Effective governance plays a crucial role in ensuring the stability and success of financial holding companies (FHCs). To promote transparency, accountability, and sound decision-making, regulatory bodies, such as the Central Bank of Nigeria (CBN), have established guidelines for FHCs to follow. In this article, we will explore some important points from the guidelines related to meetings, general meetings, access to independent professional advice, induction and continuing education, board evaluation, remuneration, risk management, internal audit, compliance, and whistle-blowing. Understanding and adhering to these guidelines will help FHCs strengthen their governance practices and uphold the highest standards of corporate governance in the financial industry. These guidelines will take effect from August 1, 2023.
Q: What is the objective of the Corporate Governance Guidelines for Financial Holding Companies in Nigeria?
A: The objective of the guidelines is to provide additional guidance on the Principles, Recommended Practices, and Responsibilities contained in the Nigerian Code of Corporate Governance (NCCG) 2018, outline industry-specific corporate governance standards for Financial Holding Companies (FHCs), and promote high ethical standards and public confidence.
Q: Which entities are required to comply with these guidelines?
A: The guidelines apply to Financial Holding Companies (FHCs) in Nigeria. FHCs and their subsidiaries must also comply with the provisions of the Nigerian Code of Corporate Governance (NCCG) 2018 and other relevant sector guidelines on corporate governance issued by the Central Bank of Nigeria (CBN) or other regulators for entities under their purview.
Q: How should the Board of Directors be appointed in a Financial Holding Company?
A: The procedure for appointment to the Board should be formal, transparent, and documented in the Board Charter. Members of the Board are appointed by the shareholders of the Financial Holding Company and must be approved by the CBN. The Board should consider core competencies in the areas of operation of its subsidiaries when constituting its Board of Directors.
Q: What is the composition of the Board of Directors in a Financial Holding Company?
A: The Board should consist of Executive and Non-Executive Directors, including Independent Non-Executive Directors (INEDs). The number of Non-Executive Directors should be greater than the number of Executive Directors on the Board and its Committees. The minimum and maximum number of directors on the Board should be seven (7) and nine (9) respectively. There should be at least three Independent Non-Executive Directors, as prescribed by the Companies and Allied Matters Act (CAMA) 2020.
Q: What qualifications and requirements should Board members of a Financial Holding Company meet?
A: Board members should be qualified persons of proven integrity and have knowledge in business and financial matters. They should have a track record of integrity and past performance. At least one director should have knowledge and/or experience in the relevant business of the subsidiaries within the Group structure.
Q: Are there any restrictions on the composition of the Board in terms of family members?
A: No more than two members of an extended family can be on the Board of a Financial Holding Company and its subsidiaries at the same time. The term “extended family” includes a director’s spouse, parents, children, siblings, cousins, uncles, aunts, nephews, nieces, in-laws, and other relationships as determined by the CBN.
Q: What happens in case of resignation or replacement of Board members
A: If a director intends to resign from the Board, they must submit a written notice of resignation to the Chairman of the Board ninety (90) days before the effective date of resignation. In the case of an Independent Non-Executive Director (INED), if their resignation would result in non-compliance with the minimum required number of INEDs, the Board must appoint a replacement within the notice period. Resigning directors can submit a written statement of concerns to the Chairman, and a copy must be forwarded to the CBN. If a Non-Executive Director resigns and the resignation results in a majority of Non-Executive Directors not being present, a replacement must be appointed within ninety (90) days. If the Chairman of the Board intends to resign, the notices of resignation should be forwarded to the Chairman of the Board Nomination and Governance Committee (BNGC) and circulated to the Board and the CBN within seven days.
Q: What is the role and responsibility of the Board?
A: The Board is responsible for the performance and affairs of the FHC. Directors owe the FHC the duty of care and loyalty and act in the interest of employees and stakeholders. They are jointly and severally liable for the FHC’s activities. The Board defines and approves strategic goals, monitors implementation, reviews investment policies, and oversees AML/CFT/CPF policies. They establish risk management frameworks, business continuity plans, and IT frameworks. The Board determines member requirements, deploys resources, appoints senior management, and approves succession plans. They ensure adherence to internal controls, verify financial reporting integrity, establish delegation of authority frameworks, and promote business ethics and CSR practices.
Q: What are the responsibilities of the Chairman?
A: The Chairman of the Board should have previous experience as MD/CEO or Chairman of a bank or reputable entity. They must meet with Non-Executive Directors (NEDs) annually, should not sit on subsidiary boards, and vice versa.
Q: What are the qualifications for the Managing Director/Chief Executive Officer (MD/CEO)?
A: The MD/CEO should have served as MD/CEO, DMD, or ED of a bank for a minimum of seven years. Unless exceptionally approved, the FHC should have only one ED, and the MD/CEO should not be eligible for re-appointment in the same capacity after their maximum tenure of ten years.
Q: What are the qualifications for Non-Executive Directors (NEDs)?
A: NEDs should not be employees of financial institutions, except when representing the interests of a promoting financial institution. They serve a maximum tenure of three terms, with each term lasting four years, totaling twelve years. NEDs have access to corporate information and management through the MD/CEO.
