Corporate Governance 2022

Last Updated June 21, 2022

Nigeria

Law and Practice

Authors



Olajide Oyewole LLP (A Member of DLA Piper Africa) is a leading business law firm in Africa. Established in 1965 as a corporate firm, it is a full-service law firm with over 55 years’ experience of solving complex multi-sector problems, and deep expertise in multiple practice areas, particularly corporate law, M&A, banking and finance, real estate, energy law, intellectual property and dispute resolution. Olajide Oyewole LLP is a member of DLA Piper Africa, a Swiss Verein whose members are comprised of independent law firms in Africa working with DLA Piper, with its offices located in Lagos and Abuja, and over 60 specialised and highly qualified partners and lawyers with multi-jurisdictional qualifications and cross-disciplinary skills. Olajide Oyewole LLP’s powerful value proposition leverages its immense resources and network to provide seamless cross-border advisory and transactional support to a cross-section of public and private-sector organisations and private clients.

Promoters of a business in Nigeria have a number of structures to choose from, the principals of which include the following.

  • Private company limited by shares – this is the most common type of company in Nigeria. It is a legal entity that is separate and distinct from its shareholders. This means that in the event the company is wound up, the extent of the shareholders’ liability is limited to the remaining unpaid amounts for their shares. Private companies must issue a minimum share capital of NGN100,000, cannot have more than 50 shareholders, and cannot offer shares to the public at large.
  • Public company limited by shares – companies that wish to offer securities to the public can do so by way of a public company. These companies have a minimum issued share capital of NGN2 million and may be listed on the stock exchange subject to listing and reporting requirements. There is no limitation to the number of shareholders under this structure.

Less frequently used forms of business organisations include the following.

  • Companies limited by guarantee – this type of company is typically used to pursue charitable objects. The liability of the shareholders of these companies is limited to the amount they have undertaken to contribute to the assets of the company in the event of the company being wound up. The company has no share capital, and its income/profit cannot be paid to its shareholders. 
  • Business name – businesses established by sole proprietors or partnerships may be carried out through a registered business name. A business name cannot sue or be sued in its name, and cannot hold assets in its name, as it has no corporate personality.
  • Partnerships – other corporate organisations available to partnerships include a limited liability partnership (LLP) where all partners have limited liability, and a limited partnership where one or more partners have unlimited liability and one or more partners have limited liability. 

Principal Sources of Corporate Governance Requirements

The principal legislation that governs corporate governance for companies in in Nigeria includes the following.

  • The Companies and Allied Matters Act 2020 (Companies Act) – this is the primary legislation that regulates the formation, operation, and management of all companies in Nigeria.
  • The Investment and Securities Act 2007 – this act established the Securities and Exchange Commission. It regulates the operations of capital market operators to ensure the protection of investors, fair, efficient, and transparent markets, and to reduce systemic risk.

In addition to the above, some key sector-specific governance codes and regulations include the following.

  • The Nigerian Code of Corporate Governance (“the Governance Code”) – the Governance Code was formulated by the Financial Reporting Council of Nigeria (FRCN) to consolidate the codes of private regulated and public companies. The Governance Code provides a framework to ensure good corporate governance in the public and private sector. Some regulators have imposed the following additional guidelines on companies operating within their sectors:
    1. the Nigerian Communications Commission Code of Corporate Governance for Telecommunication Companies;
    2. the Guidelines on Corporate Governance for Pension Fund Operators;
    3. the National Insurance Commission Corporate Governance Guidelines for Insurance and Reinsurance Companies;
    4. the Securities and Exchange Commission Rules and Regulations (“the SEC Rules”) – these rules and regulations provide participants (regulated entities) in the capital market with more precise notice of the expectations, and code of conduct required to promote fairness and equality (see 1.3 Corporate Governance Requirements for Companies With Publicly Traded Shares for further details);
    5. the Securities and Exchange Commission Guidelines – these guidelines were issued as a replacement to the SEC Code of Corporate Governance for Public Companies 2011, and are additional guidelines to the Governance Code which all public companies are required to comply with;
    6. the Rulebook of the Nigerian Stock Exchange 2015 (the Listing Rules) – the Rulebook is a compilation of all the Rules, Regulations and Guidelines of the Nigerian Stock Exchange;
    7. the articles of association of a company is also one of the sources of corporate governance requirements in Nigeria – the articles of association specify the regulations for the company’s operations and define the company’s purpose.

Companies listed on the Nigerian Stock Exchange (NSE) are required to comply with the legislation set out in 1.2 Sources of Corporate Governance Requirements. More particularly, the following corporate governance requirements must be considered by listed companies.

All listed companies must adopt and apply the Governance Code which covers issues relating to the board of directors, risk management, shareholder engagement, business ethics, sustainability, and transparency. However, the Code is based on “apply and explain” principles, and companies have the flexibility to demonstrate how they have tailored and applied the principles of the Code taking into consideration their size, industry, and growth phase. Non-compliance may attract penalties by the FRCN and sector regulators.

The FRCN requires companies to report on the application of the Governance Code using its reporting template. The report is to be submitted to the FRCN, any relevant sectoral regulator, and any stock exchange the company is listed on. In addition, the FRCN requires the report to be hosted on the investors’ portal of the company’s website for a minimum of five years.

The Securities and Exchange Commission (the SEC) requires annual reporting on a company’s level of compliance with the Governance Code, and in any issued prospectus. In addition, the SEC requires mandatory compliance with the SEC Corporate Governance Guidelines, which are additional recommended practices that add to transparency and accountability standards relevant to listed companies. The penalty for non-compliance is a fine of NGN500,000, and NGN5,000 for every day that the violation persists, or any sanction the SEC may deem fit. The SEC also requires public companies to file half-yearly returns that include corporate governance issues.

