By Jim Obazee.
The Annual Corporate Financial Reporting Summit has, in the 13 years of its existence, continued to assume its place due largely to the fact that its main objective supports consultation with stakeholders engaged in the financial reporting process. It is gratifying to note that a number of the issues discussed at last year’s Summit are now pillars of current institutional reforms worthy of celebration because of their far-reaching impact on the financial reporting regime in Nigeria; not only in the now but also in the immediate future.
Distinguished Ladies and Gentlemen, you will agree with me that the theme for this year’s Summit “National Code of Corporate Governance and New Audit Report: A Paradigm Shift” is quite apt at this time when some unspoken questions are yearning for answers…from us, as a Council.
This year’s Summit is also very important to me; personally, as it is the penultimate Summit the Council will hold with me serving as the Chief Executive Officer …if not the last since, some highly placed persons have been desperately seeking for my removal or assassination in recent times. My welcome address will speak to the two main issues, of the Summit, albeit from helicopter view.
Section 77 of the FRC Act, 2011 states that Corporate Governance “refers to the role of persons entrusted with the supervision, control and direction of an entity”. It has become a duty for us to clarify a number of issues so as to rest the breath of the public.
We have been accused from different quarters that the issuance of the National Code of Corporate Governance (NCCG) by our Council is the cause of, or capable of, creating a recession, impeding the ease of doing business and/or decreasing foreign direct investments. In other cases, we have also been informed that the NCCG is in conflict with the FRC Act, 2011 and/or the Companies and Allied Matters Act, CAP C20, LFN 2004; etc, etc. It is our sincere hope that this year’s Summit will address these issues and situate them most appropriately.
First, let me make it clear that the NCCG is not the cause of recession. Rather, it seems to me that when one fails to deal with issues as at when due, the signals, by themselves, start talking.
Although recession is occasioned from multiplicity of influences, at the very base of the root cause of recession are monetary authorities. Monetary authority(ies) usually raise interest rates if it thinks that the rate at which the economy is growing is capable of raising the level of inflation. This will naturally lead to costlier credit. Costlier credit will eventually force businesses and consumers to curb their spending. In our own experience, interest rates in the financial markets even rose more than bank deposits. As a result, people shifted their money out of their savings accounts and placed them in higher yielding money market funds….even the Deposit Money Banks themselves. As deposits shrank, banks had to curtail lending and items normally bought on credit caused sales to shrink. Companies suddenly found their stock piled up and had to respond by either shutting down production or laying off workers or take both actions. Laid off workers slashed their own spending; thereby multiplying the initial impact. The immediate result is the much talked about Recession. Please recall that when JP Morgan warned of their intention to delist Nigeria from Government Bond Index-Emerging Market in January 2015, their complaint centred on illiquidity, lack of transparency and 2-way market as against the NCCG.
The NCCG, on the other hand, has the capacity to build confidence that can assist the economy’s normal recuperative mechanism to engage.
Second, the NCCG cannot impede the ease of doing business. “Ease of doing business”, in a jurisdiction, is based on some “indicator sets”. These indicator sets, according to the World Bank Group, are in the areas of: Starting a Business, Dealing with Construction Permits, Getting Electricity, Registering Property, Getting Credit, Protecting Minority Investors, Paying taxes, Trading across Borders, Enforcing Contracts and Resolving Insolvency.
Corporate Governance is a means whereby Society can ensure that businesses (particularly corporations) are well governed, not only managed, to which investors and lenders, both domestic and foreign, can safely and confidently commit their funds. Corporate governance, to accomplish this, creates safeguards against mismanagement and corruption, while promoting fundamental values of a market economy in a democratic society. Among these fundamental values are accountability, transparency, fairness, responsibility and non-fluctuating integrity, as distinct from mere reputation.
Good corporate governance therefore on the basis of these values attracts investors by promising and assuring them that the Nigerian business environment is transparent and that there is fairness and adequate protection for minorities and other stakeholders especially as the Nigerian ownership environment is highly concentrated and replete with internally (instead of externally) dominated Corporate boards.
Capital, globally, has only two known loyalties: safety and adequate returns. Capital does not owe any loyalty to any governance environment that does not guarantee these two loyalties. This is because; capital does not focus on the “product” but on the “experience”.
If we do not arrange our jurisdictional issues by importance, they will automatically arrange themselves by priority. Again, it seems that it is the signals that are talking not the issuance of NCCG.
Third, the NCCG does not scare, and will not scare, foreign direct investment, rather it enhances it. Investors will invest today in any jurisdiction if they know that they will be entitled to keep the reward thereafter. This requires transparent laws, impartial courts, property rights and non-fluctuating adherence to international best practice in financial reporting, corporate governance, standards and codes.
