Nwoye Ifeanyi Daniel Esq.

The requirements and extent of Corporate Governance regime in Nigeria take on the look of a complicated and complex system to many people including directors, who are supposed to be responsible for compliance with Corporate Governance codes. The multiplicity of codes of Corporate Governance contributes to the confusion in no small measure. This article seeks to demystify the Corporate Governance regime in Nigeria. The corporate governance legal regime is simplified and the codes are comparatively analyzed.

Corporate Governance has usually been given the functional definition of the way and manner a company is controlled and directed so as to achieve its objectives. Thus, Corporate Governance is concerned with the “governance” of the company as opposed to the “management” of the company. The day to day management of the company is usually delegated to the management team headed by the Chief Executive officer or the Managing Director.

The company, as an artificial juristic entity is run through the division of powers between the board of directors and the members in general meeting. The powers of the board of directors are mostly delegated to the management team while decisions on governance issues, which usually deal with policy and strategy, are reserved for the Board. For example, while a manager (whether or not a member of the Board) can decide on the schedule and arrangement of production quota, the decision on which product to produce in the first instance, would be taken by the Board. Thus Corporate Governance is concerned with the way the Board carries out its function of controlling and directing the affairs of the company in such a way that the objectives of the company are attained.

We will not bother with a detailed history of Corporate Governance here but suffice it to say that the main impetus for better practices in corporate governance began in the UK in the late 1980s and early 1990s. The Report of the Committee on the Financial Aspects of Corporate Governance (the ‘Cadbury Report’) was published in 1992, and was later described as a landmark in thinking on corporate governance. Other committees were set up over the years to look at the various aspects of Corporate Governance. The reports of the different committees were used to form the Combined Code which has been severally updated.

In Nigeria, in 2003, the Artedo Peterside committee set up by the Securities and Exchange Commission (SEC), developed a code of best practice for public companies in Nigeria. The code is voluntary and is designed to entrench good business practices and standard for board of directors, auditors, CEO’s etc., of listed companies including banks. However, compliance with the code is one of the requirements for listing with the Nigerian Stock Exchange. There are other codes for specific industries like the banking, pension and insurance industries. The mandatory aspects of corporate governance are covered by the provisions of Companies and Allied Matters Act (CAMA), Investments and Securities Act (ISA) and Banks and Other Financial Institutions Act (BOFIA). These would be discussed in greater details shortly.

Agency theory: A company is seen by the law as a separate “person”. However, as a legal entity without a physical body, its affairs are carried out by humans. There is a separation between the ownership of company and management of company. This means that the owners of a company are not always one and the same with the managers. The shareholders are the owners of the company while the management of the affairs of the company and the day to day activities of the company are usually done by the directors and the management team who may or may not be shareholders of the company.

This gives rise to a form of agency relationship where the directors who manage the affairs of the company are expected to do so for the benefit of the shareholders who are the owners of the company. However, it is not always, that the interest and desires of the directors will be in congruence with the interest of the shareholders. For instance, while shareholders may be interested in higher dividends and/or increase in the share price, directors may be more concerned with higher and ever-increasing executive and director’s remuneration (fat cow syndrome). This gives rise to the risk that directors will run the company in such a manner as to advance their interests as directors while disregarding or deliberately combating the interest of the shareholders who are the owners of the company. Therefore, corporate governance seeks to balance these divergent interests and ensure that companies are governed in such a way as to attain their objectives.

The company’s objective is usually taken to be the maximization of value for shareholders (except for public and nonprofit-oriented organizations). This is known as the Shareholder Approach to corporate governance. However, other approaches (like the Stakeholders Approach, the Enlightened Shareholder Approach and the Stakeholder-Inclusive Approach), while maintaining the importance and priority of shareholders’ interests, seeks to balance those interests with the interest of other people with stakes in the company.

Corporate Failures:
In recent years, concern for the quality and manner of governance of companies with public shareholding began with the well-publicized failures of large corporations. In the US, many organizations in the savings and thrift industry had to be rescued from financial collapse in the 1980s, while in the UK, a number of companies (including Polly Peck International, the Bank of Credit and Commerce International, British and Commonwealth, the Mirror Group News International and Barings Bank) collapsed unexpectedly in the 1980s and 1990s. The clear lesson that Enron, Worldcom and other big corporate failures taught the world is that no company is too big to fail. The cases of corporate failures appeared to have some common denominators.

There appeared to be serious financial reporting irregularities and inadequate internal controls and risk management. In some cases, accounting policies were creatively modified and there were inadequate system to monitor employees’ actions and transactions on behalf of the company.

Shareholders were not aware of the real financial standing of the company as a result of the tacit collusion between the directors and the external auditors. However, a greater part of the blame was apportioned to the corporate greed of the Chief Executives and the Executive Directors and the inability of their colleagues (the non-executive directors) to provide checks and restrain them from acting improperly. These are the issues that corporate governance seeks to address.