Under the Rulebook of The Nigerian Stock Exchange (the Listing Rules), the eligibility criteria for admission includes an evaluation under the Stock Exchange’s Corporate Governance Rating System (CGRS) and a minimum rating of 70%. All companies listed on the premium board must comply with the SEC’s corporate governance requirements, and disclose in their annual report a list of the codes of corporate governance to which they are subject to, whether the company is fully compliant with the provisions of the code and, if not, provide a detailed statement of the facts of non-compliance and an explanation. Members must also undertake to adhere to any corporate governance disclosure policy requirements issued by the Stock Exchange.

In addition to the aforementioned requirements, a number of sectoral regulators have issued the following corporate governance codes and guidelines to monitor the application of the Governance Code and to impose additional corporate governance requirements for regulated entities:

  • the Central Bank of Nigeria Code of Corporate Governance for Banks and Discount Houses;
  • the Central Bank of Nigeria Code of Corporate Governance for Other Financial Institutions;
  • the Nigerian Communications Commission Code of Corporate Governance for the Telecommunications Industry;
  • the National Pension Commission (PENCOM) Corporate Governance Guidelines; and
  • the National Insurance Commission (NAICOM) Corporate Governance Guidelines.

Environmental, social and governance (ESG) issues are increasingly receiving attention as public policy, laws and market regulators are playing a central role in encouraging transparency among companies. The new Companies Act, issued in 2020 as the principal legislation applicable to all Nigerian companies, introduced a provision which imposes an additional duty on directors to ensure that they act in the best interest of the company with due regard to the impact of the company’s operations on the environment  in the community where it carries on its business, and this duty is enforceable by the company against a director in a court of law. This has highlighted the role of the board in its oversight role of ESG issues in Nigeria. Directors are also legally required to have due regard to the interests of the company’s employees in general, in carrying out their duties.

In April 2021, the Securities and Exchange Commission published Guidelines on Sustainable Financial Principles for the Nigerian Capital Market (“the Guidelines”) which set out broad principles and recommendations for better practice in sustainable finance. The Guidelines mandate all regulated entities to report on their progress in implementing ESG principles and require organisations which they supervise or finance to make appropriate disclosures on ESG issues. 

The Nigerian Stock Exchange, through its Sustainability Disclosure Guidelines, also requires all listed companies to disclose and report on ESG issues that are relevant and material to their businesses, as well as how they are managed. Sustainability information and data may be disclosed in a company’s annual report or in a separate sustainability report and submitted to the Stock Exchange. It should contain a comprehensive description of the listed company’s management overview and of economic, environmental, social and governance risks and opportunities. The Stock Exchange also encourages companies to independently verify their sustainability data against international standards.

Companies that are subject to the Governance Code are also required to pay attention to sustainability issues and to establish and monitor policies and practices addressing their social and environmental responsibilities. Boards are expected to monitor the implementation of ESG policies and report on the extent of compliance with the policies and on the company’s ESG activities.

There are also key requirements for companies in relation to reporting on ESG issues as prescribed by state authorities and sectoral regulators. Companies operating in the petroleum industry in Nigeria that seek to obtain a licence for midstream or downstream petroleum operations from the Nigerian Midstream and Downstream Petroleum Regulatory Authority (“the Authority”) are required to meet the health, safety and environmental standards prescribed by the Authority. These companies are also statutorily required to establish and finance host community trusts for the developmental objectives prescribed in the Petroleum Industry Act 2021.

At the United Nations Climate Change Conference (COP26), the Nigerian Government committed to achieve net-zero emissions by 2060 and, in line with this commitment, the Climate Change Act was passed in November 2021. The Act provides that a National Climate Change Action Plan (“the Action Plan”) will be formulated in every five-year cycle and would, among other things, serve as a basis for identifying the activities aimed at ensuring that the national emissions profile is consistent with the carbon budget goals, and establishing national goals, objectives, and priorities on climate adoption.

The Act also requires private entities with employees above 50 to establish measures to achieve the annual carbon emission reduction targets specified in the Action Plan. Private entities are also required to designate an environmental sustainability officer who would be responsible for submitting an annual report that shows the status of the entity’s carbon emission reduction efforts during the relevant period. Failure to comply with this obligation will result in fines.

The decision-making of a company is generally delegated to the board of directors in the company’s articles of association, although there are certain decisions that are reserved for the shareholders of the company. The principal bodies and functions involved in the governance and management of a company at each level are as follows.

  • Board of directors – the board is responsible for overseeing the affairs of the company. Directors may regulate their meetings as they deem fit and may exercise all such powers as are within the articles of association. Boards will consist of a combination of executive directors, non-executive directors and independent directors depending on the activities and size of the business.
  • Shareholders–the shareholders are the owners of the company, and the board of directors reports to the shareholders on the affairs of the company. The articles of association and the Companies Act provide for particular decisions reserved for the shareholders which are passed by a shareholders’ resolution.
  • Executive management – the executive management team is responsible for managing the day-to day operations of the company, and the board may delegate its powers to management to implement certain decisions and policies.

Decisions made by these particular bodies are as follows.

  • Board of directors – the board is typically authorised to make all decisions required to manage and direct the affairs of the company, secure the company’s assets, define the company’s strategic goals, and ensure the company carries out its business in accordance with the memorandum and articles of association, and the relevant laws.
  • Shareholders – there are certain significant decisions reserved for approval by shareholders. These include amending the memorandum and articles of association of the company, appointing or removing directors, altering the corporate structure, approving the audited accounts, and voluntarily winding up the company. Decisions of shareholders are taken in the form of shareholder resolutions at general meetings or in writing.
  • Executive management – the executive management team is responsible for overseeing the day-to-day running and control of the affairs of the company.  Management acts through delegated authorities from the board.

The shareholders, board of directors, and executive management make decisions in the following ways:

  • Shareholders – the decisions of shareholders are usually taken by way of a resolution passed at a properly convened general meeting (or in the case of private companies only, by written resolution). Most decisions are taken by ordinary resolution unless the articles of association or the Companies Act require the decision to be taken by a special resolution. A special resolution is a decision passed by least 75% of the votes cast, and can be used to change the company name, alter any provision in the memorandum and articles of association of a company, and effect the voluntary winding up of a company. All companies other than a small company or those with a single shareholder must hold an annual general meeting in each year.
  • Board of directors – the decisions of the board are taken in the form of a board resolution passed at its meeting or by a written resolution signed by all directors. The voting requirements for a board meeting are set out in the company’s articles of association, which may provide for a chairman’s casting vote, and the resolutions are passed by a simple majority. 
  • Executive management – the executive management acts within the authority delegated by the board of directors and is responsible for making decisions relating to the day-to-day management of the company. Accordingly, all decisions must be made within the terms of the delegation.

