Exposure Drafts of the Revised Code of Corporate Governance for Banks in Nigeria and the Guidelines for Whistle-Blowing in the Nigerian Banking Industry

CENTRAL BANK OF NIGERIA
Financial Policy & Regulation Department
Central Business District,
P.M.B. 0187
Garki, Abuja.

Tel: 09-46237401
Fax: 09-46237405

FPR/PRD/CON/MDD/02/099

July 31, 2012

CIRCULAR TO ALL BANKS AND DISCOUNT HOUSES

EXPOSURE DRAFTS OF THE REVISED CODE OF CORPORATE GOVERNANCE FOR BANKS IN NIGERIA AND THE GUIDELINES FOR WHISTLE-BLOWING IN THE NIGERIAN BANKING INDUSTRY

The Central Bank of Nigeria (CBN) is currently reviewing the extant Code of Corporate Governance for Banks in Nigeria. The review is intended to strengthen governance practices, eliminate perceived ambiguities in and align the code with current realities and global best practices.

The Bank has also developed Guidelines for Whistle-Blowing in the Nigerian Banking Industry. The guidelines represent the minimum standards for whistle-blowing which all financial institutions under the supervisory purview of the CBN shall be required to comply with.

In line with the Bank's resolve to carry along all stakeholders in the effort to entrench good corporate governance practices in the industry, the documents are being exposed for comments/inputs.

Consequently, the exposure drafts of the revised code and the whistle-blowing guidelines are attached herewith for your review, comments and inputs. The exposure drafts can also be accessed at the CBN website www.cbn.gov.ng.

Kindly send hard copies of your comments to the Director, Financial Policy and Regulation Department while the soft copies should be e-mailed to boawoyungbo@cbn.gov.ng, feahonkhai@cbn.gov.ng and pnwondi@cbn.gov.ng within four (4) weeks of the date of this letter.

C. O. CHUKWU
DIRECTOR,
FINANCIAL POLICY & REGULATION DEPARTMENT

CENTRAL BANK OF NIGERIA

REVISED DRAFT
CODE OF
CORPORATE GOVERNANCE
FOR
BANKS IN NIGERIA

APRIL, 2012

REVISED CODE OF CORPORATE GOVERNANCE FOR BANKS IN NIGERIA

TABLE OF CONTENT

| SECTION | DESCRIPTION |
|---------|-------------|
| 1.0 | Introduction |
| 2.0 | Board and Management |
| 2.1 | Responsibilities of the Board |
| 2.2 | Size and Composition |
| 2.3 | Separation of Powers |
| 2.4 | Appointment and Tenure |
| 2.5 | Board Committees |
| 2.6 | Board Meetings |
| 2.7 | Remuneration |
| 2.8 | Board Appraisal |
| 3.0 | Shareholders |
| 3.1 | Rights and Functions of Shareholders |
| 3.2 | Equity Ownership |
| 3.3 | Protection of Shareholder Rights |
| 3.4 | Meetings |
| 3.5 | Shareholder Associations |
| 4.0 | Rights of other Stakeholders |
| 5.0 | Disclosures in the Annual Report |
| 5.2 | Transparency & Integrity in Reporting |
| 5.3 | Whistle Blowing |
| 6.0 | Risk Management |
| 7.0 | Ethics & Professionalism and Conflict of Interest |
| 7.1 | Ethics & Professionalism |
| 7.2 | Conflict of Interest |
| 8.0 | Sanctions |

1.0 INTRODUCTION

1.1 The provisions of this Code represent the minimum standard which banks shall comply with. Banks are however encouraged to aspire to higher standards.

1.2 COMPLIANCE

1.2.1 This code shall apply to banks and discount houses.

1.2.2 External auditors of banks shall report annually to the CBN, the extent of the bank's compliance with the provisions of this Code. The external auditor must have adequate experience and competence in corporate governance.

2.0 BOARD AND MANAGEMENT

2.1 Responsibilities of the Board and Management

2.1.1 Boards shall put in place a charter that details their functions and responsibilities. There shall be a formal statement of areas of authority delegated to management.