At the centre of the debate for Corporate Governance is the conflict of interest between the managers and the shareholders and possibly other stakeholder groups. The key issues in Corporate Governance are framed around the matters where conflict of interest is likely. These are briefly highlighted below.

Financial reporting and auditing:
Directors may want to window dress the annual reports and financial statements of a company by applying ‘creative accounting’ techniques. The production of misleading financial statements conceals the true financial position of the company and denies shareholders and investors the ability to know the true standing of their stakes. The external auditors are supposed to provide a level of assurance of the reliability of the financial reports, thus the independence and competence of the external auditors are of utmost concern in corporate governance.

Directors’ remuneration:
Directors may reward themselves with high remuneration packages even when the company is doing very badly. This is the ‘fat cow’ issue. Directors’ remuneration should not be excessive. Corporate Governance seeks to link executive remuneration to performance. Also, remuneration should be designed to align the interest of the directors with that of the shareholders.

Company-stakeholder relations
Most of the powers in relation to the management of the affairs of a company are usually vested in the board of directors. However, some powers are reserved for the members, acting in general meeting, the most important of these powers being the ability to elect and remove directors. The under-utilization or insufficiency of the powers of members may lead to improper conducts by directors as the most effective check on them is missing.

Risk management:
Inasmuch as shareholders want to see their investments grow, this should be done within a reasonable risk threshold. Some large corporate failures have been attributed to ineffective risk management. A well-intentioned board can still make reckless decision that can adversely affect, if not completely crash the company. The duties of the board must include ensuring that there is an operative and effective system of risk management. Shareholders should feel confident that the board is aware of the risks faced by the company, and that a system for monitoring and controlling them is in place.

Information and communication:
There should be adequate flow of information to shareholders concerning the affairs of the company. The major avenue for communication is the general meeting. There should be adequate disclosures on the activities of the company in the annual reports and free discussion of issues and participation of shareholders should be encouraged at general meetings. Shareholders should not be disenfranchised on account of choice of venue for the meetings.

Ethical conduct and corporate social responsibility:
Employees, directors and the company itself are expected to behave in an ethical manner. It is also important to note that acting ethically and the company’s attitude towards social and environmental issue would impinge on its reputation.

There are three legislations that govern the legal regime of corporate governance in Nigeria. These are the Companies and Allied Matters Act (CAMA), the Investment and Securities Act (ISA), and Banks and Other Financial Institution Act (BOFIA) [The Money Laundering Prohibition Act may not deal squarely with Corporate Governance, howbeit, directors need to be wary of its provision as their actions in the governance of the affairs of the company may bring them into liability under the Act if such actions amount to money laundering.]. The above mentioned three legislations contain the mandatory provisions on corporate governance in Nigeria. They will be examined below.

Companies and Allied Matters Act
Companies and Allied Matters Act (hereinafter referred to as CAMA) is the mandatory legal document that is the first point of call with regards to every company in Nigeria. It deals with a wide range of issues starting from company formation down to winding up and dissolution. It specifies the duties and functions of the directors, the powers of shareholders and also mandates for an audit committee (made up of equal number of directors and shareholders not exceeding six). The mandatory provision for audit committee applies only to public limited liability companies. These three groups of persons (directors, shareholders and audit committee members) are the major players in corporate administration and governance of companies.

CAMA also provides for the basic contents of the annual reports and financial statement and the laying of such (which must have been sent at least 21 days before the date of the meeting to the persons entitled to attend the meeting), before the general meeting of the shareholders. A third of the directors are subject to retirement and re-election by the members at every Annual General Meeting (except a contrary provision is made in the Articles of Association of the company).

Investment and Securities Act
The Investment and Securities Act 2007 (hereinafter referred to as ISA) created the Securities and Exchange Commission (SEC), which is the leading regulatory body on the capital market and securities investments in Nigeria. SEC ensures protection of investors in Nigeria against fraudulent dealings by the maintaining fair, efficient and transparent market and reduction of systematic risk. Shares and other securities must be registered with SEC before they are offered to the public. No shares should be offered to the public without a prospectus to that effect being registered and approved by SEC. The offering of shares without registration with SEC or without a prospectus, are offences under the Act.

The Act places the responsibility for ensuring the integrity of financing controls and reporting on the Board of Directors. Prosecution for contravention of the provisions of the Act is done through the Investment and Securities Tribunal (IST), and this makes for quick resolution of disputes.

So, basically, while CAMA deals with the incorporation, running (including the issue and types of shares and other company securities) and winding up of companies, ISA deals with the offer of shares to the public and the regulation of the capital market.

