 2007 and Sections 56(2) and 67(1) of the Banks and Other Financial Institutions Act (BOFIA 2020). The Guidelines also becomes effective on August 1, 2023.
This paper will analyse the key provisions of the Code vis a vis the 2014 Code and discuss some of the legal and governance implications for the banking industry in Nigeria.
ANALYSIS OF THE KEY PROVISIONS OF THE CODE
Applicability
The Guidelines apply to the following financial institutions in Nigeria:
- Commercial Banks,
- Merchant Banks,
- Payment Service Banks (PSBs); and
- Non-Interest Banks
Board Composition and Structure
i. Appointment to the Board: By the provisions of the Guidelines, members of the Board shall be appointed by the shareholders of the bank and approved by the Central Bank of Nigeria (CBN). The Board is also empowered to appoint the MD/ CEO, Executive directors as well as senior management staff subject to the approval of the CBN. The procedure for the appointment to the Board shall be formal, transparent, and well documented in the Board Charter.
ii. Number of directors: The Guidelines require that the Board Charter outline the process for appointing directors and specify the minimum and maximum number of directors for the Board. Commercial, Merchant and Non-Interest Banks (“CMNIBs”) are to have a minimum of seven (7) and a maximum of fifteen (15) directors, while PSBs are to have a minimum of seven (7) and a maximum of thirteen (13) directors. This is a slight deviation from the 2014 Code which places the minimum number of directors at five (5) and the maximum at twenty (20).
With respect to any of the Banks that is a subsidiary of a Financial Holding Company (“FHC”), the subsidiary’s representation on the FHC’s Board and the FHC’s representation on the subsidiary’s Board cannot exceed thirty percent (30%). This requirement is a departure from the 2014 Code which prohibits any director from serving on the Board of a bank and a holding company within a group at the same time.
This requirement may have been introduced to ensure that there is some form of coordination between the Board of the subsidiary and the FHC. Essentially, key board members of the subsidiaries may provide adequate and accurate reporting to the FHC board for well informed decisions for the benefit of the group of companies.
iii. Gender diversity: the Guidelines provides that no Board of a bank shall consist of only one gender. Banks are also required to take a practical approach to women’s economic empowerment in line with Principle 4 of the Nigerian Sustainable Banking Principles to achieve gender diversity on their Boards. The 2014 Code was silent on the requirement for gender diversity; hence its inclusion in the Guidelines is a huge stride towards promoting diversity, equity and inclusion in the governance structure of Banks.
iv. Board composition: The Guidelines maintains the position of the 2014 Code that the Board shall comprise of both Executive Directors and Non-Executive Directors (“NEDs”), with NEDs being the majority.
In relation to independent directors, the Guidelines require that the Board must have a minimum of (a) three (3) independent NEDs (“INEDs”) for commercial banks with international and national authorisation, merchant banks, and non-interest banks (“NIBs”) with national authorisation; and (b) two (2) INEDs for PSBs, commercial banks with regional authorisation, and NIBs with regional authorisation. This position differs from the 2014 Code which stipulated that banks must have at least two (2) INEDs while discount houses must have at least one (1). However, for publicly listed banks, the Guidelines stipulate that the provisions of the Companies and Allied Matters Act (CAMA) 2020 on the number of INEDs shall apply. Therefore, in line with the provisions of the Companies and Allied Matters Act 2020 (as amended by the Business Facilitation Act 2023), publicly listed banks must have INEDs that constitute at least one-third of the total number of directors.
Addressing the importance of innovative technology in today’s banking, the Guidelines require that at least two (2) NEDs, one of which must be an INED, should have expertise and experience in innovative financial technology, information communication technology (“ICT”), or cyber security.
v. Extended family: The Code provides that no two members of an extended family shall serve on the Board of a Bank at the same time. There was no such provision under the 2014 Code as the Code only prevented more than two extended family members from serving on the Board of a bank and the holding company where the bank is a member of a holding company.
Furthermore, the Guidelines also provides that only one member of an extended family can occupy the position of Managing Director/Chief Executive Officer (MD/CEO), Chairman or Executive Director (ED) at any point in time. Again, this position is different from the 2014 Code as the prohibition from occupying positions of the Chairman, MD/ CEO or Executive Director only applied to banks and their subsidiaries. Such that under the previous code, two members of an extended family could occupy any of these positions on the Board of the same Bank. The Guidelines also defines “extended family”, to include the director’s spouse, parents, children, siblings, cousins, uncles, aunts, nephews, nieces, in-laws and other construed relationships that may be determined by the CBN. The 2014 Code is however silent on this point.
vi. Disclosure: The Guidelines introduces the need for disclosure which was not contained in the 2014 Code by requiring that prospective and current directors on the Board of a bank must disclose potential board memberships on boards of other organisations, as applicable, subject to CBN’s approval.