The Nigerian economy would no doubt benefit extensively from the NCCG through its demand for enhanced transparency and accountability in financial reporting (resulting from better disclosures in financial statements) and mandatory corporate codes that speaks to how covenants are taken seriously in Nigeria.
Corporate governance failures have now been proved to be at the very heart of the global financial crisis. This is because the supposed risk management systems in most corporate entities did not work since corporate boards did not live up to their responsibilities and the “gatekeepers” (financial analysts, rating agencies, prudential regulators, etc) did not draw the investing public and other relevant stakeholders’ attention to systemic risks.
The urgency for mandatory, rather than persuasive, Code of Corporate governance can be discerned from the multiplicity of Corporate Governance Codes that existed in our country prior to the issuance of the NCCG. A number of which were put in place by regulatory authorities such as the Central Bank of Nigeria, National Insurance Commission (NAICOM), National Pension Commission, Corporate Affairs Commission, Securities and exchange Commission, etc; to meet some quick fix in the course of their regulatory functions. This seems to have yielded some results hitherto (although NAICOM graciously, prior to the issuance of the NCCG, informed its constituent to comply with their code until the FRC Code is released.
The efforts of these institutions vindicate the fact that regulatory agencies with operational interest in financial reporting and corporate governance, share the common concern that corporate governance reporting should ideally meet acceptable level of quality and international comparability.
The fact that relevant enabling laws that set up these agencies mentioned above only required them to exercise authority over varying aspects of monitoring of corporate governance, without clearly vesting the power on any one entity made the situation very confusing. It is not surprising that in the midst of the confusion, compliance monitoring was not satisfactorily done and worst still; none of these organizations/agencies was clearly vested with the responsibility for the damages that may have ensured. Thus, many significant corporate governance reporting inadequacies and departures from norm, passed unnoticed. Today, this multiplicity is now set to come to an end since the NCCG is released.
Fourth, the NCCG is not in conflict with the FRC Act, 2011.
There is a misunderstanding when people read the Financial Reporting Council of Nigeria Act, 2011in a hurry. It is true that Section 77 defined “public interest entities” for the purposes of the application of the Act” the same Section 77 also defined “entity” to mean “any person or body of persons, whether incorporated or unincorporated”. This was necessary to protect the sanctity of several Sections of the said Act; especially Section 44 which states inter alia:
Section 44 (1) “Where a professional accountant makes a report on the financial statements of an entity which he has audited, he shall express a clear written opinion in his report, giving details as to whether –
The financial statements as a whole give a true and fair view of the state of affairs of the entity to which they relate; and
The financial statements comply with the provisions of this Act, or any other enactments.
Section 44 (3): “where in the annual report to the entity, the directors disclose the extent of compliance with the Code of Corporate Governance, the professional accountant shall report separately whether the disclosure is consistent with the requirements of the Code.”
The NCCG, in its present state, applies to fewer companies than the Act contemplates. The rationale for this is because NCCG is applicable to certain categories of companies in view of the nature of corporate governance and the resources required for implementing good corporate governance standards.
There is no conflict between the provisions of the NCCG and the Financial Reporting Council of Nigeria Act, 2011.
Fifth, the NCCG is not in conflict with the provisions of the Companies and Allied Matters Act, CAP C 20, LFN, 2004.
The contention that the NCCG is inconsistent with extant legislation is misconceived and ill-informed. The nature of corporate governance codes is that they complement corporate law by filling gaps existing in corporate law and practice. Most jurisdictions adopt the format of a Code instead of an Act of the Legislature because of the relative ease of amendment where necessary to deal with dynamism of the corporate world. Corporate governance is dynamic. In the United Kingdom, for example, their corporate governance code is amended every other year. This is so even though the law governing the UK Companies Act is not intended to regularly and frequently be changed.
All the issues making round that there are conflicts between the provisions of the NCCG and the Companies and Allied Matters Act CAP C 20, LFN 2004 shall be resolved in the course of this Summit.
Company Law is derived from statutes promulgated by jurisdictional legislatures, based primarily on political, economic and social considerations. It is therefore not easily changeable despite glaring need for modifications. A typical example is CAMA 1990, which the Law Review Commission has been considering for many years. This is not altogether peculiar to Nigeria as the Indian Companies Act 1956 was superseded by the Indian Companies Act 2013 that is after 57 years. Corporate Governance on the other hand is not Law; it is a way of life that is affected by rapid developments across the world that require proactive response in a manner statute cannot respond speedily (whereas a Code can respond promptly and temporarily serve as a regulatory instrument). This is why across the world; Corporate Governance Code and Corporate Law do not at any time necessarily have to dovetail.