2.1.2 The board is accountable and responsible for the performance and affairs of the bank. Specifically, and in line with the provisions in Companies and Allied Matters Act (CAMA), directors owe the bank the duty of care and loyalty and to act in the interest of the bank's employees and other stakeholders.

2.1.3 The board shall define the bank's strategic goals, approve its long and short-term business strategies and monitor their implementation by management.

2.1.4 The board shall determine the skills, knowledge and experience that members require and work effectively as a team to achieve the bank's objectives.

2.1.5 The Board shall ensure that its human, material and financial resources are effectively deployed towards the attainment of set goals of the bank.

2.1.6 The board shall appoint the CEO as well as top management staff and establish a framework for the delegation of authority in the bank.

2.1.7 The board shall ensure that a succession plan is in place for the CEO, other executive directors and top management staff.

2.1.8 The board shall set limits of authority, specifying the threshold for large transactions which it must approve before they take place. There shall be no exception for such large transactions.

2.1.9 Members of the board are severally and jointly liable for the activities of the bank.

2.1.10 The board shall ensure strict adherence to the Code of Conduct for bank directors.

2.2 Size and Composition

2.2.1 The size of the board of any bank shall be limited to a maximum of twenty (20) and a minimum of five (5).

2.2.2 Members of the board shall be qualified persons of proven integrity and shall be knowledgeable in business and financial matters, in accordance with the extant CBN Guidelines on Fit and Proper Persons Regime.

2.2.3 The board shall consist of Executive and Non-Executive directors. Executive Directors shall not be more than 40% of the entire board size.

2.2.4 The board shall have at least two (2) non-executive directors as Independent Directors as defined in the CBN guidelines on the Appointment of Independent Directors.

2.3 Separation of Powers

2.3.1 The positions of the Board Chairman and the Managing Director/Chief Executive Officer (MD/CEO) shall be separate. No one person shall combine the two positions in any bank at the same time. For the avoidance of doubt, no executive Vice Chairman shall be recognized in the board structure.

2.3.2 No two members of the same extended family shall occupy the positions of Chairman and MD/CEO or Executive Director of the bank and Chairman or MD/CEO of a bank's subsidiary at the same time.

2.4 Appointment and Tenure

2.4.1 Procedure for appointment to the board shall be formal and transparent.

2.4.2 Existing CBN guidelines on appointment to the board of financial institutions shall continue to be applied.

2.4.3 To ensure both continuity and injection of fresh ideas, non-Executive directors of banks shall serve for a maximum of three (3) terms of four (4) years each.

2.4.4 Track record of appointees shall be an additional eligibility requirement. Such records shall cover both integrity and past performance, in accordance with the extant CBN Guidelines on Fit and Proper Persons Regime.

2.4.5 The tenure of the CEO of a bank shall be in accordance with the terms of engagement with the bank which is however subject to a maximum of ten (10) years. Such a tenure may be broken down into periods not exceeding five (5) years at a time.

Such a CEO shall not be eligible for appointment in any capacity in the bank or its subsidiaries until after a period of three (3) years following the expiration of his tenure as CEO.

2.4.6 To enhance the effectiveness of directors, the bank shall allow directors access to corporate information under conditions of confidentiality; provide training and continuing education arrangements and facilitate access to independent professional advice.

2.5 Board Committees

2.5.1 The Board shall establish at least three (3) committees namely the Board Risk Management Committee (BRMC), Board Audit Committee (BAC) and Board Governance and Nominations Committee (BNC). For the avoidance of doubt, the BAC shall be different from the Statutory Audit Committee, which is a requirement of CAMA.

2.5.2 The Board shall issue, in writing, the terms of reference for each committee.

2.5.3 The Chairman of the Board shall not be a member of any board committee and/or those of the bank's subsidiaries, except for the Governance and Nominations Committee (GNC).