vii. Interlocking/ Concurrent directorship: A novel introduction by the Guidelines is the limit imposed on concurrent/ interlocking directorship by a director of a bank within its Financial Holding Company/ Group structure to two institutions only.
viii. Non-recognition of the Position of Executive Chairman or Vice Chairman: The Guidelines clearly stipulates that the position of Executive Chairman or Vice Chairman on the Board of a bank is not recognised. Accordingly, banks that currently have the position of an Executive Chairman or Vice Chairman are required to restructure their Board composition accordingly.
ix. Resignation: A director intending to resign must submit a written notice of resignation to the Chairman of the Board at least ninety (90) days before the effective resignation date. If an INED resigns and the resignation results in non-compliance with the minimum required number of INEDs, the Board must appoint a replacement within the ninety (90) days’ notice period.
Where a NED resigns and it results in NEDs not being in the majority, the Board must appoint a replacement within ninety days. Furthermore, if the Chairman resigns, he must submit a written notice to the Board Nomination and Governance Committee, which shall circulate the notice to Board members and the CBN within seven days of the receipt of the notice.
There were no provisions relating to the resignation of directors in the 2014 Code. However, it was implied that the provisions of the Companies and Allied Matters Act will apply to banks and other financial institutions.
Tenure of Directors
i. Managing Director/ Chief Executive Officer: the tenure of the MD/ CEO is subject to a maximum period of twelve (12) years.
ii. Deputing Managing Director (DMB) and Executive Directors (ED): the tenure of the DMBs and EDs of a bank is also subject to a maximum period of twelve (12) years.
iii. Non-Executive Directors: the tenure of NEDs except for INEDs is twelve (12) years, comprising three terms of four years each.
iv. Independent Non-Executive Directors (INEDs): the tenure of INEDs shall not exceed two (2) terms of four (4) years each, making a total of eight (8) years for the INED. INEDs must hold a formal meeting at least once a year in which no other directors are present.
Additionally, the Guidelines impose stricter guidelines for INEDs. For instance, an INED is not permitted to have: (a) previously served as a director or employee in a senior management role in the Bank or below the senior management level in the Bank in the previous five years; (b) a member of their immediate family who is currently employed in a senior management position in the Bank or who previously served at the senior management level in the Bank, etc.
Accordingly, the approved tenure of EDs and NEDs for Banks in Nigeria is now twelve (12) years, save for INEDs with a tenure of eight (8) years. It is imperative to note that the tenure of directors stipulated in the Guidelines differs from the provisions of the 2014 Code and the Circular of the CBN issued earlier in February 2023 titled “Review of Tenure of Executive Management and Non-Executive Directors of Deposit Money Banks in Nigeria”, which fixed the maximum tenure for Non-Executive Directors at twelve (12), years and the maximum tenure of Executive Directors at ten (10) years.
v. Cumulative tenure: the cumulative tenure limit of all types of directors on the Board of the same bank (ED, DMD, MD and NEDs) is twenty-four years.
Company secretary
The Guidelines provides that the qualifications and experience of a Company Secretary of a bank shall be in accordance with the extant Guidelines on competency and fit and proper persons in the Nigerian banking sector. Banks are also prohibited from outsourcing the functions of the company secretary. In the case of CMNIBs, the role of the company secretary cannot be merged with that of the Head Legal/Legal Adviser without the consent of the CBN.
Cool-Off Period
An Executive (ED, DMD or MD/CEO) who exits from the Board of a bank either upon or prior to the expiration of his/her maximum tenure, shall serve out a cooling period of two (2) years before being eligible for appointment as a NED in the same Bank, subject to applicable cumulative tenure limits of twelve years. Similarly, a NED shall serve a cooling period of two (2) years before being eligible for appointment in any Executive role in the same Bank. No cooling-off period shall apply when any director in a bank is appointed to the Board of another bank or an FHC outside the Bank’s group.
The Cooling-off period of two (2) years shall apply, where a director from a bank transition to a sister subsidiary, resulting in a change of role. However, a cooling-off period shall not apply where there is no role change.
The tenure of auditors of a bank shall be a maximum period of ten (10) consecutive years, subject to the rotation of audit engagement partner at least once every five (5) years. A cooling-off period of ten (10) consecutive years shall be observed for an audit firm to be reappointed by the same Bank.
It is imperative to note that the concept of “cooling off” was newly introduced in the Guidelines, as there was no provision of any cooling-off period in the previous Code.
Treatment Of Shareholders
The Guidelines regulate the ownership and acquisition of shares in Banks. No individual, group, proxy, or corporate entity can own a controlling interest in more than one Bank without the prior approval of the CBN. Before acquiring shares in a bank that will result in a five percent or higher equity holding, prior approval and No Objection of the CBN must be obtained.
