The corporate governance rating system
Licensed under the Investments and Securities Act to provide listing, trading and licensing services as well as market data solutions among others, and in recognition of the importance of corporate governance as an essential tool for long-term growth, sustainability and value creation, The Nigerian Stock Exchange (NSE) encourages listed companies and dealing member firms to adopt global best practices by implementing strong regulatory reforms.
In furtherance of its mission to provide investors with a reliable and efficient capital market, the NSE in partnership with the Convention on Business Integrity (CBI) established a Corporate Governance Rating System (CGRS) for companies listed on the NSE. The Corporate Governance Rating System (CGRS) is a framework developed to assess companies based on the quality of corporate integrity; corporate compliance; the understanding of fiduciary responsibilities by Directors as well as corporate reputation.
The Rating System which was launched in 2014 seeks to develop a tradable corporate governance index; encourage good corporate governance practices among listed companies and provide access to reliable information on the Nigerian equities market. Using the CGRS, investors will be able to differentiate between a “well governed” company and one that is not well governed.
The launch of the CGRS kick-started the introduction of the Premium Board of The Exchange which effectively took off in the first quarter of 2015. At the launch of the CGRS in 2014, three (3) listed companies underwent the rating system and have been admitted to the Premium Board. Given the many benefits that the Premium listing offers, more listed companies are now voluntarily seeking admission to the Board.
The CGRS is governed by a Steering Board (SB) which is the governing body responsible for defining the system, scope and structure of the Rating System. The SB is also responsible for approving the companies on the CGRS and is made up of seven (7) members including nominees from the CBI, the NSE, SEC, civil society, corporate governance experts and an international rating/private sector development agency – the Humboldt-Viadrina School of Governance (HVSG), Berlin, which acted as an independent observer during the development and pilot stage of the CGRS in Nigeria. The Board has three Committees namely: the Selections Committee, the Ratings Committee and the Interventions Committee, each overseeing the different aspects of the rating process.
The unique characteristics of the rating process – which typically takes about six (6) weeks – entails an assessment of a company’s compliance with relevant corporate governance codes, regulatory rules and anti-corruption programs; a Directors’ Fiduciary Awareness Certification Test, which examines Directors’ awareness on matters regarding the composition of the Board on which they serve and of the Board committees, roles, responsibilities and the effectiveness of these as organs of governance, ownership structure and influence. The assessment also entails a corporate integrity test and a review by an Expert Multi Stakeholder Group (EMSG), which sits to provide views, advice, recommendations and informed opinion to the Ratings Committee on the corporate governance practices of listed companies. A company is successful if it achieves a minimum overall rating of 70%.
The benefits of the Corporate Governance Rating System have been identified to include the following:
• Provides an objective and independent analysis of corporate governance practices and its influence on corporate fairness in dealing with stakeholders;
• Provides valuable information for conducting research in various fields of governance;
• Increases credibility in and attractiveness of companies that meet the rating threshold to both investors and partners alike;
• Provides a tool to enable regulators judge the progress of corporate governance reforms;
• Provides the ability to discern between poorly and well governed companies;
• Pre-empts and prevents adverse business situations by reducing company reputational risk;
• Leads to increased inflow of Foreign Direct Investment (FDI);
• Forms the basis for listing on The NSE’s proposed “Premium Board” along with other criteria; and
• A key element in the development of a tradable Corporate Governance Index (CGI).
Despite the benefits which the CGRS and listing on the Premium Board portend for listed companies, critics have argued that the CGRS requirements are vague, unstable and unquantifiable and cannot validly form the basis for the creation of a new board. It has also been said that corporate governance can only be adjudged by clearly stated principles, such as those contained in the CBN and SEC Codes and the listing requirements, rather than the stringent CGRS requirements. Concerns have been expressed that the rating may ultimately be reduced to another box ticking exercise and listing on the Premium Board a “feel good” laurel.
Be that as it may, Corporate Governance ratings are becoming very powerful sources of information on a company’s commitment to excellence in its governance practices. The ratings reflect the extent to which a company’s corporate governance practices and policies serve the interests of investors, shareholders and other stakeholders. It is envisioned that the CGRS will help build a robust and transparent corporate governance system which will transcend current practices and standards, which are currently largely driven by a regulatory framework. The process should be transparent and fair such that it would engender the confidence of listed companies and the investing public.
The Nigerian Stock Exchange via its letter dated January 18, 2016 informed all quoted companies of the formal commencement of the first phase of the rating exercise – the Corporate Compliance (Self-Assessment) Stage. The Fiduciary Awareness stage during which the Fiduciary Awareness Certification Test to be conducted on the Directors of quoted companies is the next phase of the exercise.
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