The Companies Act requires that the company ensure that minutes of proceedings of board, shareholder, and executive management meetings are kept.

Companies operate a single-board structure where both executive and non-executive directors sit on the same board in the discharge of their functions. Under the Companies Act, all companies are required to have at least two directors, except for companies categorised as small companies. Boards may elect a chairman to preside over their meetings, who may be granted a casting vote by the articles of association. In addition, public companies are legally required to have at least three independent directors.

The board may constitute committees and may exercise power through the committees, or delegate responsibility for specific aspects of the governance of the company to them. Whilst there are no specific requirements on the type of committees that private unregulated companies should have, regulated entities and public companies are required to have at least an audit committee, a governance or remuneration committee, and a risk management committee under the Governance Code.

The members of the board are collectively responsible for overseeing the affairs of a company by providing entrepreneurial and strategic leadership. The board is typically comprised of executive and non-executive directors with the following roles.

  • The chairman – the chairman provides overall leadership to the board at its meetings and ensures that the board works together towards achieving the company’s strategic objectives. The Governance Code recommends that the roles of chairman and chief executive officer are held by two separate individuals.
  • Non-executive directors (NEDs) – NEDs provide an independent and impartial view on the running of the company’s business, the governance structure, and the practice in the boardroom. NEDs are not involved in the day-to-day management of the company.
  • Independent non-executive directors (INEDs) – INEDs must not have an interest or relationship that could reasonably be perceived to influence the director’s ability to be impartial and objective in the boardroom. The Companies Act requires public companies to have a minimum of three independent non-executive directors on the board, and the Governance Code recommends that most of the non-executive directors are independent.
  • Executive directors – executive directors are responsible for the day-to-day management of the affairs of the company and reporting directly to the board on the overall performance of the company as relates to strategy implementation, risk management, organisational management, financial performance, amongst others. Executive directors include the managing director. The managing director/CEO is the head of the management team delegated by the board to administer the affairs of the company.

A company may by its articles of association determine the maximum number of directors to be appointed to the board. A public company is required by law to have at least three independent directors on its board. Also, a person is precluded from serving as a director on more than five public companies at the same time.

The Governance Code recommends that the board be composed of individuals with an appropriate mix of knowledge, skills, experience, diversity (including experience and gender), and independence to objectively and effectively discharge its roles and responsibilities. The Code also recommends that the board be composed of a proper mix of executive and non-executive directors with the majority of the members being non-executive directors.

The first set of directors of a company is determined in writing by the subscribers to the memorandum of association of the company or named in its articles. Directors must provide their consent to their appointment. Subsequent appointment of directors may be by a re-election at an annual general meeting or the appointment of new directors. The board of directors may also appoint new directors to fill any vacancy arising out of death, resignation, retirement, or removal of an existing director. However, such appointment is subject to the ratification of the members at the next annual general meeting, without which the director ceases to be in office.

Independence of Directors

Under the Companies Act, a director has a duty not to fetter his discretion to vote in a particular way, and to always act in the best interest of the company. Also, a public company is required to have at least three independent directors. The Companies Act provides that an independent director is one that:

  • does not own (directly or indirectly) more than 30% of the shares of the company; or
  • has not been previously employed by the company; or
  • has not acted as an auditor of the company; or
  • has not been paid or received from the company sums exceeding NGN20 million, or acted as a partner, director or officer of an entity that received or made a NGN20 million payment to the company.

In addition, the Governance Code recommends that most of a company’s non-executive directors should be independent and provides the criteria for establishing the independent status of a non-executive director. It precludes the chairman of a board from serving as the chairman of a committee simultaneously and recommends that boards should carry out annual assessments on the independence of their directors.

Conflict of Interest

The Companies Act provides that a director has a duty to avoid conflict-of-interest situations, and to ensure that his/her personal interest does not interfere with the performance of his/her roles and responsibilities on the board. There are various circumstances where a conflict-of-interest situation may arise, which include the use of property, opportunity or confidential information while performing their role as director of the company; receiving a personal benefit or secret profit from the business; or acting as a director on the board of a competing company.

Directors have a duty to give a written notice of disclosure to the board of their interest in any transaction or proposed transaction with the company as soon as they become aware of it. The board may authorise transactions in which conflict-of-interest issues have been raised by following an established process set out in a policy document. In the absence of such approval, the offending director is liable to account to the company for benefits derived that are contrary to the law.

Directors have a fiduciary relationship with the company, and the Companies Act sets out the statutory duties they must observe. Directors must:

  • discharge their duties honestly and observe good faith in any transaction in relation to the company;
  • act in what they believe to be the best interest of the company to promote its objectives, while having regard to the impact of the company's operations on the environment, its employees, and its shareholders;
  • exercise a degree of care, diligence, and skill which a reasonably prudent director would exercise in similar circumstances – directors must meet the minimum standard of skill and care expected of someone in their position and utilise their skills and experience;
  • declare the nature and extent of any interest in proposed transactions or arrangements with the company before the secret profits are made;
  • exercise their power for the specific purpose it was given and not for any collateral purpose.

Directors must not:

  • restrict their discretion to vote in any way;
  • put themselves in a position where there is, or could be, a conflict between their personal interests and their duty to the company;
  • make any secret profit or achieve any unnecessary benefit;
  • misuse the company's information;
  • accept bribes, gifts or commissions from any person in respect of any transaction involving their company in order to induce their company to deal with such a person.

Directors are also legally required to comply with reporting and disclosure requirements including annual returns, financial statements, and other corporate information. They must also ensure the company’s compliance with other legal obligations including regulations relating to data protection, health and safety, environmental matters and employment issues.

