Independence broadly connotes the absence of interest in an enterprise or organization which could affect the exercise of objective judgment. In Nigeria, the SEC, CBN and NAICOM Codes of Corporate Governance require the appointment of Independent Directors.
The SEC Code of Corporate Governance defines an Independent Director as a Non- Executive Director whose shareholding directly or indirectly does not exceed 0.1% of the company’s paid up capital. Such a person should not have been employed by the company (or the relative of such a person) in the past three financial years. The individual should be “free of any relationship with the company or its management that may impair or appear to impair the director’s ability to make independent judgments”.
The CBN Guidelines on the appointment of Independent Directors require that the individual should have “sound knowledge of the operations of listed companies, the relevant laws and regulations guiding the industry, a minimum academic qualification of first degree or its equivalent, with not less than 10 years of relevant working experience”.
An Independent Director brings an outside perspective to strategy and gives the benefit of his experience and know-how to decision. Not being a “substantial shareholder”, the Independent Director is expected to be in a position to take account of the interest of all stakeholders from a “non-emotional” view point. They are expected to provide unbiased and independent views to the Board and represent minority shareholders’ interests.
The question often arises as to how long an I n d e p e n d e n t D i r e c t o r c a n r e m a i n “Independent”? Whilst the SEC Code of Corporate Governance is silent on tenure, the CBN guidelines provide that the term of office of an Independent Director shall be 4 years for a single term and a maximum of 8 years of two consecutive terms. In the event that an Independent Director resigns mid- term, he/she is expected to notify the CBN of the circumstances surrounding such resignation.
A cap on the tenure of independent directors is based on the assumption that familiarity impairs the independence of an individual. This assumption may not always be correct. It has been argued that Independence is a state of mind and is not dependent on tenure. A person who is independent will always remain independent and a person seeking his personal benefit will always try to do so.
According to Faith Stevelman, Director- Center of Business Law & Policy, New York Law School “I think it would be very difficult to maintain a forceful degree of objective oversight and the ability to rationally scrutinize the plans and objectives of management at arm’s length in a truly rational and methodical fashion once close friendships and long-term associations have developed”. Another school of thought however posits that “the longer the independent director is there, the greater is the fear they have of him because they know he is tough and not a person they can meddle with” Suresh Talwar.
However, rather than set terms limits for Independent Directors, a periodic evaluation of the performance of individual directors would provide the Board with a basis for deciding whether or not to re-appoint a director who is due for re-appointment. Such an assessment, if conducted objectively, will amongst others assist the Board in determining whether or not an Independent Director is performing his/her role on the Board.