The first reference to the concept of the Senior Independent Director was made as part of the recommendations by the Higgs Report published in the United Kingdom in 2003. No concise definition has been proffered for the Senior Independent Director (SID) over the years but a SID may simply be described as an Independent Director who is designated as the senior Director from a pool of independent Non-Executive Directors. It is now generally accepted, that to qualify as “independent”, Non-Executive Directors need to have the necessary independence of character and good judgment and also be free of any connections that may lead to a conflict of interest.
The concept of the SID arose due to concerns in the UK that there would be occasions when major or institutional shareholders might be in disagreement with the Board of Directors of a company, but unable to make their opinions heard through the Chairman and the Chief Executive Officer (CEO). Substantiating its recommendation on the SID, the Higgs Report stated that the role of the SID was important in the relationship between the major shareholders and the Board stating that “The senior independent director should be available to shareholders, if they have reason for concern that contact through the normal channels of chairman, or chief executive has failed to resolve, or for which such contact is inappropriate”.
Critics of the concept of the SID in the UK at the time argued that the Chairman should be able to resolve difficulties between a company and its shareholders, and that the position of a SID was superfluous. It was argued that opening up an additional channel of communication for shareholders would perhaps more likely confuse company-shareholder relationships rather than improve them. Arguments that it made governance more cumbersome and weakened the role of the Chairman were also put forward. Despite these criticisms, the recommendation as contained in the Higgs Report made it through the revised version of the Combined Code and is today included in the UK Corporate Governance Code (UK Code). Consequently, listed and large companies in the UK are required to nominate an independent NED as the senior NED or Senior Independent Director (SID).
The role of the SID as contemplated by the UK Code is that the SID should serve as the sounding board for the Chairman and act as an intermediary for the other Directors. A SID should organize periodic meetings with other Non-Executive Directors without the Chairman being present, spearhead the process of appraising the Chairman’s performance and overseeing succession planning for the Chairman’s position. A SID should also be available to shareholders to address any issues or concerns they feel have not been properly addressed through the usual channels of communication with the Board. The role also involves attending sufficient meetings with major shareholders to obtain a balanced understanding of their issues and concerns.
It has however been argued that the most critical role of the SID is to keep the performance of both the Chairman and the Chief Executive Officer constantly under review and to ensure that the relationship between the two is healthy and not one that will have a negative impact on shareholders and the company. The SID is expected to alert the Chairman, the Board and major shareholders where he has objectively formed the view that a change in leadership in either of the two roles is imperative in the best interest of the company. This is perhaps the most difficult aspect of the role of the SID and the most important.
The concept of a SID is fairly novel and unpopular within the Corporate Governance spectrum in Nigeria as none of the existing Codes of Corporate Governance contain reference to this additional layer within the board governance structure. The 2015 draft Financial Reporting Council (FRC) Code for the Private Sector (the “draft Code/National Code”) however contains a provision similar to the UK Code on the SID. The draft Code recommends that Boards should appoint one of the Independent Non-Executive Directors as a SID and emphasizes that in addition to the unique role that the SID plays on the Board, he has legal responsibilities as do all the other Directors. The SID is therefore expected to have regard to the relevant obligations under extant laws and regulations. The draft Code states further that the performance of the SID should be reviewed by the Chairman and other Non-Executive Directors while his remuneration should be reviewed by a committee of the Board consisting of the Chairman and the Chief Executive Officer, subject to a final approval by the Board.
Like the UK Code, the draft FRC Code states that the SID should act as a sounding board for the Chairman by guiding him through the decision-making process and stipulates that the SID should chair the Nomination Committee and the process of appointing a new chairman.
There have been some very loud criticism of the attempt by the FRC to introduce this concept into the Corporate Governance framework in Nigeria, the loudest being that the concept is not in consonance with the provisions of the Companies and Allied Matters Act. However, if embraced, the SID could actually be the panacea to address the very worrisome phenomenon of the “Super Chairman” – the Chairman who is also a substantial (an often majority) shareholder. Where the individual designated as SID has the right moral fiber, he/she should be able to checkmate the excesses of a high handed Chairman who also wears the cap of majority shareholder.
In the UK, the position is now fully accepted as an important organ within the governance framework for large and listed companies and is gradually being adopted across a wide range of other organizations, including the public and not-for-profit sectors. It is now accepted that the position constitutes a critical check against the concentration of power on the Board such that no one individual wields power in a manner that robs the Board of the benefits of the process of checks and balances in the discharge of its duties.