If the CBN objects to the acquisition, the Bank must notify the investor(s) within forty-eight hours of receiving the objection. Any government’s equity holding in a Bank, whether direct or indirect, must not exceed ten per cent (10%), and should be divested to private investors within a maximum of five years from the date of investment. Existing investments beyond five years must comply with this requirement within two years from the Effective Date.
Audit
Although the NCCG 2018 contains recommended practices for internal and external audit, the Guidelines make provision for additional requirements and state that Banks are to be guided by the following internal and external audit principles:
a. A bank must have an in-house internal audit and compliance function headed by a qualified person appointed by the Board and approved by the CBN. The bank is required to undertake an independent external assessment of the effectiveness of the internal audit function annually, and submit a report to the Director, Banking Supervision Department by 31st, May of the next accounting year.
b. NIBs must establish an internal Shariah audit function led by an Internal Shariah Auditor (“ISA”) at or above the rank of Assistant General Manager. Commercial banks with a NIB window must appoint a head of the internal shariah audit function with a rank not lower than a manager.
c. The Board has the power to appoint and remove (subject to confirmation at an AGM), the external auditor, subject to CBN’s approval. The external auditor must report annually on the Bank’s compliance with NCCG 2018, and the Guidelines in the company’s financial statements.
Whistleblowing And Sustainability
Similar to the provisions of the 2014 Code, the Guidelines require the Banks to adhere to the recommended Principle 19 of the NCCG 2018 on whistleblowing, and the existing CBN Guidelines for Whistleblowing in Nigeria’s financial institutions.
On sustainability, Banks are also required to comply with the provisions of the Recommended Principle 26 of the NCCG 2018, and the requirements of the Nigerian Sustainable Banking Principles which requires companies to pay attention to sustainability issues including environment, social, occupational issues to ensure successful long term business performance. In light of the increase in the clamour for sustainable institutions, the inclusion of a sustainability framework for banks in the Guidelines is laudable as same is not contained in the 2014 Code.
Business Integrity
To maintain confidence in its integrity, Banks are required to create a Code of Business Conduct and Ethics, which should include legal obligations, stakeholder expectations, and the responsibility and accountability of individuals reporting on issues of unethical concerns. The code should be reviewed at least once every three years.
Related Party Transactions
Banks are required to establish a policy concerning insider trading and related party transactions by directors, senior executives, and employees. A summary of the policy is required to publish on their website. Another significant inclusion which seeks to curtail the rise of non-performing loans in the Nigeria banking industry is seen in Principle 22.4 which states that “any director whose facility or that of his/ her related interest remains non-performing in any financial institution for more than one year shall cease to be on the Board of the bank and shall be blacklisted from sitting on the Board of such bank and that of any other financial institution under the purview of the CBN”.
The provision on related party transactions is a significant improvement from the 2014 Code and hoped to enhance disclosure and transparency in the banking industry.
Conflicts of Interest
Banks shall develop and adopt a policy to guide the Board and individual directors in conflict-of-interest situations. The Board shall be responsible for managing conflicts of interest of directors and senior management in a bank.
Any concern raised by a director on the activities of his/ her FHC and all discussions on conflict of interest shall be recorded in the minutes of the Board/ Board Committee meetings.
Stakeholder Engagement
The Guidelines require that banks have their websites and are encouraged to communicate with stakeholders via the website and other official channels.
The Board shall ensure that stakeholders have the freedom to communicate their concerns on illegal or unethical practices to the Board. Where the concerns relate to the activities of the Board, such individuals may present a complaint to the CBN. This is in line with the NCCG 2018 which provides that communicating and interacting with stakeholders keeps them conversant with the activities of the Company and assists them in making informed decisions.
Sanction
Compliance with the Guidelines is mandatory for all Banks. Consequently, the Guidelines note that failure of a bank to comply with any of the requirements under this Guidelines and the Recommended Practices in NCCG 2018, constitutes a regulatory breach and shall attract a penalty as may be prescribed by the CBN.
In addition, breach of any of the provisions of the Guidelines by a director, manager or officer shall attract appropriate sanctions including monetary penalties and administrative sanctions. Such director, manager or officer of the bank shall also be suspended for six (6) months in the first instance and possible removal from the Board of the bank in the event of continued reoccurrence of the breach. The introduction of the possibility of suspension of directors for breach of any of the provisions of the Guidelines is a stronger sanction which is hoped will propel directors and officers of the Banks to be more circumspect in their management and administration of the Banks.
CONCLUSION
The novel provisions of the Code are expected to enhance good corporate governance in the Nigeria banking industry. The Code will be instrumental in ensuring these institutions’ stability, sustainability, effective governance, and trustworthiness. Consequently, it is important for banks to review their corporate governance structure so as to ensure compliance with the provisions of the Guidelines.