Banks and Other Financial Institutions Act
Banks and Other Financial Institutions Act (hereinafter referred to as BOFIA), charged the Central Bank of Nigeria (CBN) with the regulation and supervision of banks and other financial institutions in Nigeria. The CBN under BOFIA has the powers to make subordinate regulations for the financial sector. This is in order to curtail the excesses on the part of those saddled with the responsibility of managing financial companies in Nigeria.
The Act provides for the prosecution of any director who contravenes the provision of the Act. The Act also provides for the keeping and maintenance of books of account in accordance with extant accounting standards as may be prescribed by the CBN or other legislation from time to time. Appointment of auditors must be approved by CBN. In the exercise of the foregoing powers and responsibilities, the CBN drafted the Mandatory Code of Corporate Governance for Banks in Nigeria.

Apart from statutory provisions on corporate governance examined above, there are codes of corporate governance issued by the different regulatory bodies, the chief among them being the Securities and Exchange Commission’s Code of Corporate Governance first issued in 2003 with the latest review issued in 2011.
There are other regulatory bodies that regulate activities in specific sectors. Central Bank of Nigeria (CBN) regulates banks and the financial sector generally. The Insurance industry is regulated by National Insurance Commission (NAICOM), while Pension Fund Administrators and Pension Fund Managers are regulated by National Pension Commission (PENCOM), a body established under the Pension Reform Act 2004 with the principal object of regulating, supervising and ensuring the effective administration of pension matters in Nigeria. NAICOM issued a separate Code of Corporate Governance for Insurance Industry in February, 2009 (hereinafter called NAICOM Code) and PENCOM has its own code of corporate governance.
In this section, we shall examine the SEC Code and also take a comparative look at the provisions of the other codes mentioned above.

SEC Code of Corporate Governance

The SEC code applies to all public companies in Nigeria, all public companies with listed securities and all public companies seeking to issue securities or seeking listing by introduction. For companies with listed securities, the code should form the basis of minimum standard of corporate behavior, while companies seeking to raise funds by issuance of securities or seeking listing by introduction are expected to demonstrate sufficient compliance with the principles and provisions of the code as is appropriate to their size, circumstance or operating environment.
Where there is a conflict between the provisions of the SEC code and the provisions of any other code in relation to a company covered by the two codes, the SEC code provides that the code with the stricter provision shall apply. The SEC code makes wide provisions on the conduct of company’s affairs; however a few salient provisions will be highlighted below.
(a) Chairman/CEO: the code provides that for all companies with listed securities, the positions of the Chairman of the Board and Chief Executive Officer shall be separate and held by different individuals. This is to avoid over-concentration of powers in one individual which may rob the board of desired checks and balances in the discharge of its duties.
(b) Tenure of directors: Subject to the provisions of CAMA and satisfactory performance, all directors should be subject to re-election at regular intervals of at least once every 3 years. Also, biographical details of the directors nominated for re-election will be accompanied by the performance evaluation results and other information that can guide the decision of the shareholders.
(c) Directors’ remuneration: There should be a comprehensive policy on directors’ remuneration. The Board should approve the remuneration of each executive director, including the CEO individually, taking into consideration the relevance of skill and experience to the company. Only non-executive directors should be involved in the decisions regarding executive directors. Remuneration for nom-executive directors should be fixed by the Board and approved by members in a general meeting.
(d) Internal audit: All companies should have an effective risk-based internal audit function. Where the Board decides not to establish such a function, sufficient reasons should be disclosed in the company’s annual report, explaining how assurances of effective internal processes and systems such as risk management, internal control and the like will be obtained.
(e) Rotation of external auditors: In order to safeguard the integrity of the external audit procees, companies should rotate both the external audit firms and audit partners. The audit partners should be rotated by the audit firm while the company should not retain the services of an audit firm continuously for more than 10years. Firms disengaged after continuous service for a period of 10 years can be reappointed after the expiration of 7 years after disengagement.
(f) Risk management: The Board is responsible for the process of risk management. It should accordingly form its own opinion on the effectiveness of the process. Management is accountable to the Board for implementing and monitoring the process of risk management and integrating it into the day-to-day activities of the company.
(g) Meetings: General meetings should be conducted in an open manner, allowing for free discussion on all issues on the agenda. The chairmen of all board committees and of the statutory audit committee should be present at general meetings to respond to shareholders questions. The venue of a general meeting should be accessible to shareholders. The Board should ensure that shareholders are not disenfranchised on account of choice of venue.
(h) Board of directors: The primary responsibility for ensuring good corporate governance in the company lies with the Board. The Board shall define a framework for the delegation of its authority or duties to Management specifying matters that may be delegated and matters that are reserved for the Board. The delegation of any duty to Management does not in any way diminish the overall responsibility of the Board and the directors for being accountable and responsible for the affairs and performance of the company.

