by Chinedu Ekeke
When will more Nigerians start paying attention to the Financial Reporting Council (FRC), the institution that regulates auditors, accountants and sets Nigeria’s Corporate Governance and Stewardship Codes? At the moment, only a few people bother with FRC’s guidelines: practicing accountants, auditors, and a handful of management and board members of formal and properly-structured businesses. Yet more people should show interest, especially for a country in dire need of foreign investments. No investor takes a dime to a jurisdiction where utmost transparency and integrity in business is not promoted, where they are not sure that institutional regulations will guarantee safety to their dollars and returns on their investments.
Now, 96% of all businesses in Nigeria are Small and Medium-sized Enterprises (SMEs), compared to 53% in the United States and 65% in Europe. Still, this huge number contributes only 1% to Nigeria’s GDP while the smaller numbers in United States contribute a staggering 50% to that country’s GDP. We can argue that the United States is not at the same level of development with Nigeria, hence the huge gap in contribution of SMEs to GDP, yet when weighed against countries on the same level of development, Nigeria is still light years behind with respect to tapping into the huge benefits of SMEs.
A key challenge facing small businesses in Nigeria is poor credit environment; the inability to access funding. Yet one known aid to funding of small businesses is a country’s sound Corporate Governance Code. Investors consider matters of transparent reporting seriously when allocating investment funds, and Nigerian SMEs can attract these funds by first appreciating, and then applying the principles set out in the FRC’s Code.
Consider this as Nigeria being in competition with other countries of the world for investment capital. And investors look carefully at laws and regulations that guarantee safety of investments before moving in their money. Even donors (for non-profit organisations) also want to be sure that there are institutional regulations that ensure transparency in the use of funds they give to non-profit organisations within a country. This means that with sound Corporate Governance Code, and all other factors being equal, there’s a chance we will attract huge investment capital into our economy.
It is this understanding that the FRC assumes as it invites members of the public to take a look at its draft of the Nigerian Code of Corporate Governance 2018. The Code is the product of a 15-member committee set up in January to review an initial one issued in October 2016, but which was suspended by the Federal Government just eleven days after. The plan now is to replace it with a new one.
Code of Corporate Governance is a set of rules that set standards of good practice in issues like composition of boards of organisations – both private and public, their remuneration, accountability, relationship with external and internal stakeholders, as well as overall governance of the firm. The FRC is responsible for setting and promoting compliance with these standards for accounting, financial reporting and auditing in Nigeria. It has the powers to ensure good corporate governance practices in organisations.
This proposed new Code of Corporate Governance is resting on 28 principles and 230 practices. The principles are the ideals which corporate organisations should strive for in their governance journey. These principles are like the objectives to which organisations should aspire.
The practices are the ‘hows’ of implementing the principles. During implementation, the new code is designed to allow organisations focus more on its ‘spirit’, rather than its ‘letters’. The spirit is the intent – what FRC had in mind while a particular principle was being crafted.
This focus on intent, rather than the letters, is captured in the philosophy of this new code which the regulatory body described as ‘APPLY and EXPLAIN’. This philosophy was favoured because it is believed to be scalable. It assumes application and simply requires entities to explain how the principles were applied with regards to the business and the nature of its operations.
Scalability suggests that the ‘APPLY and EXPLAIN’ philosophy can be applied to meet the individual needs of the organisations while, at the core, the spirit behind the principles is borne in mind.
It stands in contrast to the former one whose philosophy was ‘COMPLY or ELSE’. Seen by many experts as rigid, the ‘COMPLY or ELSE’ philosophy is one-size-fits-all, and does not recognize the differences in business types and their operations. It gives no room for flexibility. It has also been jettisoned in other jurisdictions and replaced with the ‘Apply and Explain’ philosophy.
One fear comes to mind at this point: with this seemingly lax philosophy, will there ever be penalties for any breach? Of course, there will. FRC, through the Securities and Exchange Commission (SEC), will monitor the adoption of this code and impose appropriate sanctions to entities that deviate.
It’s important to note that there are also sectoral regulators whose own governance codes are already in place and have been running for years in their sectors. For instance, the Central Bank of Nigeria has its code for banks and discount houses; the Nigerian Communications Commission has one for the country’s Telecommunications sector while the Securities and Exchange Commission has its for publicly quoted companies. These sectoral regulators are also empowered to impose appropriate sanctions on companies that deviate from the code. For instance, if a bank deviates, the Central Bank will impose appropriate sanction on it based on the specific deviation.
FRC thinks it has done a good job with the new Corporate Governance Code, but still expects inputs from members of the public before releasing the final version. But the only members of the public who can make inputs are those who have shown interest in the draft copy currently in the public domain. This is why more Nigerians need to follow the activities of the Financial Reporting Council.