“Institutionalizing a system for evaluating the Company’s corporate governance practices ensures that its governance standards, practices and processes are adequate and effective.”
In addition to the performance evaluation of the Board, the Nigerian Code of Corporate Governance, 2018 recommends an annual corporate governance evaluation. Essentially an audit of the Company’s governance standards, practices and processes that will review and attest to compliance or otherwise with the provisions of the Code. The Code recommends that this be undertaken annually and at least every three years by an external consultant. The annual review can be undertaken internally by the Company Secretary. However, to ensure that the independence of the in-house Company Secretary is not compromised by an assessment of the Board to which he/she reports, using an external consultant to undertake the audit along with the annual Board evaluation may be expedient.
A summary of the report of the evaluation is to be included in the Company’s annual report and on the investors’ portal.
The Corporate governance evaluation or audit is a robust assessment of the effectiveness of the Company’s governance structure benchmarked against best practice as enunciated in the Code. The review will encompass Board and Committee oversight as well as a review of executive management to evaluate leadership effectiveness. The review will seek to ascertain to what extent the behavior of executive Management aligns with or reinforces governance principles agreed at Board-level (Deloitte – Auditing Governance).
The scope of the corporate governance evaluation will include an assessment of the Company’s legal entity structure, governance framework, roles and responsibilities of those within the governance framework, leadership, culture, strategy, risk management, separation of power, clarity of reporting lines, delegation of authority policies, internal control, remuneration, communication with regulators, etc. To ensure that the audit is effective, the approach should be one of assessing impact and output of the adopted practices, policies and procedure.
In terms of methodology, similar, to the Board performance evaluation, the Corporate Governance Audit will entail a review of documents, administration of surveys, observation and benchmarking. Policies on risk management, whistleblowing, internal audit, insider trading, conflict of interest, remuneration and communication often demonstrate how the Company has implemented code provisions. However, observing the proceedings of a Board meeting for example will provide clearer insight on how the Board handles conflict of interest issues.
Governance is important for the sustainability of value creation. The evaluation process measures the effectiveness of governance by auditing not only financial performance, but other lead indicators like compliance, risk appetite, the tone at the top, middle and bottom, etc. An outstanding financial performance could sometimes be linked to excessive risk-taking, resulting in superlative performance during a particular period which may not be sustainable and may indeed be eroded over time. A robust evaluation of the Company’s governance ensures that the appropriate oversight designed to ensure long term sustainability is indeed in place and functional.
The Nigerian Code of Corporate Governance adopts a principle-based approach in specifying minimum standards of practice that companies should adopt. Thus, the philosophy is one of ‘Apply and Explain’ which requires the application of the principles and an explanation as to how the principles have been applied, given the peculiarity of each entity. Practices recommended in the Code are scalable to suit the type, size and growth phase of each company while achieving the outcomes envisaged by the principles. Hence, corporate governance evaluation must be conducted within the context of the peculiarities of each Company and a “one size fits all” approach. To be effective, the consultant must have a clear understanding of the industry and recognize what “good governance” looks like.
Corporate governance is the system by which organisations are directed and controlled. It encompasses the relationship between the Board of Directors, Management, shareholders and other stakeholders, and the effects on corporate strategy and performance. Corporate governance is important because it looks at how these decision makers act, how they can or should be monitored, and how they can be held to account for their decisions and actions. It is thus imperative that a periodic soundcheck is undertaken to ensure that the system continues to function as intended, that gaps are identified and bridged as required and that higher standards are set and attained in the long-term interest of the enterprise.