For example, it is legal for a man to divorce his wife if they believe for whatever reason that they are no longer compatible. It is also legal for the same man to remarry another woman who is single and willing to marry him thereafter. It will be unfair, dishonest, lack of self-discipline and lack of integrity for the new wife to be the immediate junior sister of his newly divorced wife! This is the root of Corporate Governance. It is “consoling religion”…when all seems lost, it stands fast. It requires us to find mental clarity in the control of our perception, find effectiveness in the direction of our actions and also to find resilience and purpose in the discipline of our will. It is not an accident for Corporate Governance Code and Corporate Law not to dovetail at all times, this is because corporate governance Code is the result of high intention, sincere effort, intelligent direction and the wise choice in many alternatives where corporate law would have required emergency review.
For instance, I will expect that the requirement of paragraph 19.6a of the NCCG (private Sector) that provides that “No retired Partner of an audit firm shall be appointed as a director of any company that had been, or still being audited or investigated by the firm from which the partner retired until five years after the disengagement of the firm from such audit or investigation and/or the disengagement of the partner from the firm” should hence be included in the Partnership agreement while the one that relates to Audit manager and above (as in paragraph 19.6b) be included in letters of promotion to Audit manager grade. How do we expect Corporate Law to immediately address these issues?
Instructively, the making of the National Code of Corporate Governance underwent an unprecedented, detailed and rigorous process involving key regulators, shareholders, stakeholders and the public at large, commencing with the work of a Steering Committee instituted in January 2013. Please recall that prior to the final issuance of the NCCG on 17th October 2016, there were numerous public hearings on the Exposure Draft (two in 2015 and one in 2016). Additionally, over the past four years, the NCCG has been the major thrust of the Annual Financial Reporting Summit. We are very happy to note that in this Year’s Summit, we are now discussing the NCCG as a document- in- effect and not as a draft- for- consideration. The NCCG addressed three main issues: Ownership Concentration, Corporate Board Concentration and Audit Market Concentration.
The private sector code is essentially a blend and refinement of the different sectoral codes on corporate governance in existence in Nigeria prior to the unified code. The code of corporate governance for the Private sector is mandatory. The Not-for-Profit sector governance code is operated on “Comply or Justify non-compliance basis’’, while that of the Public Sector is yet to be effective.
The International Standard on Auditing (ISA) 701, on the other hand, is now effective globally from December 18, 2016. It deals essentially with the auditor’s responsibility to communicate Key Audit Matters (KAM) in the auditor’s report. It also aims to address both the auditor’s judgment as communicated in the auditor’s report and the form and content of such communication. I do not think there are controversies in this area in our jurisdiction but it is our hope that this Summit will address whatever misgivings that may exist in our minds on the requirements of this new Standard.
Finally, permit me to remind us that the importance of corporate governance for corporate success as well as for social welfare cannot be overstated. If there are areas of the NCCG that needs to be reviewed immediately, our Council and the National Committee on the NCCG will be happy to take that on board. I must not fail to say that the Nigeria Insurers Association (NIA) and the Organised Private Sector (led by the Nigeria Employers’ consultative Association) have visited the Council, since the NCCG became effective, to raise their observations constructively.
Accordingly, I therefore invite you to speak frankly to this subject of corporate governance in the course of this 2-day event.
As I said sometimes ago, I am convinced that at the individual level, a certain amount of disorientation is to be expected…and a certain degree of confusion is perhaps unavoidable. As Thomas Berry rightly pointed out in his book “The Dream of the Earth” …colours reveal unsuspected hues, and not all of them are soothing; sounds swell with new meanings, but not all of them are comforting; human actions bespeak hitherto unimaginable significance, but not all of it is complimentary. But in both the pleasure and the pain, the earth folds back more intimately on itself through this vision (of disorientation and unavoidability).
Permit me to then request that we should all be prepared to, at the close of this Summit, stand together with Nigeria’s interest as paramount.
You are welcome to the FRC. As Howard Schultz (the founder of Starbucks) will always say “We aren’t in the coffee business, serving people. We’re in the people’s business, serving coffee”. AS FRC, we want us to, at this Summit, reflect deeply and agree with us that “You cannot discover new oceans unless you have the courage to lose sight of the shore”.
My very distinguished Ladies and Gentlemen, I cannot end this Welcome Address without saying a big “thank you” to the personalities and co-sponsors that have come to grace this occasion today. I am indeed grateful.
Once again, on behalf of management and staff of the Financial Reporting Council of Nigeria, I heartily welcome you to this 2-day Summit and thank you for counting it worthy of your time.
Obazee, the Executive Secretary of the FRC, delivers this piece at the 13TH Annual Financial Reporting Summit and Dinner, Lagos December 2016.
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