Q: What are the requirements for Independent Non-Executive Directors (INEDs)?
A: INEDs should have knowledge of relevant business operations and regulations. Their term is four years and may be renewed once. They should meet additional requirements, such as not having served in senior management positions within the FHC or its subsidiaries and not having any material relationships that compromise independence. INEDs should notify the Board of any circumstances that may impair their independence, and the Board confirms their independence annually.
Q: What are the responsibilities of the Company Secretary?
A: The Company Secretary should have appropriate qualifications and experience and should not outsource their functions. They may also serve as the Head Legal/Legal Adviser. The Company Secretary ensures board-related compliance matters are provided to the Chief Compliance Officer, reports to the Board with an indirect reporting line to the MD/CEO, and their appointment and removal are subject to the Board’s decision and CBN’s ratification.
Q: What is the eligibility criteria for directors in an FHC (Financial Holding Company) in relation to transmutation?
A: An executive in an FHC cannot be appointed as a non-executive director (NED) in the same FHC, and vice versa. Additionally, an independent non-executive director (INED) on the Board of an FHC or its subsidiary cannot move into any other role within the FHC or its subsidiaries. Furthermore, an INED cannot concurrently sit on the Board of an FHC and its subsidiary.
Q: What is the cooling-off period requirement for directors who exit from the board of a bank?
A: The managing director/CEO or an executive director (ED) who exits from the board of a bank, either upon or prior to the expiration of their maximum tenure, must serve a cooling-off period of two (2) years before being eligible for appointment in any role on the board of its FHC. However, a non-executive director (excluding INED) who exits the board of a bank does not need to serve a cooling-off period before being eligible for appointment to the board of its FHC as a non-executive director.
Q: What are the restrictions on auditors in an FHC?
A: The tenure of auditors in an FHC is limited to a maximum period of ten (10) consecutive years, with the rotation of the audit engagement partner at least once every five (5) years. If an audit firm wants to be reappointed by the same FHC, a cooling-off period of ten (10) consecutive years must be observed. Additionally, an audit firm cannot provide audit services to an FHC if one of the FHC’s senior/top management was employed by the firm and worked on the FHC’s audit during the immediate past three (3) years.
Q: What are the interlocking directorship restrictions within a Group structure?
A: A director (except an INED) of an FHC can be appointed as a non-executive director on the board of entities within its Group structure, but the total number of directors from the subsidiaries cannot exceed thirty percent (30%) of the FHC’s board, and the number of FHC directors on the board of a subsidiary cannot exceed thirty percent (30%) of the subsidiary’s board. Interlocking or concurrent directorship by a director within the Group structure is limited to a maximum of two institutions. However, the tenure of interlocking directors on the board of FHCs/subsidiaries within the Group cannot extend beyond their tenure on the board of their initial appointment within the Group.
Q: What are the requirements for establishing board committees in an FHC?
A: The board of every FHC must establish the board committees listed in the Nigeria Code of Corporate Governance (NCCG), 2018. The terms of reference and composition of the board committees should be set out in the board-approved charter for each committee. The membership of board committees should be reviewed and refreshed at least once every three (3) years. NEDs chair all board committees, except the Board Audit Committee (BAC), Board Nomination and Governance Committee (BNGC), and Board Remuneration Committee (BRC), which are chaired by INEDs.
Q: What are the requirements for the Board Audit Committee (BAC) and Board Risk Management Committee (BRMC) in an FHC?
A: All members of the BAC of an FHC should be able to read and understand financial statements. At least one member of the BAC should have relevant professional qualifications and experience in financial and accounting matters. The BAC should have unrestricted access to the financial records of the FHC, including the External Auditors’ reports. The BRMC of an FHC should be chaired by an NED and its composition should include at least two (2) NEDs and the MD/CEO of the FHC.
Q: What is the schedule for meetings of the Board and its committees?
A: The schedule of meetings of the Board and its committees is approved by the Board ahead of each financial year.
Q: How often should the Board and its committees meet?
A: The Board and its committees should meet at least once every quarter. Stand-alone committees should meet on a need basis, but at least once a year.
Q: Where should the meetings of the Board and its committees be held?
A: The meetings of the Board and its committees should be held at a specified location or virtually if physical meetings cannot be held.
Q: What is the required quorum for the meetings of the Board and its committees?
A: The quorum for the meetings of the Board and its committees should be two thirds of members, majority of whom should be non-executive directors (NEDs).
Q: Is attendance mandatory for Directors at Board and committee meetings?
A: Yes, every Director is required to attend all meetings of the Board and its committees that he or she is a member. Directors must attend at least two-thirds of all Board and committee meetings to qualify for reappointment.
Q: What should be done with the minutes of the meetings?
A: Minutes of meetings of the Board and its committees should be properly written in English, adopted by members, signed off by the Board/Committee Chairman and Company Secretary, and kept in the minutes book at the FHC’s Office.
Q: How should the venue of a general meeting be determined?
A: The Board should ensure that the venue of a general meeting is convenient and easily accessible to the majority of shareholders.
Q: Can the venue of general meetings be rotated?