2.5.4 Board committees shall be headed by non-executive directors.

2.5.5 The head of the internal audit shall report directly to the BAC.

2.5.6 The BAC shall have unlimited access to the financial records of the bank including external auditors' reports.

2.5.7 The Board shall avoid changing the BAC members and external auditors at the same time.

2.6 Board Meetings

2.6.1 To effectively perform its oversight function and monitor management's performance, the board shall meet at least once a quarter.

2.6.2 Every director is required to attend all meetings of the board. In order to qualify for re-election, a director must have attended at least two-thirds of all board meetings.

2.6.3 The Board shall disclose, in the Corporate Governance Section of the Annual Report, the total number of board meetings held in the financial year and attendance by each director.

2.7 Remuneration

2.7.1 Banks shall align executive and Board remuneration with the long term interests of the bank and its shareholders.

2.7.2 Levels of remuneration shall be sufficient to attract, retain and motivate executive officers of the bank and this shall be

balanced against the bank's interest in not paying excessive remuneration.

2.7.3 Where remuneration is linked to performance, it shall be designed in such a way as to prevent excessive risk taking.

2.7.4 Every bank shall have a remuneration policy put in place by the directors, which shall be disclosed to the shareholders.

2.7.5 A committee of non-executive directors shall determine the remuneration of executive directors.

2.7.6 Executive directors shall not receive seating allowances and directors' fees.

2.7.7 Non-Executive Directors' (Non-EDs) remuneration shall be limited to directors' fees, sitting allowances for board and board committee meetings and reimbursable travel and hotel expenses. Non-EDs shall not receive benefits, salaries, etc, whether in cash or in kind, other than those mentioned above.

2.7.8 Where share options are adopted as part of executive remuneration or compensation, the Board shall ensure that they are not priced at a discount except with the authorization of the relevant regulatory agencies.

2.7.9 Share options shall be tied to performance and subject to the approval of the shareholders at AGMs.

2.7.10 Share options shall not be exercisable until one year after the expiration of the tenure of the director.

2.7.11 Banks shall disclose in their annual reports, details of their shares held by directors and related parties.

2.7.12 The Remuneration Committee shall comprise only Non- EDs while the Governance and Nomination Committee shall have a combination of Executive and Non-EDs. However, where both committees are combined, its membership shall be drawn only from Non-EDs.

2.8 Board Appraisal

2.8.1 There shall be annual board and directors' review/appraisal covering all aspects of the boards' structure, composition, responsibilities, processes and relationships, as may be prescribed by the CBN.

2.8.2 The annual board appraisal shall be conducted by an independent consultant. The report shall be presented to shareholders at the AGM and a copy forwarded to the CBN.

3.0 SHAREHOLDERS

3.1 Rights and Functions of Shareholders

3.1.1 Shareholders shall have the right to obtain relevant and material information from the bank on a timely and regular basis.

3.1.2 Shareholders shall have the right to participate actively and vote in general meetings.

3.1.3 In addition to the traditional means of communication, banks shall have a website and are encouraged to communicate with shareholders via the website. Such information shall include major developments in the bank, risk management practices, executive compensation, local and offshore branch expansion, establishment of and investment in subsidiaries and associates, board and top management appointments, etc.

3.2 Equity Ownership

3.2.1 An equity holding of 5% and above by any investor shall be subject to CBN's prior approval.

3.2.2 In order to discourage government(s) from having majority shareholding in banks, government(s) direct and indirect equity holding in any bank shall be limited to 10%.

3.3 Protection of Shareholders' Rights

3.3.1 Every shareholder shall be treated fairly.

3.3.2 The Board shall ensure that minority shareholders are adequately protected from overbearing influence of controlling shareholders.

3.3.3 The Board shall ensure that the bank promptly provides to shareholders documentary evidence of ownership interest in the bank such as share certificates, dividend warrants and

related instruments. Where these are rendered electronically, the Board shall ensure that they are sent in a secure manner.

3.4 Meetings

3.4.1

Notice of general meetings shall be as prescribed by the Companies and Allied Matters Act (CAMA).

3.4.2

The Board shall ensure that the venue of a general meeting shall be convenient and easily accessible to the majority of shareholders.

