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  >  Our Perspective   >  KEY HIGHLIGHTS OF THE CBN’S CODE OF CORPORATE GOVERNANCE GUIDELINES FOR BANKS AND FINANCIAL HOLDING COMPANIES IN NIGERIA

KEY HIGHLIGHTS OF THE CBN’S CODE OF CORPORATE GOVERNANCE GUIDELINES FOR BANKS AND FINANCIAL HOLDING COMPANIES IN NIGERIA

INTRODUCTION

In 2019, the Financial Reporting Council of Nigeria (“FRCN”) revolutionised the scenery of corporate governance in Nigeria with the introduction of the Nigerian Code of Corporate Governance 2018 (“NCCG 2018”) as the single Corporate Governance Code for Nigeria. The NCCG 2018 replaced all preceding sectoral codes, including the CBN’s Code of Corporate Governance for Banks and Discount Houses, issued in 2014. In view of the pronouncement of the FRCN permitting sector regulators to issue sector-specific guidelines on corporate governance for institutions under their regulatory purview, the CBN adapted the principles and recommended practices of the NCCG 2018, global best practices and previously issued codes, circulars, and directives of the CBN and issued a Circular with respect to the Corporate Governance Guidelines for Commercial, Merchant, Non-Interest, and Payment Service Banks in Nigeria, as well as the Corporate Governance Guidelines for Financial Holding Companies in Nigeria (the “new Guidelines”), on the 13th of July, 2023, with an effective date of 1st August 2023.

The new Guidelines set out three primary objectives:

  • to provide additional guidance on the principles, recommended practices and responsibilities contained in the NCCG 2018
  • to outline industry-specific corporate governance standards for Banks; and
  • to promote a culture of high ethical standards among banking operators while enhancing public confidence.

In this Article, we will highlight the key principles and requirements set out in the new Guidelines, variations from the Code of Corporate Governance for Banks & Discount Houses (which the new Guidelines now supersedes), and the impact the new Guidelines will have on the banking industry’s integrity, stability, and investor confidence.

THE CORPORATE GOVERNANCE PRINCIPLES IN THE NEW GUIDELINES

  1. BOARD STRUCTURE AND COMPOSITION[1]                                                                                                                                                                                    a. Number of Directors: Under the new Guidelines, Commercial, Merchant and Non-Interest Banks (CMNIBs) are required to maintain a minimum of seven (7) Directors and maximum of fifteen (15) Directors, while Payment Service Banks (PSB) must have a minimum of seven (7) Directors and a maximum of thirteen (13) Directors. This is a complete deviation from the stipulation of the NCCG 2018 which provided for a minimum of five (5) Directors and a maximum of twenty (20) Directors. 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. In addition, no director of a bank can serve on the board of more than two institutions within a FHC or group structure.                                                                                  b. Composition of the Board: Similar to the NCCG 2018, the Board is to comprise both Executive Directors and Non-Executive Directors (“NEDs”), with NEDs being the majority on the Board and Committees. The requirement for Independent Non-Executive Directors (INED) on the Board of Commercial Banks with international and national authorisation, Merchant Banks and Non-interest Banks with national authorisation has been increased from the minimum of two (2) to three (3) while PSBs, commercial banks with regional authorization and Non-Interest Banks with regional authorisation must have a minimum of two (2) INEDs. At least two NEDs, one of which must be an INED, should have requisite knowledge and experience in Innovative Financial Technology, Information Communication Technology (“ICT”), and/or Cyber Security.

The requirement for two or three INEDs does not apply to Banks that are publicly listed companies, as the Companies and Allied Matters Act 2020 (as amended by the Business Facilitation Act 2023) requires public companies to have INEDs that constitute at least one-third of the total number of directors.

   c. Gender Diversity/Inclusion: In achieving gender diversity and promoting gender inclusion on the Board, Banks are required to adopt a practical approach towards women empowerment in accordance with Principle 4 of the Nigerian Sustainable Banking Principles.

 d. Limitation on Participation of Extended Family: A Bank can appoint a maximum of two members of the same extended family on its Board. This is a complete departure from the NCCG 2018, which states that an INED shall not be a close family member of the company’s directors. In addition, only one member from an extended family can occupy the positions of Managing Director/Chief Executive Officer (MD/CEO), Chairman, or Executive Director at any given time.

 e. Separation of Roles: The new Guidelines state that the position of an Executive Chairman or Vice Chairman will not be recognised in the board structure of Banks. This provision aims to ensure separation of responsibilities and oversight. The same applies to the position of Vice Chairman or Deputy Managing Director in the case of FHCs. Also, a member of a NIB’s advisory committee of experts or the financial regulation advisory council of experts shall not be a member of the Board, senior management and/or staff of any Non-Interest Financial Institutions under the regulatory purview of the CBN.

  f. Notice upon Resignation: Directors resigning from the Board must submit a written notice of resignation to the Board Chairman at least ninety (90) days before the effective date of resignation. In the event that the resigning Director is an INED, and such resignation will result in non-compliance with the requirement on minimum number of INEDs on the Board, the Board shall ensure that a replacement is appointed within the ninety (90) days’ notice period. Also, where the resignation of a NED would result in majority of the Board being Executive Directors, the Board shall ensure a replacement is appointed within the ninety (90) days’ notice period.

