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Mandatory versus Discretionary Rule Dichotomy in the Harmonization of Corporate Governance Codes: Lessons for Nigeria

Published online by Cambridge University Press:  20 November 2019

Collins C Ajibo  and
Kenneth I Ajibo
Collins C Ajibo*
Affiliation:
University of Nigeria
Kenneth I Ajibo*
Affiliation:
Pan-Atlantic University, Lagos
*
[email protected]
[email protected]
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Abstract

Harmonizing corporate governance systems can potentially level the playing field for businesses, as it would increase financial and economic interconnections, including market integration, between countries. Although harmonization at the regional level such as the EU seems challenging because systems are so diverse, the reverse is the case at the national level. A critical issue in the harmonization effort is whether to adopt the “comply or explain” approach or the mandatory compliance approach. Although mandatory compliance is necessary in certain circumstances, particularly in cases of corporate pseudo-reporting that occasions corporate failures, the predominant approach involves “comply or explain”. Given competing interests in the business community, the inclination for flexibility and the regulatory authority's disposition for an oversight function, this article argues that a hybrid approach should be followed, which will internalize the merits of both the “comply or explain” and mandatory compliance approaches while eschewing their disadvantages.

Keywords

Corporate governanceharmonizationcodecomply or explainmandatory rulehybrid
Type
Research Article
Information
Journal of African Law , Volume 63 , Issue 3 , October 2019 , pp. 385 - 411
Copyright
Copyright © SOAS, University of London 2019 

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Footnotes

*

PhD (Manchester), LLM (Manchester), BL, LLB (Nigeria). Lecturer in law, Faculty of Law, University of Nigeria, Enugu Campus.

**

PhD (Hull), LLM, PGD (Hull), BL, LLB (Nigeria). Lecturer in law, Pan Atlantic University, Lagos, Nigeria.

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117 Ibid.

118 Ibid.

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129 Ibid.

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131 The Sarbanes-Oxley Act (SOX) (Public Law 107, 116 Stat 745, enacted 30 July 2002), officially called the Public Company Accounting Reform and Investor Protection Act, is an act passed by US Congress in 2002 to protect investors from the possibility of fraudulent accounting activities by corporations. SOX mandated strict reforms to improve corporate financial disclosures and prevent accounting fraud. Furthermore, in the aftermath of the global financial crisis of 2007–09, the US enacted a comprehensive new law to deal with its financial institutions and investors entitled the Dodd Frank Wall Street Reform and Consumer Protection Act 2010. Title IX (secs 901–91) of this act (“Investor protections and improvements to the regulation of securities”) further strengthened the role of the US SEC relating to corporate governance issues.

132 Since the Cadbury Report in 1992, above at note 9, over 50 codes have been introduced and adopted in different countries. The Cadbury Report has been superseded by many successive reports culminating in a Combined Code and the current UK Code. See V Magnier “Harmonisation process for effective corporate governance in the European Union: From a historical perspective to future prospects” (2014) 41/1 Journal of Law and Society 1.

133 The current version of the UK Code (formerly the Combined Code) is available at: <https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.PDF> (last accessed 3 September 2019).

134 The new code applies to accounting periods starting on or after 17 June 2016 and applies to all companies with a premium listing of equity shares regardless of whether they are incorporated in the UK or elsewhere.

135 Companies with reporting periods beginning before 17 June 2016 should continue to report against the 2014 Code but, in the spirit of co-ordination and coherence, they are encouraged to consider whether it would be beneficial to adopt some or all of the new provisions in the revised code earlier than formally expected.

136 CJ Milhaupt “Evaluating Abe's third arrow: How significant are Japan's recent corporate governance reforms?” (2017, Columbia Law and Economics working paper no 561) at 1–4.

137 Further corporate governance strategic framework relating to harmonization is contained in the EU Commission Action Plan. EU company law applies in principle to most EU limited liability companies, while EU corporate governance rules only apply to companies listed on a stock exchange. See European Commission “Action plan: European Company law and corporate governance: A modern legal framework for more engaged shareholders and sustainable companies” (12 December 2012), COM (2012) 740 final, available at: <http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52012DC0740&from=EN> (last accessed 3 September 2019).

138 While the directives and recommendations apply in some areas, the mandatory aspect of the code was enforced in 2000 in the UK through the Listing Rules before the framework was introduced in the EU. The mandatory aspect only requires companies to offer reasons for non-compliance.

139 See 2006/46/EC, art 46(a).

140 This divergence is particularly prominent where a company is registered in one state but its shares are listed in one or more states. The UK Listing Rules contain the “comply or explain” regime and apply to all listed companies in the jurisdiction no matter the place of incorporation. However, in some other jurisdictions, such as the Netherlands, the obligation to adopt a code-based approach is enshrined in company law and applies to local companies listed in the regulated market on the basis of their place of incorporation. The practical effect of this is that a company risks being regulated by both the place of incorporation and the country where it is listed. The fact that companies could totally avoid procedural harmonization basically weakens any possible move towards convergence. See S Arcot et al “Corporate governance in the UK: Is the comply-or-explain approach working?” (2010) 30/2 International Review of Law and Economics 193.

141 Belgian laws permit shareholders to demand some explanations from company boards of directors by inserting an item in the agenda of the general meeting that could effectively require the board to account to the company how it has complied with the corporation's corporate governance practices. Such a requirement can increase the level of adherence to the code of best practices by the board and ultimately enhance the firm's performance. See Magnier “Harmonisation process”, above at note 132 at 1.

142 The Nigerian SEC Code of Corporate Governance Practices was developed in 2003 (the code has now been replaced by the 2011 code) based on a unitary board structure (as is the case with the UK and US) with an emphasis on the identified triple constraints: the role of the board of directors and management; shareholders rights and privileges; and the audit committee.

143 Ibid.

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148 Public Sector Code 2016, art 5.

149 Not-For-Profit Code 2016, art 7.1–7.2.

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158 See OECD Corporate Governance Factbook (2019, OECD) at 15, available at: <https://www.oecd.org/daf/ca/Corporate-Governance-Factbook.pdf> (last accessed 3 September 2019).

159 See SOX, secs 401–09.

160 The failure of Enron and Worldcom, in part, informed the enactment of SOX.

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164 See Ford “New governance, compliance”, above at note 153 at 8–9.

165 See also OECD Corporate Governance Factbook, above at note 158 at 15.

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167 See Best Practices in Asian Corporate Governance (2007, Asian Productivity Organization), available at: <https://www.apo-tokyo.org/publications/ebooks/best-practices-in-asian-corporate-governance-pdf-2-5mb/> (last accessed 3 September 2019).

168 OECD Corporate Governance Factbook, above at note 158 at 15.

169 S Apampa “Is there a right corporate governance framework for Nigeria?” (5 July 2014) Premium Times, available at: <http://www.premiumtimesng.com/opinion/164425-is-there-a-right-corporate-governance-framework-for-nigeria.html> (last accessed 3 September 2019).

170 Nwachukwu “Capital market investors”, above at note 12.

171 Ibid.