Directors are appointed to direct and manage a company’s business and they owe their statutory duties to the company itself. However, in making decisions in the best interest of the company, directors have a legal duty to consider the interest of its employees, the shareholders, its stakeholders and the environment in the community where the company operates.

Directors do not owe a duty to creditors directly. However, where a company is insolvent or nearing insolvency, directors may be able to avoid liability for fraudulent or wrongful trading if they can demonstrate that they took every necessary step to minimise potential loss to creditors.

Generally, only a company can enforce the breach of a director’s duties or ratify an irregular act since the duties are owed to the company itself. This poses some difficulty as an individual shareholder who wishes to sue a director may not be able to obtain a board approval required to commence an action in the name of the company. The Companies Act therefore contains provisions which allow shareholders to bring a derivative action on behalf of the company under certain circumstances.

The consequences for breach of a director’s duties to the company may include payment of compensation or damages for any loss suffered on account of the breach of their duties, recovery of misapplied property, accounting for profit, restitution, rescission of a contract, being restrained by injunction or held criminally liable, where the breach amounts to a crime.

A director also risks being disqualified by the court from acting as a director or from taking part in the promotion, formation, or management of a company if the director is convicted of a criminal offence relating to the running of a company, or fraudulent or wrongful trading.       

In addition to a director’s liability relating to the breach of their duties, directors who receive more money than they are entitled to as remuneration are guilty of misfeasance and accountable to the company for such money. Where a payment declared to be illegal by the Companies Act is made to a director, the amount received is deemed to have been received by them in trust for the company. In addition, if a director has breached the tax obligations of a company, the director may be held personally liable for tax penalties payable by a company.

Under various legislation including the Economic and Financial Crimes Commission Act and Money Laundering (Prohibition) Act, a director can be held criminally responsible if the director participated in the commission of the crime related to the company’s activities.

The liability of directors can be limited under certain circumstances. A company cannot indemnify a director from liability arising from legal breach in respect of the company, including negligence, default, or breach of trust. However, directors can be indemnified by way of an advance against legal costs incurred by them in successfully defending legal proceedings. However, if the director is not successful, the advance must be repaid to the company.

A company may pay for directors’ and officers’ (D&O) insurance for its directors. This generally covers individual directors against claims made against them in their capacity as director (including defence costs). Shareholders may ratify or confirm negligent actions taken by directors, or conduct which breaches a director’s duty, insofar as the breach is not illegal or fraudulent. However, this does not absolve a director from any liability to a third party.

The remuneration of directors is determined by the shareholders in a general meeting, and where remuneration is fixed by the articles of association, it can only be changed by a special resolution of the shareholders. Directors cannot be paid remuneration free of income tax or varying with the standard rate of income tax under the Companies Act. The members of the audit committee of a public company are also not entitled to remuneration.

The managing director’s remuneration is determined by the board of directors. The Governance Code recommends that the managing director/CEO and other executive directors should not receive sitting allowances for attending meetings of the board or its committees, and directors’ fees from the company, its holding company or subsidiary. The Governance Code also requires companies to implement a claw-back policy to recover excess or undeserved rewards, such as bonuses, incentives, share of profits, stock options, or any performance-based rewards from directors and senior executives. The Companies Act also requires that the remuneration of managers of the company be disclosed to the shareholders at general meetings.

Companies are required by the Companies Act to file annual returns to the Corporate Affairs Commission, accompanied by audited financial statements which are required to disclose all payments and remuneration from the company to its directors and its officers for the year.

The Governance Code also recommends that the company’s remuneration policy as well as the remuneration of all the directors should be disclosed in the annual reports of the company.

A company has a separate legal personality from its shareholders and the shareholders’ liability to the company is generally limited to any amount unpaid on their shares. The relationship between the company and its shareholders is a binding contractual one governed by the articles of association of the company, whereby they agree to observe the provisions of the memorandum and articles of the company.

The shareholders are given a right of participation in the company rather than a direct interest in the assets of the company, and are entitled to dividends from the distributable profit of the company in the proportion of their shareholding. Upon winding up, the shareholders are also entitled to the surplus assets of the company after the company’s creditors have been fully paid.

Sometimes, shareholders may enter into shareholder agreements with themselves and the company, outside the articles of association. A shareholder’s agreement confers privacy as the articles of association are required to be filed at the Corporate Affairs Commission.

Unless otherwise provided in the company’s articles of association, the business of the company is directed and managed by the board of directors who exercise all the powers of the company that are not legally reserved to the shareholders. 

Certain powers that are exercisable only by shareholders in a general meeting include the approval of audited accounts, the ratification of the appointment of directors and the approval of a major asset transaction valued at 50% or more of the value of the company.

Shareholders have a right to attend general meetings and to require directors to call a general meeting to direct the board or management to take certain decisions if they hold more than one tenth of the paid-up capital of the company or total voting rights, stating the purpose of the meeting.

Save for small companies or companies having a single shareholder, the board is required to hold a general meeting annually in addition to any other meeting in that year. Not more than 15 months shall elapse between one annual general meeting and the next.

Written notice of the meeting must be given to each shareholder, director and auditor at least 21 days before the meeting; unless a majority of shareholders holding not less than 95% in nominal value of the shares with a right to attend and vote agrees to a shorter notice. No business may be transacted at any general meeting unless notice of it has been given. Such notice must contain the place, date and time of the meeting as well as the general nature of the business to be transacted to enable the recipients to decide whether their attendance is necessary. Where any special resolution is to be submitted to the meeting, the text of that resolution must be included in the notice.

Shareholder meetings other than an annual general meeting are extraordinary general meetings, and they can be convened with 21 days’ notice whenever the company sees fit.

The default method for voting on a resolution is by a show of hands and shareholders’ votes for or against each resolution are counted. Alternatively, a poll may be required to be conducted by the chairman – at least three shareholders, or shareholders together holding 10% of the votes, in which case votes must be counted according to the number of votes attached to the shares held by the relevant shareholders.

