Transparency and disclosure are cornerstones of corporate governance and the bedrock of regulatory compliance. In response to recent corporate governance scandals, regulators have adopted a number of regulatory changes to achieve increased transparency. One component of these changes has been increased disclosure requirements. For example, the Sarbanes- Oxley (SOX) Act, adopted in response to Enron, WorldCom and other corporate governance failures, requires detailed reporting of off-balance sheet financing and special purpose entities. Additionally, SOX increased the penalties for misreporting.
Transparency refers to the ease with which the public is able to make meaningful analysis of a company and its actions and relates to both financial and non-financial information about the company. Companies should disclose policies relating to business ethics, the environment and other commitments, as this information can be important to investors and others in better evaluating the relationships between companies and the communities in which they operate.
Typically, transparency prohibits the use of personal agenda, hidden contracts or other activities that can create distrust between a company and its stakeholders. Disclosure is a component in measuring a company’s level of transparency and the most important aspects of disclosure are related to the company’s finances, relationship between stakeholders and risk management. External auditors are required to include in their audit reports, comments on the adequacy of disclosure as a basis for audit opinions. A company must fully disclose to the market all material information related to transactions with related parties and indicate whether the transactions were executed at arms-length and on normal market terms.
An insider is broadly defined as a director, officer or any person who has access to a company’s confidential information or holds shares in a company and includes spouses and children.
In Nigeria, the Banks and Other Financial Institutions Act (BOFIA) and the CBN Code of Corporate Governance contain salient provisions on the requirement for disclosing insider related lending. Section 17 of BOFIA provides for full disclosure by Directors and Managers of their interest in loans, credits and advances and mandates the Company Secretary to read such disclosures at board meetings as well as record same in the minute book.
The CBN Code of Corporate Governance highlights the use of transparency as a tool for abating the pervasive influence of family members and related-parties. Such influence, if left unchecked may result in high levels of insider abuses including non- performing insider-related loans, as was the case with some of the “failed banks”. Before the CBN intervention of 2009, many banks had accumulated a significant amount of insider-related credits, a majority of which were undisclosed.
The Code further provides that any Director whose facility or that of his/her related interests remains non-performing for more than one year should cease to be on the board of the Bank and could be blacklisted from sitting on the board of any other Bank.
Disclosure of insider related credits will enthrone transparency and accountability – which remain key elements of sound corporate governance; provide stakeholders with the needed statistics and indices to take informed decisions on the performance of the company and also enhance the stakeholder confidence in the integrity of both the Board and Management of a company.
Remarkably, beyond compliance with Code provisions, some Banks have put in place policies that bar Directors from obtaining loans from the Banks on whose boards they sit. This indeed is global best practice.