A: Yes, the Board may consider rotating the venue of general meetings to promote better access to the majority of shareholders.
Q: Can general meetings be held virtually?
A: Yes, FHCs may hold their general meetings virtually when physical meetings are not feasible.
Q: How can directors and Board committees access independent professional advice?
A: The FHC shall facilitate access to relevant independent professional advice for its directors and/or Board committees.
Q: Who approves requests for independent professional advice?
A: Requests for independent professional advice by directors and/or Board committees are a matter for Board consideration and approval. The Board keeps proper records of its decisions on such requests.
Q: Are there requirements for induction and continuing education of directors?
A: Yes, a formal induction program for new directors should be conducted within three months of their appointment. The Board should approve an annual budget for training and continuing education for directors and ensure its proper implementation.
Q: How often should a Board evaluation take place?
A: There should be an annual appraisal of the Board, its committees, Chairman, and individual directors covering all aspects of governance. The evaluation should be conducted by an independent external consultant with experience in corporate governance and performance management.
Q: What should be included in the annual Board evaluation?
A: The Board evaluation should cover the scope described in the extant CBN Guidelines for Annual Board Evaluation by External Consultants of Banks and Other Financial Institutions in Nigeria.
Q: What should be done with the report of the annual Board evaluation?
A: FHCs should forward the report of the annual Board evaluation by the independent external consultant to the Director, Financial Policy and Regulation Department (FPRD), CBN, as prescribed in the CBN Guidelines.
Q: Is there a remuneration policy for FHCs?
A: Yes, the Board should develop a remuneration policy that is disclosed in the annual report.
Q: How should executive and Board remuneration be aligned?
A: FHCs should align executive and Board remuneration with the long-term interests of the FHC and its shareholders.
Q: Who approves the remuneration of specific positions within the FHC?
A: The Board approves the remuneration of the MD/CEO, ED (where approved), Senior Management, and other employees. The fees and allowances for NEDs are fixed by the Board and approved by shareholders at a General Meeting.
Q: What limitations are there on remuneration for NEDs?
A: Remuneration for NEDs is limited to director’s fees, sitting allowances for Board and committee meetings, and reimbursable travel and hotel expenses. NEDs should not receive additional benefits, salaries, or allowances.
Q: How should the remuneration of MD/CEO and ED be structured?
A: The remuneration of the MD/CEO and ED should be linked to performance and structured to prevent excessive risk-taking.
Q: Are there requirements for stock options as part of remuneration?
A: If stock options are adopted as part of executive remuneration, the Board should ensure that they are not priced at a discount. Share options should be tied to performance and subject to approval by shareholders at an AGM. They should not be exercisable until one year after the director’s tenure expires.
Q: What should the Board confirm at the end of each financial year regarding remuneration?
A: The Board should confirm that the implementation and execution of the remuneration policy achieved its objectives.
Q: What should be described in the approved Enterprise Risk Management (ERM) Framework?
A: The approved ERM Framework should clearly describe the roles and responsibilities of the Board, BRMC, Chief Risk Officer (CRO), senior management, and internal control function.
Q: What are the qualifications and responsibilities of the CRO?
A: The qualification and experience of the CRO should be in accordance with the guidelines on competency and fit and proper persons. The CRO, who should not be below the grade of an Assistant General Manager, reports to the Board.
Q: How often should the Board review the implementation of risk management policies?
A: The Board should review the effectiveness of the implementation of risk management policies and procedures at least once annually.
Q: How often should the ERM Framework be reviewed?
A: The Board should review the ERM Framework at least once every three years.
Q: What risk management information should be disclosed in annual financial statements?
A: FHCs should disclose a summary of their risk management policies in their annual financial statements. Publicly quoted FHCs should host this summary on their website.
Q: Can an FHC outsource its internal audit/compliance functions?
A: No, an FHC cannot outsource its internal audit/compliance functions.
Q: What are the qualifications and responsibilities of the head of internal audit?
A: The qualification and experience of the head of internal audit should be in accordance with the guidelines on competency and fit and proper persons. The appointment and removal of the head of internal audit are the responsibility of the Board, subject to CBN’s approval. The head of internal audit, who should not be below the rank of an Assistant General Manager, reports directly to the BAC.
Q: How often should an independent external assessment of the internal audit function be conducted?
A: An independent external assessment of the effectiveness of the internal audit function should be carried out annually, and the report should be submitted to the Director, Banking Supervision Department, by the end of May following the end of every accounting year.
Q: What are the qualifications and responsibilities of the Chief Compliance Officer (CCO)?
A: The CCO should not be below the rank of a General Manager or as prescribed by the CBN. The qualification and experience of the CCO should be in accordance with the guidelines on competency and fit and proper persons. The appointment and removal of the CCO are the responsibility of the Board, subject to CBN’s approval. The CCO should monitor compliance with various requirements and report to the Board.
Q: How should FHCs comply with whistle-blowing guidelines?
A: FHCs should comply with the recommended practices of whistle-blowing stated in the NCCG 2018 and the extant CBN Guidelines for Whistleblowing for Banks and Other Financial Institutions in Nigeria.
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