Before the passage of the Companies Act 2020, all general meetings were held physically in Nigeria. However, in the wake of the COVID-19 pandemic, the Companies Act introduced provisions to allow companies to convene shareholders’ meetings electronically. Companies have also taken the opportunity to amend their articles of association to incorporate provisions on electronic meetings.

Shareholders may institute legal proceedings in the name and on behalf of the company based on a director’s action (or inaction) involving negligence, default, or breach of duty, if it is in the best interests of the company.

Proceedings may also be brought against the company or directors on the grounds that the affairs of the company are being run in an illegal, oppressive, unfairly prejudicial, or unfairly discriminatory manner, or with disregard to the interest of a shareholder or shareholders.

By virtue of the Companies Act, a shareholder who possesses, either directly or through a nominee, shares in a public company that entitles the shareholder to exercise 5% of the unrestricted voting rights at any general meeting is considered a substantial shareholder and must notify the company of his or her interest within 14 days after that person becomes aware that he is a substantial shareholder.

Within 14 days of receipt of the notice or of becoming aware that a person is a substantial shareholder, the company must give notice in writing to the Corporate Affairs Commission. The duty also arises where the person ceases to be a substantial shareholder.

Under the Companies Act, companies are required to publish their financial statements, including the directors’ report and auditor’s report, and deliver them to the Corporate Affairs Commission annually, except where the requirement is dispensed with by law. For companies that qualify as small under the Companies Act, the directors may deliver modified financial statements instead.

The Companies Act sets out the matters the annual report should deal with. They include any significant change in the assets of the company, directors’ interests, important events affecting the company, likely future developments of the business, charitable gifts, employee engagement and training.

The Listing Rules require listed companies to announce their financial statements for the full financial year immediately after the figures are available and not later than 90 days after the relevant financial period. The annual financial report must also be available to the public for at least five years. They must also announce the financial statements for each of the first three quarters of their financial year immediately after the figures are available, and not later than 30 days after the relevant financial period.

Under the SEC Rules, all listed companies must also release their earnings forecast, 20 days prior to the commencement of a quarter. The chief executive officer and the chief financial officer must swear to an affidavit of correctness of the information disclosed in the annual report, accounts, and periodic financial reports released to the public.

Public companies are required by the SEC Rules to publish their quarterly financial statements in at least one newspaper and on the company’s website. In addition, the Governance Code recommends a full and comprehensive disclosure of all matters that are material to investors and stakeholders as good corporate governance practice.

See 4.11 Disclosure of Payments to Directors/Officers for disclosure requirements relating to directors’ remuneration, and 6.2 Disclosure of Corporate Governance Arrangements for disclosure requirements on corporate governance.

The FRCN requires all public companies, their holding companies (private or public) and regulated entities to comply with the Governance Code and to report annually on how they have applied its principles. Companies need to state in their report whether they have complied with the provisions of the Code, and if not, explain why.

The FRCN’s reporting template sets out the information required to be provided in the corporate governance report, which includes matters relating to the board of directors, risk management, shareholder engagement, business ethics, sustainability, and transparency. The SEC Rules also require the board of a public company to comply with the Governance Code, and to ensure that the company’s annual report includes a corporate governance report that conveys clear information on the strength of the company’s governance structures, policies and practices to stakeholders. The report should include information relating to the composition and responsibilities of the board and committees, the company’s code of business conduct and its sustainability policies. See 1.3 Corporate Governance Requirements for Companies With Publicly Traded Shares for corporate governance disclosure requirements for listed companies.

A company is required to notify the Companies Affairs Commission when there are any key changes to its particulars, such as change in the registered office, shareholding and directorship. It must also file annual returns along with audited financial statements and file all special resolutions within 15 days of passing them. All documents filed at the Commission are available to the public.

Every company is required to appoint an external auditor to audit the financial statements of the company. However, companies that have not carried on any business since incorporation, and small companies, are exempt from this requirement. A private company qualifies as a small company in a financial year if:

  • its turnover is not more than NGN25 million;
  • its net assets value is not more than half the value of the prescribed turnover;
  • one of its members is an alien; and
  • none of its members is a government, government corporation or agency or its nominee.

Directors of a company are statutorily required to lay the audited financial statements before the shareholders at the general meeting and certify the accuracy of the financial statements. The auditors are also expected to confirm whether proper books of accounts were kept by the company and report on the correctness of the information provided in the directors’ report.

The additional requirements that govern the relationship between the company and the auditor under the Governance Code include:

  • mandatory rotation of external auditors after a period of ten years for regulated companies;
  • the requirement to appoint persons who are qualified under the Companies Act as auditors, eg, an employee of the company may not be appointed as an external auditor – the qualifications are generally structured to avoid conflict of interests;
  • the right of an external auditor to receive notices of general meetings and attend such meetings; and
  • an auditor is precluded from providing non-audit services except where any other services offered by the auditor have been approved by the board in accordance with international auditing standards.

The Governance Code requires boards of regulated companies to establish a sound framework for managing risk and ensuring an effective internal control system for their companies. It recommends setting up a risk management committee where non-executive directors constitute the majority of the committee. It also recommends the appointment of an independent reviewer to assess the effectiveness of the internal audit function at least once every three years.

The Companies Act mandates the chief executive officer and the chief financial officer of a company to certify that the company has internal controls that have been established, maintained and effected as of the date the financial statements were signed off. It is also mandatory for the statutory audit committee of a public company to constantly monitor and review the effectiveness of the company’s system of accounting and internal control, and to authorise the internal auditor to conduct any necessary investigations.

All public companies are required by the SEC Rules to establish a risk management committee to assist in their oversight of the risk profile, risk management framework and risk reward strategy as determined by the board.