A Director resigning from the Board due to unresolved concerns pertaining to the operations of the Bank is expected to submit a written statement to the Board Chairman for circulation to the Directors of the Bank and a copy of the written statement must be forwarded to the CBN within seven days of the notice of resignation.  In the case of the Board Chairman’s resignation, a written notice must be submitted to the Chairman, Board Nomination and Governance Committee (BNGC), who shall circulate the notice to the Board members and the CBN within seven days of receipt of the notice.

  1. BOARD ROLES AND RESPONSIBILITES[2]

The new Guidelines provide for additional roles and responsibilities of the Board. First, the Board and Board Committees are mandated to draft a Charter, and such document must be submitted to CBN for approval. These Charters are to be reviewed at least once every 3 (three) years, following which the Board-approved copies must be submitted to the CBN for its “No Objection” within 30 (thirty) days of the Board’s approval of same and prior to its implementation. Secondly, the Board shall ensure a review of the investment policies and strategies of the bank at least once every three years and submit a copy to the Director of the Banking Supervision Department of the CBN. Thirdly, the Board shall supervise the bank’s policies and procedures related to Anti-Money Laundering/Combating the Financing of Terrorism and Countering Proliferation Financing and approve an Enterprise Risk Management (ERM) Framework and Information Technology Framework for the bank including a Business Continuity plan.

The Guidelines now requires the Board to designate one of its Executive Directors as the Executive Compliance Officer (ECO) and CBN must be notified of such appointment.

  1. OFFICERS OF THE BOARD[3]                                                                                                                                                                                                               a. Chairman[4]: The Guidelines require the Chairman to hold a formal meeting with the NEDs once a year. If the Bank is a member of a FHC, the Chairman of the Bank cannot serve on the FHC’s Board and the Chairman of the FHC’s Board cannot also serve on the Bank’s Board.                                                                                                                                                                                                                                                                                                   b. Tenure of Directors[5]: The MD/CEO and Deputy Managing Director/Executive Director’s tenure shall be governed by the terms of engagement with the bank; however, their tenure shall be subject to a maximum period of 12 (twelve) years. NEDs shall serve for a maximum period of 12 (twelve) years, comprising 3 (three) terms of 4 (four) years each. The tenure of INEDs shall be a maximum of 2 (two) terms of 4 (four) years each. It is important to note that the previous code was silent on the tenure for INEDs.

The new Guidelines also provides for a cumulative tenure of 12 (twelve) years for ED’s and prohibits the extension of such tenure where an ED becomes a DMD. However, where a DMD/ED becomes an MD/CEO of the same bank, the new Guidelines permit a cumulative period of 24 (twenty-four) years from the date of first appointment to the bank’s board[6].

 c. Company Secretary[7]: The new Guidelines prohibit outsourcing of the Company Secretarial. It further makes it mandatory for CMNIBs to obtain CBN’s approval where the role of the Company Secretary is to be combined with that of the Head Legal/Legal Adviser. However, for PSBs, the role of Company Secretary can be combined with Head Legal/Legal Adviser. In addition, the Company Secretary shall report directly to the Board and have an indirect reporting line to the MD/CEO.

   4. BOARD AND COMMITTEE MEETINGS[8]

The new Guidelines provide that the Board and its Committees must meet at least once every quarter. However, where the Remuneration Committee is a stand-alone committee, meetings should be on a need basis, but at least once a year. In the case of an NIB, the Board is mandated to meet with the Advisory Committee of Experts (ACE) at least once every quarter.

The new Guidelines also introduced the option to convene virtual Board & Committee meetings if physical meetings cannot be held, and quorum for meetings shall be two-thirds of members, majority of whom shall be NEDS.

  1. BOARD COMMITTEES[9]

The new Guidelines provide that the membership of Board committees shall be reviewed and refreshed at least once every three years and that all Board committees shall be chaired by INEDs except the Board Audit Committee (BAC), Board Nomination & Governance Committee (BNGC) and the Board Remuneration Committee (BRC) which must be chaired by Independent Non-Executive Directors.

