Key Highlights
- The Central Bank of Nigeria (CBN) has implemented a tenure policy for chief executives of deposit money banks (DMBs) as part of measures to strengthen governance practices in the banking industry and promote seamless succession.
- The Nigerian Code of Corporate Governance (NCCG) 2018 recommends a maximum tenure of three three-year terms for Independent Non-Executive Directors (INEDs), while leaving the issue of tenure limit for Executive and Non-Executive Directors to the discretion of the Board, highlighting the need for periodic refreshing of Non-Executive Directors (NEDs).
- Corporate governance codes in other countries, such as the UK, Europe, and the US, also provide guidance on board member tenure, with recommendations ranging from maximum of nine-year tenures to voluntary policies on director tenure. These regulations aim to balance the benefits of experience and continuity with the need for fresh perspectives and independent oversight in corporate boards.
The Central Bank of Nigeria (CBN) has dominated the news in recent times. The naira redesign policy and attendant issues readily come to mind, along with the recent vote to increase the benchmark interest rate by 50 basis points to 18.
One CBN policy that appeared to have largely flown under the radar is the tenure policy for chief executives of deposit money banks (DMB). A money deposit bank, according to the CBN, is a financial institution licensed by the regulatory authority to mobilize deposits from the surplus unit and channel the funds through loans to the deficit unit and performs other financial services activities.
The tenure review, rolled out by the CBN, has been described as part of measures aimed at strengthening governance practices in the banking industry. It is equally expected to help create room for seamless succession.
Board tenure simply refers to the length of time that a director serves on a company’s board of directors. Generally, the best policy or strategy on board tenure depends on the specific circumstances and goals of the company. The tenure of corporate boards has become a critical issue in recent times. As boards stay on longer, questions are raised about their effectiveness and independence. The CBN’s recent board tenure limit is therefore significant in many respects.
Now, the purpose of board tenure is to ensure that the board of directors of a company operates effectively and in the best interest of the company’s shareholders and other stakeholders.
This is important for a lot of reasons
Board continuity: Board members with longer tenures bring valuable institutional knowledge and expertise to the board, which can help ensure board continuity and consistency in decision-making.
Board diversity: Limiting board tenure can promote board diversity by encouraging the rotation of board members and opening up board positions to new and diverse perspectives.
Prevent complacency: Long-serving board members can become complacent or overly familiar with the company’s management, which can hinder their ability to provide independent oversight and constructive criticism.
Improve corporate governance: Regular refreshment of the board can help prevent conflicts of interest, ensure proper succession planning, and promote effective risk management. Overall, board tenure policies aim to balance the benefits of experience and continuity with the need for fresh perspectives and independent oversight.
In general, some companies have a mandatory retirement age or term limit for directors to promote board refreshment and bring in new perspectives. For example, some companies may require directors to retire at the age of 75 or after serving a certain number of years on the board.
Other companies may allow directors to serve longer terms to maintain continuity and stability. In such cases, it is important to ensure that directors continue to demonstrate the necessary skills, expertise, and independence required to fulfil their duties effectively. Ultimately, the key is to strike a balance between continuity and fresh perspectives. Companies should regularly assess the skills and diversity of their board and consider rotating directors to ensure that the board remains effective and aligned with the company’s strategic goals. A transparent and objective board evaluation process can be helpful in this regard.
One must point out that across the world, trends in corporate board member tenure vary across different regions and countries.
In Nigeria, the Companies and Allied Matters Act (CAMA) 2020, which became effective in August 2020, provides for the appointment, removal, age limit and resignation of Directors. It however does not prescribe a tenure limit.
The Nigerian Code of Corporate Governance (NCCG) 2018, was issued on January 15, 2019, by the Financial Reporting Council of Nigeria (FRC) under Sections 11(c) and 51(c) FRC Act 2011. Principle 7.2.9 of the NCCG 2018 recommends that the tenure of the Independent Non-Executive Directors (INEDs) should be a maximum of three three-year terms. The Code however leaves the issue of tenure limit for Executive and Non-Executive Directors to the discretion of the Board, depending on the peculiarities of the Company highlighting the need for periodic refreshing of Non-Executive Directors (NEDs).
The Corporate Governance Code issued by the Securities and Exchange Commission (SEC) of Nigeria provides guidance on the maximum tenure for board members of listed companies in Nigeria.
According to the Code, the maximum tenure for independent directors is nine years, while the maximum tenure for non-independent directors is three terms of three years each. After completing the maximum tenure, a director can only be reappointed after a cooling-off period of at least three years.
The National Code of Corporate Governance for Mauritius 2016 (Mauritius Code) has no specific provision for the tenure of board members.
The King IV Code on Corporate Governance for Southern Africa 2016 posits that INEDs should not serve longer than nine (9) years.
Across Europe, there is no standard rule for the tenure of corporate board members. However, some countries have adopted corporate governance codes that recommend limits on board member tenure. For example, the UK Corporate Governance Code suggests a maximum nine-year tenure for the Chairperson and NEDs, which will thereafter be subject to annual re-election by shareholders. The larger focus in Europe appears to be on board diversity and independence.
In the US, there is no federal law that mandates a specific tenure limit for corporate board members. However, some companies have voluntarily adopted policies on board member tenure. For example, the New York Stock Exchange (NYSE) requires listed companies to have a policy on director tenure, and the National Association of Corporate Directors (NACD) suggests that a director’s tenure should not exceed 12 years.
Corporate board tenure regulations vary across Asia, as each country has its own set of laws and corporate governance codes. In countries like Japan and South Korea, there is a tradition of lifetime employment, which extends to directors serving on corporate boards. In these countries, long-serving directors are seen as valuable assets who bring stability and continuity to the boardroom. However, there is a growing recognition that board refreshment is essential for companies to remain competitive in a rapidly changing business environment. Some Asian countries are beginning to introduce term limits for directors and encourage greater board diversity.
The tenure of corporate boards is a critical issue that requires careful consideration. While long-serving directors can bring valuable experience and knowledge to the boardroom, there is a risk that they may become too comfortable in their roles and lose their independence. Companies and regulators must strike a balance between promoting board refreshment and ensuring that boards have the expertise and continuity needed to oversee the management of companies effectively.
Overall, while there is no standard rule on board member tenure across regions, there is however a growing trend towards limiting board member tenure to promote board diversity, prevent complacency, and improve corporate governance.
Corporate board tenure may seem like a technical issue, but it has significant implications for the sustainability of firms. In fact, it can be a critical component in improving the sustainability of firms. Studies indicate that tenure‐diverse boards exhibit significantly higher CEO performance‐turnover sensitivity and that firms with tenure‐diverse audit committees are less likely to experience accounting restatements.
It is no surprise therefore that experts insist that longer board tenures can provide a valuable source of institutional memory, relationships, stability, and a long-term perspective that can be beneficial for sustainability initiatives. To remain competitive companies should prioritize board tenure policies and practices that promote sustainability.
Ultimately, the goal should be to ensure that corporate boards are effective, independent, and focused on promoting the long-term success of the companies they oversee.
Chioma Mordi is the MD/CEO
About The Society for Corporate Governance Nigeria
SCGN is a registered not-for-profit organisation committed to the development of corporate governance best practices in Nigeria. Today, the Society is the foremost institution committed to the development and promotion of corporate governance best practices in Nigeria. cmordi@corpgovnigeria.org