“Independent Non-Executive Directors bring a high degree of objectivity to the Board for sustaining stakeholder trust and confidence” -Principle 7 of the Nigerian Code of Corporate Governance 2018(NCCG, 2018)
According to the NCCG 2018 an Independent Non-Executive Director (INED) should represent a strong independent voice on the Board, independent in character and judgment and accordingly free from such relationships or circumstances with the Company, its management, or substantial shareholders as may, or appear to, impair his/her ability to make independent judgment. Whilst the meaning of independence may be contextual, the Code defines an Independent Director as that Non-Executive Director who meets the following criteria:
- Holds not more than 0.01% of the paid-up capital of the Company;
- Is not a representative of a shareholder that has the ability to 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 indirectly
- 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;
- has not served on the Board for more than nine years from the date of his first election.
The Code describes a reclassification of an existing NED into an INED on the same Board as undesirable. As such a sitting Non-Executive Director who otherwise satisfies the aforementioned criteria cannot be re-classified as an Independent Director.
An independent Director is clearly expected to bring an external unbiased perspective to the Board and it is expected that he/she will be appointed based on skillset, experience and strength of character. The INED’s “lack of interest” in the affairs of the Company and objectivity should not translate to a lackadaisical attitude to the affairs of the Company. The INED should inspire and sustain investor, regulator and public trust and confidence by presenting a formidable and dispassionate stance on the board.
Independence goes beyond ticking the checklist recommended by the Code. It is indeed possible for an individual to meet the set criteria and still fail the true test of independence. If the CEO or Board Chairman handpicks a “crony” who to all intent and purposes meets the aforementioned criteria, and labels such a person “Independent”, compliance would be with the letter rather than the spirit of the requirement. Independence does not however connote consistently being on the “other side”, suspicion of and an uncooperative attitude towards other Board members. The INED must at all times be reminded that his/her role is to stir the Board towards balanced decision making that as much as possible takes consideration of the interests of all stakeholders.
The responsibility placed on the INED makes it imperative for him/her to devote time and attention to the Company. Whilst this is a requirement for every director, it is more significant for the INED whose appointment is often predicated on personal reputation. The INED is also required to Chair most Board Committees – in particular the Board Audit and Governance (Nominations) Committees. To provide clarity and ensure the INED is aware of the expectations of the role, a letter of appointment and an induction programme are useful.
The conversation on whether or not tenure impacts independence has been settled by the Code which provides that the INED should not serve on the Board for longer than nine years from the date of his/her first election and the Board is required to annually ascertain and confirm the continued independence of each INED.
The Board has a significant role to play in safeguarding the independence of the INED. Independence can be threatened by the appointment process, familiarity over time, economic considerations and the culture on the Board. The Board must oversee the appointment of an INED to ensure it is free, fair and transparent. The Board must also ensure that remuneration of the INED and other Non-Executive Directors is adequate without compromising the NED’s objectivity.
Ultimately, the value of the INED to the Board largely depends on his/her strength of character. Dedicating time and intellectual resources where one has no pecuniary interest is a matter of choice and oftentimes altruistic. Sustaining the independence of the Independent Director largely depends on the personal integrity of the Director. Where the INED can no longer act in that capacity, he/she should be bold enough to leave.