Directors typically – save for Independent Directors – are not precluded from holding shares in companies on whose Boards they serve. Indeed, some companies by their Articles of Association prescribe shareholding qualification for Directors. Section 251 (1) & (2) of the Companies and Allied Matters Act, 2004 (CAMA) provides a basis for this. Where so fixed, the Director is obliged by the provisions of CAMA to obtain his qualification within two months of appointment or vacate the office.
In practice, most Directors are shareholders either in their personal capacity or as nominees of corporate shareholders. Many private companies are owner-managed businesses such that a majority if not all the shareholders also sit on the Board. Typically, Shareholder Agreements and indeed Articles of Association provide for “substantial shareholder” Board representation. Upon reaching a particular threshold (usually 5%) shareholders are invited to make nominations to the Board.
A substantial shareholder as contemplated by CAMA is one who holds either directly or through a nominee, at least 10% of the shares of a company. The SEC Code of Corporate Governance for Public Companies in defining an Independent Director, infers that a substantial shareholder is one who holds directly or indirectly 0.1% of the company’s paid up capital. However, the Listing Rules of the Nigerian Stock Exchange requires listed companies to disclose in their annual reports details of persons and entities who hold 5% and more of the company’s shares as these are considered substantial shareholders.
The CBN Code of Corporate Governance for Banks encourages the composition of a Board which is independent of individual shareholders and defines director independence to mean the non-representation of any particular shareholder interest. The exposure draft of the Nigerian Code of Corporate Governance recommends that a majority of Non-Executive Directors on the Board be Independent.
There are arguments in support of the position that a Board made up predominantly of owner-Directors tends to be more hands-on, focused on corporate performance and delivering shareholder value. On the other hand, a more popular global perspective is that separating the role of ownership and governance engenders Board independence which is a sine qua non to delivering value to a wider spectrum of stakeholders and acting in the company’s overall interest. Decisions would not always be influenced by investment objectives of the individual and institutional shareholders but will be better focused on considerations beyond the bottom-line.
It is suggested that whilst Directors (save for independent directors) should be free to hold shares, there should be a cap on their shareholding as individual Directors and as a Board. A situation where 95% of the entity is owned by Directors cannot be in the overall interest of the company. Hence the clamor by regulators for more independent Directors on Boards – particularly of public companies. It is conceded that there is no rule of thumb in this regard and examples of successful companies with a preponderance of owner-directors abound.
As the clamor for more independence for the Board gathers momentum, a worrisome trend that needs to be addressed is that of the “substantial shareholder Chairman”. The role of the Board Chairman is crucial to the optimal performance of the Board of Directors and by extension the Company. The concept of the separation of the role of the Chairman from that of the CEO implies that the Chairman should be independent of Management and free from any business interest or other relationships which could interfere with his ability to make independent judgment. The return of a former CEO (after the cool-off period as envisaged by the respective Codes of Corporate Governance) as Chairman of the Board raises the question of independence and overbearing influence – particularly where the former CEO is a substantial shareholder. The Chairman is expected to be in a position to create some balance on the Board. It is for this reason that the Codes recommend that the Chairman should not be a member Board Committees. Ideally and as much as possible, the Chairman should be an independent Director.
The major implications for Directors of public companies who hold substantial shares in these companies relate to their independence and the restrictions placed on their freedom to deal with the shares as they please being subject to a number of constraints such as the prohibition of insider trading and compliance with disclosure requirements under the Rules & Regulations of the Securities and Exchange Commission. Are substantial shareholder Directors able to comply with these restrictions? Are they able to maintain the level of independence required to perform optimally in the overall interest of the company? Diversity of Board composition to include more independent, non-shareholding Directors will ensure the Board independence – a major signpost of Board effectiveness.