Introduction
The practice of Corporate Governance demands the presence of an Independent Director(s) to significantly improve the quality of decision-making on the Boards of Companies.
For this reason, the term “Independent Director” has come under diverse interpretations in different laws applicable to various jurisdictions.
This position of an Independent Director has often been reserved for a Non-Executive Director who has demonstrated independence and objectivity regarding his relations to a Company and is not entitled to receive monetary compensation from the Company save for approved Director remuneration and Sitting allowance.
This article examines the concept of an Independent Director under various Laws and Regulations to form a holistic opinion on its relevance in a Company’s governance structure.
THE PROVISIONS OF CAMA ON INDEPENDENT DIRECTORS
On the 7th of August 2020, the Companies and Allied Matters Act (CAMA) came into effect and introduced new requirements to the Corporate Governance Landscape in Nigeria.
By Section 275(1) of CAMA, Public Companies are required to have a minimum of three Independent Directors on their Board. This is a welcome development, considering the repealed CAMA 2004 was silent on this requirement.
PREREQUISITES TO QUALIFY AS AN INDEPENDENT DIRECTOR UNDER CAMA 2020
By Section 275(3), a Director of a Public Company would be deemed independent when neither the Director nor his relatives in the two years preceding appointment to the Board;
1. was an employee of the Company
2. (i) made or received from the company payments of more than N20,000,000,
- (ii)owned directly or indirectly more than a 30% share or other ownership interest, in an entity that made to or received from the company payments of more than the amount stated in subparagraph (i) or acted as a partner, Director or officer of a partnership or Company that made to or received from the company payments of more than such amount;
- owned directly or indirectly more than 30% of the shares of any type or class of the Company, and
- was engaged directly or indirectly as an auditor for the Company.
This requirement differs from the requirements found in the Nigerian Code of Corporate Governance 2018, thus creating room for conflict regarding which provision Companies are mandated to comply with.
INDEPENDENT DIRECTORSHIP AND THE NCCG 2018
The Nigerian Code of Corporate Governance 2018, which is the chief regulatory instrument that provides for acceptable corporate governance practices, advocates for the presence of Independent Directors on the Board. Principle 7 of the Code states that,
- “Independent Non-Executive Directors bring a high level of objectivity to the Board for sustaining stakeholder trust and confidence”.
The above principle underscores the relevance of an Independent Non-Executive Director. Further to this, the Code presupposes that the position of an Independent Non-Executive Director (INED) is occupied by a director whose relationship with the Company is devoid of blood/business affiliations that may otherwise affect the ability of the Director to maintain a high level of objectivity in decision making.
According to the Code, an INED is a NED who:
- does not possess a shareholding in the Company the value of which is material to the holder such as will impair his independence or over 0.01% of the paid-up capital of the Company;
- is not a representative of a shareholder that can control or significantly influence Management;
- is not, or has not been an employee of the Company or group within the last five years;
- is not a close family member of any of the Company’s advisers, Directors, senior employees, consultants, auditors, creditors, suppliers, customers or substantial shareholders;
- does not have, and has not had within the last five years, a material business relationship with the Company either directly, or as a partner, shareholder, Director, or senior employee of a body that has, or has had, such a relationship with the Company;
- has not served at directorate level or above at the Company’s regulator within the last three years.
- does not render any professional, consultancy, or other advisory services to the Company or the group, other than in the capacity of a Director;
- does not receive, and has not received additional remuneration from the Company apart from a Director’s fee and allowances; does not participate in the Company’s share option or a performance-related pay scheme, and is not a member of the Company’s pension scheme; and
- has not served on the Board for more than nine years from the date of his first election.
The appointment of an independent Director based on the above requirements is premised on his ability to possess the proper skill set to provide a unique and unbiased perspective to board decisions and have the requisite interest to drive the affairs of the Company.
This requirement is distinct from that of CAMA 2020. However, the similarity between the two regulations lies in the expectation for an Independent Non-Executive Director to have no blood relations or record of serving as an Auditor to the Company.
The UK Corporate Governance Code 2018
Envisioned to foster long-lasting business success, the UK Code of Corporate Governance prescribes stringent governance frameworks for premium-listed companies on the London Stock Exchange.
According to Principle 2 of the Code, which provides for the division of Board responsibilities,
- “The Board should include an appropriate combination of executive and non-executive (and in particular, independent non-executive) directors, such that no one individual or small group of individuals dominates the board’s decision making”.
The Code equally mandates that at least 50% of non-executive directors on the board, excluding the chair, must be deemed independent by the board.
Although the UK Corporate Governance Code does not demand companies to adhere strictly to its principles because of the compliance or explain the approach of the Code, it, however, offers valuable insights on how the appropriate composition of Board membership can enhance the decision-making process in a Company’s governing body.
The material fact of this Code is that it recognizes the essence of Independent Non-Executive Directors, hence the recommendation for at least half of the Board to be Independent Directors.
KING IV Report on Corporate Governance for South Africa
Similar to the Nigerian Code on Corporate Governance, the KING IV PEPORT contains governance outcomes, principles, and practices that seek to enshrine the practice of Corporate Governance in Companies resident in South Africa… The Code applies to all organizations in South Africa regardless of their form of incorporation.
Principle 7 of the KING IV Report provides that
- “The governing body should comprise the appropriate balance of knowledge, skills, experience, diversity, and independence for it to discharge its governance roles and responsibilities objectively and effectively “
While the KING IV Report does not propose a specific number regarding the composition of independent non-executive directors on the Board, it re-emphasizes the relevance of Directors having the quality of “being independent” to enhance the objectivity and effectiveness of the governing body.
This Code adopts the apply and explain approach regarding its compliance and expects organizations to adhere strictly to its principles and recommended practices.
Conclusion
A common thread in the various legislations that attempt to define the concept of an “independent director” is the impact of the holder of this position in steering a Company strategically in the right direction.
This is why Directors who aspire to this level of relevance within an organization must demonstrate capacity not just in skillset and experience but in terms of character and ability to show devotion to acting in the best interest of a Company.
Ultimately, the Board has the chief responsibility of ensuring that Directors who would serve as ”independent directors” possess the expected regulatory, character, and experience requirements to discharge the duties of this office effectively.
Chisom Anene-Nwankwo and Chioma Mordi
About The Society for Corporate Governance Nigeria
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