Olajide Oyewole LLP (A Member of DLA Piper Africa)

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Lagos 101007
Nigeria

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Olajide Oyewole LLP (A Member of DLA Piper Africa) is a leading business law firm in Africa. Established in 1965 as a corporate firm, it is a full-service law firm with over 55 years’ experience of solving complex multi-sector problems, and deep expertise in multiple practice areas, particularly corporate law, M&A, banking and finance, real estate, energy law, intellectual property and dispute resolution. Olajide Oyewole LLP is a member of DLA Piper Africa, a Swiss Verein whose members are comprised of independent law firms in Africa working with DLA Piper, with its offices located in Lagos and Abuja, and over 60 specialised and highly qualified partners and lawyers with multi-jurisdictional qualifications and cross-disciplinary skills. Olajide Oyewole LLP’s powerful value proposition leverages its immense resources and network to provide seamless cross-border advisory and transactional support to a cross-section of public and private-sector organisations and private clients.

Sustainability and ESG Disclosures in Nigeria – Growing Regulatory and Investor Expectations

Introduction

Environmental, social and governance (ESG) issues have become a focal point of the scrutiny of stakeholders, and key decision-makers. With the growing evidence of the correlation between a culture of sustainability and long-term business success, there is mounting pressure on boards to ensure their organisation addresses their environmental and social impacts, and Nigerian regulators are beginning to emphasise the importance of adopting ESG practices, not just as a compliance issue, but as part of the culture and strategy of organisations.

This article explores the regulatory overview of ESG in Nigeria and the impact of sustainable investment or ESG investment in Africa, with a particular focus on Nigeria.

History of ESG in Nigeria

The regulatory landscape of ESG has witnessed a significant number of reforms in recent years. Stakeholders are demanding greater accountability from companies on performance, disclosure of corporate information and compliance with established ESG standards. The COVID-19 pandemic coupled with the rapid advancement in technology, establishment of international frameworks on sustainability principles and reporting, the rise of sustainable financing, and the need to forestall corporate failures have all led to the expansion of ESG-related legislation in Nigeria.

The substantive legal foundation of ESG regulation in Nigeria is the 1999 Constitution of the Federal Republic of Nigeria (the Constitution). The Constitution embeds the key objectives and directive principles that government officers and their agencies are expected to observe and apply in exercising their legislative, executive, and judicial powers. It emphasises the need for the government to adopt and implement essential ESG concepts and practices, not only for the advancement of individual prosperity, but also for the overall growth and sustainable development of the Nigerian economy.

Laws such as the Environmental Impact Assessment (EIA) Act 2004 and the Harmful Waste Act 2004 are examples of the regulations which provide the framework for the protection of the environment in Nigeria. The EIA Act requires that an impact assessment should be performed by the company in relation to any activity or project likely to have a significant effect on the environment. Public and private-sector organisations may not undertake projects without prior consideration of their environmental implications. The EIA Act is a suitable tool for promoting sustainable development by combining development goals with environmental preservation, both internationally and locally. Similarly, the Harmful Waste Act 2004 criminalises any operations pertaining to the storage, purchase, importation, and transfer of toxic wastes and imposes civil liability for any damage caused by a breach of this provision.

In 2012, the Central Bank of Nigeria (CBN) published the Nigerian Sustainable Banking Principles (the Principles) which are applicable to banks and other financial institutions. The expressed objective of the Principles is to enhance the financial success of applicable institutions over the longer term while ensuring that they remain environmentally and socially responsible. Nigerian financial institutions are required to create a strategy that assesses the critical environmental and social interests and the prospects to be achieved through their commercial activities. According to the CBN, the objective of the Sustainable Banking Principles is to positively impact the environment in which the financial institutions operate, and to protect the interests of the customers. The Principles are currently under review by the CBN.

Regulatory evolution of ESG in Nigeria

The Nigerian regulatory environment started to experience a flood of ESG-related legislation commencing in 2018, when the Nigerian government passed the Federal Competition and Consumer Protection (FCCP) Bill. Among other things, the FCCP Act was enacted to protect the interest of consumers and to contribute towards the sustainable development of the economy.

In the same year, the Securities and Exchange Commission (SEC) approved the Nigerian Stock Exchange Sustainability Disclosure Guidelines for public listed companies. The guidelines outline the core ESG principles, the key reporting requirements for listed companies, and specify the key indicators to be considered to ensure annual disclosure by companies in compliance with the stipulated timelines.

Also in 2018, the Financial Reporting Council of Nigeria issued the Nigerian Code of Corporate Governance 2018 (NCCG). The NCCG applies to public and private regulated companies, and encourages companies to prioritise sustainability issues – particularly those relating to social, occupational, environmental, health and safety matters – that would guarantee the long-term success of the business, and effectively project the company as a socially responsible citizen that contributes towards economic development.

The Companies and Allied Matters Act, enacted in 2020, places an obligation on directors of Nigerian companies to preserve the assets of those companies, promote the purposes for which the companies were formed, and consider the needs and the interest of employees and members, and the impact that the operations of the companies can have on the environment in communities where they carry on business. Directors of Nigerian companies now have a legal obligation to consider the interest of their host communities and the environment in their decision-making, on behalf of the companies on whose boards they sit.

The Guidelines on Sustainable Financial Principles for the Nigerian Capital Market (the Guidelines) were adopted by the SEC in April 2021. The first principle in the Guidelines encourages regulated entities to entrench key ESG considerations into the operations and decision-making processes of their organisations, to prevent or minimize negative impacts. The fifth principle mandates regulated entities to report on their progress in implementing ESG principles and to make appropriate disclosures on their ESG issues. The SEC further provided a detailed reporting template and advised entities to adopt the Global Reporting Initiative or any other internationally recognised reporting standards in preparing their reports.

The recently passed 2021 Climate Change Act provides for a framework that would ensure Nigeria achieves low greenhouse gas emissions through the utilisation of inclusive green growth and sustainable economic development. The Act also requires all ministries, departments, and agencies of the federal government, as well as public and private enterprises in Nigeria, to develop and implement mechanisms targeted at reducing carbon emissions and promoting a clean and climate-focused society.