3.4.3

The Board shall ensure that unrelated issues for consideration are not lumped together at general meetings. Statutory business shall be clearly and separately set out. Separate resolutions shall be proposed and voted on each substantial issue.

3.4.4

The Board shall ensure that decisions reached at general meetings are properly and fully implemented.

3.5 Shareholders' Associations

3.5.1

The Board shall ensure that dealings of the bank with shareholders' associations are always transparent and in strict adherence with the Code for Shareholders' Associations published by the Securities and Exchange Commission (SEC).

4.0 RIGHTS OF OTHER STAKEHOLDERS

4.1.1

Stakeholders shall be able to freely communicate their concerns about illegal or unethical practices to the board. Where such concerns border on the activities of the board, such individuals shall have recourse to CBN.

4.1.2

Where stakeholder interests are protected by law, stakeholders shall have the opportunity to obtain effective redress for violation of their rights.

4.1.3

Banks shall demonstrate good sense of corporate social responsibility to their stakeholders such as customers, employees, host communities, and the general public.

5.0 DISCLOSURE AND TRANSPARENCY

5.1.1

In order to foster good corporate governance, banks are encouraged to make robust disclosures beyond the statutory requirements in BOFIA, CAMA and other applicable laws.

5.1.2

Disclosure in the annual report shall include, but not limited to, material information on:

(a)

Major items that have been estimated in accordance with applicable accounting and auditing standards.

(b)

Rationale for all material estimates;

(c)

Details on Directors:

i. The bank's remuneration policy for members of the board and executives.
ii. Non-EDs' remuneration, including fees, allowances, etc
iii. Executive compensation
iv. Details and reasons for share buy-backs, if any, during the period under review;
v. Board of Directors' performance evaluation
vi. Details of directors and shareholders who own 5% and above of the bank's shares as well as other shareholders who in concert with others control the bank.

(d)

Corporate governance:

i. governance structure;
ii. composition of board committees including names of chairmen and members of each committee;

(e)

Risk Assets:

i. Concentration of assets, liabilities and off-balance sheet engagements by sector, geography, and product.
ii. Loan quality.
iii. Lending/borrowing to/from subsidiaries and associates.
iv. Loans and advances/funding or commitment lines from institutions outside Nigeria.
v. Related party transactions.
vi. Insider-related credits in accordance with the extant CBN circular.

(f)

Risk management:

i. All significant risks.
ii. Risk management practices indicating the board’s responsibility for the entire process of risk management as well as a summary of external auditors’ observed lapses thereon.

(g)

Information on strategic modification to the core business.

(h)

All regulatory/supervisory contraventions during the year under review and infractions uncovered through whistle blowing, including actions taken thereon.

(i)

Capital Structure/Adequacy.

(j)

Regulatory Sanctions and Penalties.

(k)

Any service contracts and other contractual relationships with related parties.

(l)

Frauds and Forgeries.

(m)

Contingency Planning Framework.

(n)

Any matter not specifically mentioned in this code but which is capable of affecting in a significant form, the financial condition of the bank or its status as a going concern.

5.2 Transparency and Integrity in Reporting

5.2.1

Banks shall have a structure to independently verify and safeguard the integrity of their financial reporting, which shall:

i. entail the review and consideration of the financial statements by the BAC; and
ii. enhance the independence and competence of the bank’s external auditors.

5.2.2

The BAC shall be structured so that it:

i. consists only of non-executive directors;
ii. is chaired by an independent director;
iii. has at least three members.

5.2.3

The BAC shall be of sufficient size, independence and technical expertise to discharge its mandate effectively.

5.2.4

The BAC shall include members who are financially literate (that is, be able to read and understand financial statements). At least one of the members shall have relevant qualifications and experience (that is, shall be a qualified accountant or other finance professional with experience in financial and accounting matters).

5.2.5

The BAC shall review the integrity of the bank’s financial reporting and oversee the independence of the external auditors.

5.2.6

The BAC shall meet at least once every quarter.

