The Central Bank of Nigeria (CBN) Code of Corporate Governance For Finance Companies in Nigeria (Board functions, Separation of Powers, Director appointments, Board Committees and Remunerations)
Finance Companies (FCs) as a financial license category established by the Central Bank of Nigeria (CBN) play a complementary role to banks in the business of financial intermediation.
This segment of the financial system is expected to mobilize funds by way of borrowings, debt issuance and fund raising from local and foreign investors for lending to small, micro and medium scale enterprises. Their activities were expected to deepen the market and complement the financial inclusion drive of the CBN.
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The Operational Guidelines for Finance Companies in Nigeria was revised in 2014 as part of initiatives to establish financial stability as well as reposition the finance company sub-sector for greater effectiveness in the financial sector landscape.
To complement these efforts, the CBN issued the Code of Corporate Governance for Finance Companies. The Code is expected to enhance good governance practices, engender public confidence to attract investments and promote efficiency and transparency in the sub-sector.
The Code is issued pursuant to the relevant provisions of the Central Bank of Nigeria (CBN) Act 2007, Banks and Other Financial Institutions Act (BOFIA) CAP B3, Laws of the Federation of Nigeria (LFN) 2004, other relevant laws and extant CBN Guidelines and Circulars.
What is the application scope of the code of corporate governance for finance companies?
The code shall apply to all licensed FCs in Nigeria.
What are the responsibilities of the Board of directors of a finance company under the code?
The Board shall be accountable and responsible for the performance and affairs of the FC. Also, in line with the provisions of the Companies and Allied Matters Act (CAMA) 2020 (as amended), directors owe the FC the duty of care and loyalty to act in the interest of the FC’s shareholders and other stakeholders.
What is the extent of liability for members of the board of an FC?
Members of the Board are severally and jointly liable for the activities of the FC.
What are the functions of the board of directors of an FC under the code?
– The Board shall define and document the FC’s strategic goals, approve its long and short-term business strategies and monitor their implementation by management.
– The Board shall determine the skills, knowledge and experience that members require which shall, at the minimum, be in line with the requirements of the Approved Persons Regime.
-The Board shall ensure that its human, material and financial resources are effectively deployed towards the attainment of set goals of the FC.
-The Board shall appoint the CEO as well as top management staff and establish a framework for delegation of authority in the FC, which shall comply with extant regulations issued by the CBN from time to time.
– The Board shall establish and monitor agreed performance targets for the management.
– The Board shall ensure that a succession plan is in place for the MD/CEO, executive directors and management staff of the FC.
– The Board shall set limits of authority, specifying the threshold for large transactions which it must approve before they take place.
– The Board shall ensure strict adherence to the Code of Conduct for directors.
-The Board shall consider, approve and monitor the implementation of the FC’s budget, including setting expenditure limits for management
What does the code say about Boarding committees?
Composition and Size of the Board:- The size of the Board of any FC shall be limited to a minimum of 5 and a maximum of 9 with more than fifty per cent of board membership comprising non-executive directors (NEDs).
-Members of the Board shall be persons of proven integrity and shall meet the requirements of the Revised Assessment Criteria of Approved Persons Regime. At least two (2) members of the Board of Directors other than the Executive Directors shall be required to have banking or related financial industry experience.
– The Board shall consist of Executive and Non-Executive Directors. The number of Non-Executive Directors shall be more than that of Executive Directors.
– The Board of FCs shall comprise at least one (1) Independent NonExecutive Director (INED). An Independent Director is a member of the Board of Directors who has no direct material relationship with the FC or any of its officers, major shareholders, subsidiaries and affiliates.
What does the code say about separation of powers of the board?
-The positions of the Board Chairman and the MD/CEO shall be separate. Also, no one person shall combine the two positions in any FC at the same time. For the avoidance of doubt, no executive Vice Chairman shall be allowed in the Board structure.
– Not more than two members of a family shall be on the board of a FC at the same time. The expression ‘family’ includes director’s spouse, parents, children, siblings, cousins, uncles, aunts, nephews, nieces and in-laws.
-Where the FC is a member of a holding company, not more than two family members shall be allowed to serve on the Boards of the FC and the holding company.
-No two members of a family shall occupy the positions of Chairman and MD/CEO or Executive Director of the FC and Chairman or MD/CEO of a FC’s subsidiary at the same time.
What does the code say regarding Director appointment and tenure?
– Members of the Board of Directors shall be appointed by the shareholders and approved by the CBN.
-To qualify for the position of a Non-Executive Director, it is required that the nominee shall not be an employee of a bank or other financial institution, except where the FC is promoted by the bank or other financial institution and the proposed director is representing the interest of such an institution.
-The procedure for appointment to the Board shall be formal, transparent and documented in the Board charter.
-The appointment to the Board of FCs shall be in accordance with extant regulations issued by the CBN from time to time.
– The track record of appointees shall be an additional eligibility requirement. Such records shall cover both integrity and past performance, in accordance with extant CBN guidelines
-To ensure continuity and injection of fresh ideas, NEDs of FCs shall serve for a maximum of three (3) terms of four (4) years each.
-The term of office of an Independent Director shall be 4 years for a single term and a maximum of 8 years of two consecutive terms if reelected upon the expiration of the first term.
-The tenure of the MD/CEO of the FC shall be in accordance with the terms of engagement subject to a maximum period of ten (10) years. Such tenure shall be broken down into periods not exceeding five (5) years at a time. Any person who has served as MD/CEO for the maximum tenure (of ten years) in an FC shall not qualify for appointment in any capacity in the same FC or its subsidiaries until after a period of three (3) years after the expiration of his tenure as MD/CEO.
-Where the FC is a member of a Group or is owned by another financial institution, a director in the FC may be allowed to serve on the Boards of the FC and its holding company at the same time, provided the aggregate number of directors from the subsidiaries and associates at any point in time shall not exceed 30 per cent of the membership of the Board of Directors of the holding company.
-To enhance effectiveness, all Directors shall have access to corporate information under conditions of confidentiality; undergo training and continuing education and have access to independent professional advice.
What are the committees that are to be established by a board?
The Board shall at the minimum, establish the following Committees:
a) Risk Management Committee
b) Audit Committee
c) Board Governance and Nominations Committee
What does the code say about remuneration of the board of FCs?
An FC shall under the code align executive and board remuneration with the long term interests of their institutions and their shareholders.
– Levels of remuneration should not be excessive but sufficient to attract, retain and motivate executive officers, management and members of staff of the FC.
-Where remuneration is linked to performance, it shall be designed in such a way as to prevent excessive risk taking.
– Every FC shall have a remuneration policy put in place by the Board of Directors, which shall be disclosed to the shareholders in the annual report.
-The MD/CEO and other Executive Directors shall not receive sitting allowances and Directors’ fees.
-Non-Executive Directors’ (NEDs) remuneration shall be limited to Directors’ fees, sitting allowances for Board and Board Committee meetings and reimbursable travel and hotel expenses. NEDs shall not receive salaries and benefits whether in cash or in kind, other than those mentioned above.
-Where share options are adopted as part of executive remuneration or compensation, the Board shall ensure that the stock options are not priced at a discount except with the prior authorization of the relevant regulatory agencies.
-Share options shall be tied to performance and subject to the approval of shareholders at AGMs.
-Share options shall not be exercisable until one year after the expiration of the tenure of the Director.
– FCs shall disclose in their annual reports, details of the shares held by Directors and their related parties.