The Petroleum Industry Act (PIA) 2021 was enacted as the main regulation governing the oil and gas industry in Nigeria. The Act introduced a body known as the Host Community Development Trust responsible for financing the execution of projects that would benefit the development of host communities. This provision also requires operators to participate, as a matter of law, in environmental and social sustainability activities, and to address ESG issues relevant to communities within which they operate. While these rules and regulations do not cover the entirety of Nigeria's comprehensive ESG regulatory framework, they adequately illustrate the significant efforts made in Nigeria to guarantee that ESG plays a prominent role in the operations of commercial organisations, even if they are as simple as a sole proprietorship.

ESG reporting trends and disclosure requirements

Due to the general consensus on the critical role of ESG in corporate long-term success and the changing needs of stakeholders, corporations must adopt a disclosure approach that sheds light on their identified key ESG-related metrics and overall material ESG performance in various areas of business and at different levels of the organisation. A well-thought-out disclosure approach may not only increase the quality of ESG performance data, but also boost trust and drive business performance.

Some key disclosure requirements that are required when doing business in Nigeria include:

  • submission of regular reports to the CBN to enable it to track the progress of implementation and adherence to the Nigerian Sustainable Banking Principles;
  • submission of a corporate governance report (with clear information on governance concerns, environmental and social risks and opportunities); and
  • the inclusion of a statement of the company’s efforts towards ensuring ESG compliance in the annual report of the company.

The Nigerian Stock Exchange (NSE), through its Sustainability Disclosure Guidelines 2019, requires listed entities to adopt sustainability reporting, by revealing the sustainability practices that impact their business and how well they are managed. Sustainability information and data may be disclosed in a company’s annual report or in a separate sustainability report and submitted to the Exchange.

The Environmental Impact Assessment Act mandates operators in the public and private sector to carry out assessment on any project likely to have a significant impact on the environment. All operators shall, before embarking on the proposed project, apply in writing to the National Environmental Standards and Regulations Enforcement Agency, so that a proposed project can be quickly assessed to determine its effects on the environmental at an early stage. The agency will then issue a signed certificate stating that an environmental assessment of a project has been completed.

The SEC’s Guidelines on Sustainable Financial Concepts for the Nigerian Capital Market compels all regulated enterprises to report on their progress in applying ESG principles and to provide adequate disclosures on ESG concerns to organisations that they oversee or fund. These disclosures are to be made annually on a standalone basis or as an integral part of the entity’s annual report to stakeholders. The timing of the report should be the same as the financial performance report of the organisation.

At the United Nations Climate Change Conference (COP26), the Nigerian government committed to achieve net-zero emissions by 2060 and, in line with this commitment, the Climate Change Act was passed in November 2021. The Act provides that a National Climate Change Action Plan (the Action Plan) will be formulated in every five-year cycle which would, amongst other things, serve as a basis for identifying the activities aimed at ensuring that the national emissions profile is consistent with the carbon budget goals, and establishing national goals, objectives, and priorities on climate adoption. The Act also requires private entities with more than 50 employees to establish measures to achieve the annual carbon emission reduction targets specified in the Action Plan. Private entities are also required to designate an environmental sustainability officer who would be responsible for submitting an annual report that shows the status of the entity’s carbon emission reduction efforts during the relevant period. Beyond the disclosures required by laws and regulations, there are other disclosures on gender equity, inclusion, human rights, and social welfare that companies are encouraged to comply with.

Notably, several corporations have made significant progress in incorporating the United Nations Sustainable Development Goals (SDGs) and the United Nations Principles for Responsible Investment (UNPRI) into their business practices.

Global Sustainable Investment Outlook – the effect and impact in the African context

The Global Sustainable Investment Alliance defines sustainable investment as an investment approach that considers ESG factors in portfolio selection and management.

During the two years after the COVID-19 pandemic, ESG-centric products had an average compounded annual growth rate of 27% in global assets under management (AUM). Between 2019 and 2021, Japan and Canada recorded the largest growth in ESG-centric products, whilst the Middle East and Africa recorded -16% growth within the same period. This growth is attributable to institutional investors’ stronger interest in ESG, increased climate-related financial disclosures, and increased regulatory action. Europe and the USA represented more than 80% of global sustainable investing assets between 2018 to 2020. Socially conscious investment is expected to continue to grow globally. For instance, according to Bloomberg Professional Services, ESG AUM are expected to hit USD53 trillion by 2025. The upward movement in sustainable investment was fostered by international instruments and global norms such as the UNPRI, the Paris Agreement, the SDGs, the Task Force on Climate-related Financial Disclosures, the United Nations Environment Program Finance Initiative (UNEP FI), and the United Nations Global Compact.

The UNPRI seeks to understand the investment implications of ESG factors and supports its international network of investor signatories in incorporating these factors into their investment and ownership decisions. The SDGs, which were adopted by all United Nations member states in 2015, contain 17 goals to achieve a better and more sustainable future for everyone by 2030. The SDG goals aim to eradicate poverty, improve health and education, decrease inequality, and encourage economic growth whilst preserving the environment and tackling climate change. The Paris Agreement is probably the most significant of these international efforts, being a legally binding international instrument on climate change. The Agreement, which was adopted by 196 parties at COP 21 and entered into force on 4 November 2016, aims to limit global warming to well below two degrees Celsius, and expects countries to deliver Nationally Determined Contributions (NDCs) every five years.

The contribution of these international efforts to the shaping of the sustainable global finance system has been immense. For instance, it has been noted that institutional investors often require investment managers to be signatories to the UNPRI. In 2022, the UNPRI has more than 4,800 signatories from over 80 countries representing approximately USD100 trillion.

The UN Global Compact has 7,000 signatories from 135 countries, and 159 countries representing 83.6% of global emissions have submitted new or updated NDCs.

The African context and the sustainability dilemma

According to the Global Sustainable Investment Review 2020, policies and regulations, industries and collaborations, customer preferences, and markets are the key drivers of sustainable and responsible investment in all regions, including Africa. Some of the important regional developments and initiatives in Africa which seek to embed sustainability principles include:

  • partnership with the UN Sustainable Stock Exchanges Initiative;
  • state NDCs;
  • the SEC’s 2021 Guidelines on Sustainable Financial Concepts for the Nigerian Capital Market and the 2012 Code for Responsible Investing in South Africa;
  • the sugar tax in Nigeria and South Africa;
  • the 2016 King IV Report and the 2018 Nigerian Code of Corporate Governance;
  • the 2020 African Green Bond Toolkit developed by Financial Sector Deepening Africa in collaboration with Congo Basin Institute and UK Aid, green bond listing on the stock exchanges, and Nigeria’s sovereign green bond programme; and
  • the African Development Bank’s green bond program.