5.2.7

The report of the BAC to the Board shall contain, but not limited to, the following:

i. Assessment of whether external reporting is consistent with committee members’ information and knowledge and is adequate for shareholder needs.
ii. Assessment of the management processes supporting external reporting.
iii. Procedures for the selection and appointment of the external auditor and for the rotation of external audit engagement partners.
iv. Recommendations for the appointment or, if necessary, the removal of the external auditor.
v. Assessment of the performance and independence of the external auditors. Where the external auditor provides non-audit services, the report shall state whether the BAC is satisfied that provision of those services has not compromised the auditor’s independence.
vi. Assessment of the performance and objectivity of the internal audit function.
vii. The results of the committee’s review of risk management and internal control systems.
viii. Recommendations for the appointment or, if necessary, the dismissal of the head of internal audit.

5.2.8

The appointment and removal of the head of the internal audit shall be the responsibility of the Board on the recommendations of the BAC subject to CBN ratification.

5.2.9

To be appointed as head of internal audit, the candidate shall meet the requirements specified in the CBN guidelines.

5.2.10

The head of internal audit shall report directly to the BAC but forward a copy of the report to the MD/CEO of the bank.

5.2.11

Appointment of external auditors shall be approved by the CBN.

5.2.12

External auditors shall render reports to the CBN on banks’ risk management practices, internal controls and level of compliance with regulatory directives.

i. The external auditor shall review the work of the internal auditor on each of the bank’s key risk elements to cover risk identification, measurement, monitoring and control. The key risk elements as specified in the Risk Based Supervision framework are strategic, operational, liquidity, legal, market and credit risks.
ii. The external auditor shall review compliance with policies and internal control procedures put in place by the board to manage and mitigate the institution’s risks.
iii. The external auditors shall report on the level of each key risk element as well as the composite risk profile of the bank and make recommendations to the Board to enhance the effectiveness of risk management processes in the bank.
iv. Copies of their report shall be forwarded to the CBN together with the external auditor’s management letter on the bank’s audited financial statements.

5.2.13

External auditors of banks shall not provide client services that shall amount to conflict of interest including the following:

i. Bookkeeping or other services related to the accounting records or financial statements of the audit client;
ii. Appraisal or valuation services, fairness opinion or contribution-in-kind reports;

iii. Actuarial services;
iv. Internal audit outsourcing services;
v. Management or human resource functions including broker or dealer, investment banking services and legal or expert services unrelated to the audit contract.

5.2.14

The tenure of auditors in a given bank shall be for a maximum period of 10 years after which the audit firm shall not be reappointed in the bank until after a period of another 10 years.

5.2.15

An audit firm shall not provide audit services to a bank if one of the bank’s top officials (Directors, CFO, and CAO etc) was employed by the firm and worked on the bank’s audit during the last two year.

5.3 Whistle – Blowing

5.3.1

Banks shall have a whistle-blowing policy made known to employees and other stakeholders.

5.3.2

The policy shall contain mechanisms, including assurance of confidentiality, that encourage all stakeholders to report any unethical activity to the bank and/or the CBN.

6.0 RISK MANAGEMENT

6.1.1

Every bank shall have a risk management framework specifying the governance architecture, policies, procedures and processes for the identification, measurement, monitoring and control of the risk inherent in its operations.

6.1.2

The board is responsible for the bank’s policies on risk oversight and management and shall satisfy itself that management has developed and implemented a sound system of risk management and internal control.

6.1.3

Risk management policies shall reflect the bank’s risk profile and appetite and clearly describe all elements of the risk management as well as its internal control system.

6.1.4

Banks shall disclose a summary of its risk management policies.

6.1.5

A bank’s risk management policies shall clearly describe the roles and accountabilities of the Board, BRMC, management and internal audit function.

6.1.6

As part of its oversight for the risk management and internal control system, the Board shall review the effectiveness of the implementation of that system at least annually. Ultimate responsibility for risk oversight and risk management rests with the full Board.

6.1.7

It is the responsibility of the Board to prepare the bank’s risk management framework as well as oversight responsibility for its implementation. However, the management has the responsibility for the effective implementation of the framework.