The Chairman of the BNGC in NIBs must be knowledgeable and experienced in Islamic Finance or Islamic Commercial Jurisprudence. It is also mandatory for the Board of any CMNIB to establish a Board Credit Committee (BCC) to oversee its credit matters. For the PSBs, it is mandatory for its Board to establish a Board Committee responsible for Information & Communication Technology (ICT) and Cybersecurity. The new Guidelines prohibit the establishment of sub-committees of Board Committees.

The BAC shall consist of NEDs only while the Board Risk Management Committee shall be chaired by a NED and its composition shall include at least two NEDs and the ED in charge of risk management.

  1. COOL-OFF PERIOD[10]

Any Executive Director who leaves a Bank’s Board shall serve out a cooling period of two years before being considered for a NED role in the same bank. A NED that leaves office must also wait for two years before being considered for an executive role in the same bank. A cooling-off period of two years applies when an Executive Director is appointed to the Board of the Bank’s FHC. Any member of the Financial Regulation Advisory Council of Experts (FRACE) that leaves office must wait for three years before becoming eligible for appointment as a director or member of an ACE in any NIFI supervised by the CBN.

A bank’s auditors can serve up to ten consecutive years, subject to the rotation of audit engagement partners once every five years. A cooling-off period of ten years is required before an audit firm is eligible to be reappointed by the same bank. Lastly, the Governor and Deputy Governors of the CBN, the MD/CEO and Executive Directors of the Nigeria Deposit Insurance Corporation (“NDIC”) and the departmental directors of the CBN and the NDIC must observe a cooling-off period prescribed by their respective governing board before being eligible for any appointment in a bank.

  1. INTERNAL AUDIT FUNCTION

The new Guidelines make provision for additional requirements and state that Banks are to be guided by the following internal and external audit principles:

  • A bank must have an in-house internal audit and compliance function headed by a qualified person approved by the Board and CBN and must undertake an independent external assessment of the effectiveness of the internal audit function annually. A report on this must be submitted to the Banking Supervision Department by 31st, May of the next accounting year.[11]
  • 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.[12]
  1. COMPLIANCE FUNCTION

In line with the CBN’s desire to ensure strict compliance with laws and regulations, the new Guidelines require Banks to have an Executive Compliance Officer (“ECO”) who cannot combine his/her duties of communicating regulatory requirements to the appropriate parties and reporting any violations to the Board with any income-generating activity. Furthermore, all Banks are required to have a Chief Compliance Officer (“CCO”) who holds a position not less than that of a General Manager (for Commercial and NIBs with national and international authorisation) or an Assistant General Manager (for Merchant Banks, Commercial and NIBs with regional authorisation). The CCO is responsible for monitoring and coordinating the implementation of regulatory requirements and reports to the Board through the ECO.[13]

  1. TREATMENT OF SHAREHOLDERS[14]

The new 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, investors must obtain CBN’s prior approval and No Objection. 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 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 of the new Guidelines.

  1. SANCTIONS

Non-compliance with the new Guidelines and the NCCG 2018 constitutes a regulatory breach and shall attract penalty as prescribed by CBN. Rendition of false, misleading, or incomplete information to the CBN and breach of any of the provisions of the new Guidelines by a Director, Manager or Officer shall attract appropriate sanctions including monetary penalties and administrative sanctions on the individual and the bank. A Director, Manager or Officer shall be suspended for 6 (six) months in the first instance and possible removal from the Board of the Bank in the event of continued reoccurrence of the breach.

CONCLUSION

By the singular act of providing specific corporate governance requirements for different banking models, the provisions of the new Guidelines are expected to promote a more robust and adaptable framework for the Nigerian banking sector. The new Guidelines will be instrumental in achieving transparency, sustainability, accountability, and effective governance in the Nigerian banking sector.

The new Guidelines have far-reaching provisions which makes it important for Banks to initiate a thorough review of their current corporate governance architecture vis-à-vis the Guidelines and ensure immediate compliance.

FOOTNOTES:

[1] Principle 1.0 of the new Guidelines

[2] Principle 2.0 of the new Guidelines

[3] Principle 3.0

[4] Principle 3.0, section 3.1

[5] Principle 3.0, section 3.2-3.5

[6] Principle 8.0

[7] Principle 3.0, section 3.6

[8] Principle 5.0

[9] Principle 6.0

[10] Principle 7.0

[11] Principle13.0

[12] Principle 14.0

[13] Principle 15.0

[14] Principle 20.0

Author : Esther Aderomi – Associate, Lexworth Legal Partners

DISCLAIMER: LEXWORTH LEGAL PARTNERS

This document is intended only as a general discussion on the subject of this article. Please do not regard it as legal advice. We would be delighted to provide additional details or advice about specific queries, if required.

For further enquiries, kindly send an email to e.aderomi@lexworthlegal.com or info@lexworthlegal.com.