These developments in sustainable investing in Africa may, however, be juxtaposed against the philosophical and perhaps moral arguments relating to an equitable transition to net zero. Africa is particularly vulnerable to the effects of climate change despite having only contributed between 2% to 3% of total global emissions, compared to 23% by China, 19% by the United States, and 13% by the European Union. Due to its continued reliance on fossil fuels for industrialisation and to end poverty, it may suffer the brunt of the global movement towards cleaner sources of energy and the ESG-focused investment market. For instance, in 2021, the green bond issuance in the United States amounted to USD81.9 billion, while China came in second with USD68.1 billion worth of green bonds. Meanwhile, only about USD3.96 billion has been raised in Africa as of August 2021.

The Economic Commission for Africa identified the major challenges of Africa in reacting to climate change discussions as the low levels of access to technology, reliance on rain-fed agriculture and high poverty levels in the region. African countries require greater access to technical assistance and funding. The World Bank has emphasised in its report that the region is directly and indirectly exposed to the transition risks associated with climate change, which is amplified by the dependence of many countries, and contracts, on energy, mining, and minerals. As banks, development finance institutions and private equity firms are increasingly refusing to grant funding for projects unless there is a proven sustainability plan, Africa’s position is most concerning.

Sustainability investment solution from within Africa

The main asset owners in Africa are pension and social security funds who could be part of the solution to the sustainability financing dilemma. However, only 50% of the funds, when benchmarked against pension funds globally by the World Bank, provided information on how valuable sustainability is to their investments.

The funds provided limited data on the sustainable investment strategies adopted and did not disclose any information on their approach to climate change. The 2021 World Bank Group’s report on African pensions and ESG factors had noted that pension funds need to work with capital market regulators to build green financial frameworks, and the African Pension Supervisors Forum members should prioritise regional ESG reporting standards for African pension funds. Another dimension to the sustainability dilemma is the materiality of ESG in Africa. While pension funds could be a source of investment furthering the adoption of ESG in Africa, these funds may not be sufficient to industrialise Africa.

In the African context and in view of its comparatively low carbon emissions, global investors should consider “S” and “G” to be more material. Sustainable investment should be tied to putting an end to poverty, promoting ethical governance, and addressing other social issues in the region. The 2021 African Private Equity Industry Survey on the importance of ESG considerations when investing in African private equity revealed that ESG is considered very important by general partners, with “E” at 81%, “S” at 91%, and “G” at 86%. While the environment ranks as important, social considerations were considered more important.

Conclusion

According to the 2020 KPMG Survey of Sustainability Reporting, the two most significant events for ESG and sustainability reporting in Nigeria are the Securities and Exchange Commission’s (SEC) approved Nigerian Stock Exchange’s Sustainability Disclosure for listed companies, and the 2018 Code of Corporate Governance. Since the KPMG survey, Nigeria has made further strides through the SEC-issued Guidelines on Sustainable Financial Concepts for the Nigerian Capital Market in April 2021.

From the global stage, the International Financial Reporting Standard’s (IFRS) move to form a convergence of the currently fragmented ESG reporting would also be significant for ESG in Nigeria as current sustainability disclosures are made in accordance with the Global Reporting Initiative’s reporting framework and guidelines. Like many countries, Nigeria still faces significant ESG issues and corporate response is varied. For instance, the country is still facing significant environmental issues in the Niger Delta region, desertification in the North, allegations of police brutality, workplace issues and “green washing”. However, in line with global efforts, Nigerian companies are beginning to adapt to these changes and adopt quality ESG reporting and standards in their operations and governance.

Olajide Oyewole LLP (A Member of DLA Piper Africa)

Plot 5 Block 14
Bashorun Okusanya Avenue
Lekki Peninsula Scheme 1
Lagos 101007
Nigeria

+234 1 279 3670

corporate@olajideoyewole.com www.dlapiperafrica.com/nigeria
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Law and Practice

Authors



Olajide Oyewole LLP (A Member of DLA Piper Africa) is a leading business law firm in Africa. Established in 1965 as a corporate firm, it is a full-service law firm with over 55 years’ experience of solving complex multi-sector problems, and deep expertise in multiple practice areas, particularly corporate law, M&A, banking and finance, real estate, energy law, intellectual property and dispute resolution. Olajide Oyewole LLP is a member of DLA Piper Africa, a Swiss Verein whose members are comprised of independent law firms in Africa working with DLA Piper, with its offices located in Lagos and Abuja, and over 60 specialised and highly qualified partners and lawyers with multi-jurisdictional qualifications and cross-disciplinary skills. Olajide Oyewole LLP’s powerful value proposition leverages its immense resources and network to provide seamless cross-border advisory and transactional support to a cross-section of public and private-sector organisations and private clients.

Trends and Development

Authors



Olajide Oyewole LLP (A Member of DLA Piper Africa) is a leading business law firm in Africa. Established in 1965 as a corporate firm, it is a full-service law firm with over 55 years’ experience of solving complex multi-sector problems, and deep expertise in multiple practice areas, particularly corporate law, M&A, banking and finance, real estate, energy law, intellectual property and dispute resolution. Olajide Oyewole LLP is a member of DLA Piper Africa, a Swiss Verein whose members are comprised of independent law firms in Africa working with DLA Piper, with its offices located in Lagos and Abuja, and over 60 specialised and highly qualified partners and lawyers with multi-jurisdictional qualifications and cross-disciplinary skills. Olajide Oyewole LLP’s powerful value proposition leverages its immense resources and network to provide seamless cross-border advisory and transactional support to a cross-section of public and private-sector organisations and private clients.

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