Comparative analysis of the codes
Though there are remarkable similarities between the corporate governance codes, there are still fundamental differences in their provisions. It is always helpful to remember that while SEC code applies to public companies generally, these other codes are ‘specialized’ in that they govern specific sectors, and the SEC code provides that where there is a conflict between the provisions of the SEC code and any other code, where a company is covered by the two codes, the code with the stricter provision will apply. Some of the provisions of the codes will be highlighted below.
– Family members on the board: The SEC code provides that not more than two members of the same family should be on the board of a public company at the same time. While the CBN code’s provision is to the effect that no two members of the same family should be Chairman and CEO or Executive Director, the PENCOM code only requires a disclosure of the relationship between the Chairman and the CEO. The NAICOM code’s provision is the same as SEC code on this issue.
– Board composition: The SEC code provides that the membership of the Board should not be less than 5 or more than 15. The CBN code provides for a maximum of 20 members on the Board. While PENCOM code prescribes no maximum number of board members, The NAICOM code provides that the membership should not be less and 7 and more than 15.
– Independent directors: SEC code provides that there should be on the board at least one independent director while the CBN code prescribes 2 as the minimum number or 20%. PENCOM code’s provision is same as SEC code on this issue. The NAICOM code is silent on this.
– Board committees: According to the SEC code, the Board is to determine the duties of its committees. The provision of the CBN code is same as SEC here. The PENCOM code requires a nomination committee while the NAICOM code requires an investment committee.
– Remuneration of non-executive directors: By the provisions of the SEC code, the remuneration of the non-executive directors are recommended by the board and approved by members in general meeting. The CBN code limits remuneration to sitting allowances and expenses. The PENCOM code requires the Board to report to members annually on remuneration while the NAICOM code requires members’ approval for remuneration of non-executive directors.
– Remuneration of executive directors: By the SEC code, the remuneration of executive directors is fixed by committees composed solely of non-executive directors. The CBN code is the same with SEC code on this issue. Under the NAICOM code, the Board determines the remuneration of executive directors.
– External auditors: Under the SEC code, the maximum number of years an external auditor can be continuously retained by a public company is 10. The external audit firm can be re-appointed after the expiration of 7 years from the discontinuance. The CBN code provides that the appointment of external auditors is subject to approval by the CBN and the maximum number of years of continuous engagement is still 10. The PENCOM code has no express provisions on external auditor. The NAICOM makes the maximum number of years of continuous engagement to be 5 and the appointments will be subject to approval by NAICOM.
– Internal audit: The SEC code provides that there should be a risk-based internal audit to be headed by a senior management employee and to report to the audit committee. The CBN code provides that the internal audit should headed by at least an employee on AGM grade, and to report to the audit committee. The PENCOM code just requires that a sound system of internal control be entrenched in to the processes of the company. The Provisions of the NAICOM code is same as CBN code except that the internal audit function is to report to the MD/CEO.

This article has tried to simplify the legal and regulatory regime of corporate governance in Nigeria. The detailed provisions of the laws and codes are beyond the scope of this present work. Therefore, to keep abreast of the continually changing corporate governance requirements, the services of a qualified legal practitioner or other professionals (in accordance with Section 295 of CAMA) should be retained.
Similarly, though the provisions on corporate governance (especially the SEC code) may seem to focus on public companies, there is still a myriad of provisions (in the CAMA and the specialized codes) that private companies are expected to comply with. However, it may be beneficial for private companies to adopt the provisions of the codes that are appropriate to their operations and circumstance.

– Adejoh Edogbanya, Shedrack Ekpa, Hasnah Kamardin, Corporate Governance Mechanism and the Applicable Legal Regimes in Nigeria, International Journal of Administration and Governance (ISSN 2077-4486)
– Corporate Governance in Nigeria: The Ethical and Behavioral Imperatives, International Conference on Arts, Economics and Management (ICAEM’14) March 22-23, 2014 Dubai (UAE)
– Kunle Aina, Board of directors and corporate governance in Nigeria, International Journal of Business and Financial Management Research
– G.O. Demaki (FCIS) Proliferation Of Codes Of Corporate Governance In Nigeria And Economic Development
– Cadbury Report (1992). Report of the committee on the financial aspects of corporate governance otherwise known as the Cadbury Report 1992.
– SEC. 2011. Code of Corporate Governance in Nigeria.
– Code of Corporate Governance for Licenced Pension Operators.
– Code of Corporate Governance for Public Companies in Nigeria issued by the Securities and Exchange Commission.
– Code of Corporate Governance for the Banking Industry in Nigeria (post consolidation).
– Code of Corporate Governance for the Insurance Industry.
– Companies and Allied Matters Act
– Investment and Securities Act
– Central Bank of Nigeria Act
– Banks and Other Financial Institutions Act
– The ICSA Study Text In Corporate Governance, Brian Coyle, Sixth Edition

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