Board independence is considered pivotal to corporate governance as a result of which governance reforms in recent years have increasingly pinned hope as well as responsibility on Independent Directors to drive higher standards of governance.
An Independent Director is typically a non-executive director who is free from such relationships or circumstances with the company, Management, or controlling shareholders, which may appear to impair his/her ability to make independent judgment towards the affairs of the company.
By way of background, in the first half of the twentieth century, a managerialist model of corporate governance was practiced in the United States with Inside directors, chosen and controlled by the CEO, dominating corporate boards. The concept of the independent director and the related model of the “monitoring board” appeared in 1970 following the occurrence of two watershed events namely the sudden collapse of the major railway company, Penn Central in 1970 and Eisenberg’s bestseller “The Structure of the Corporation” published in 1976. According to Eisenberg, the Board’s essential function is to monitor the company’s management by being independent from it. Today, the reliance on independent directors as a panacea for corporate misconduct is at the heart of corporate governance in the US.
In the UK, the concept of Independent Director was embraced following the adoption of the Cadbury Report. Similarly, the European Model Company Act of 2015 and the OECD Principles of Corporate Governance of 2015 recommend assigning important tasks to independent board members.
Over the years, respective jurisdictions have adopted Codes of Corporate Governance including the UK Corporate Governance Code 2019, the Deutscher Corporate Governance Kodex 2019 (German Corporate Governance Code) the Afep Medef Code of Corporate Governance 2016, the Spanish Corporate Governance Code 2015, and the US Corporate Governance Principles for Listed Companies. The Codes in the main recommend that majority of directors on the board should be independent directors who have no personal or business relationship that will cause substantial conflict of interest.
Being not closely related to the company, Independent Directors are not susceptible to undue influence from Management. Similarly, Independent directors promote corporate credibility and governance standards and bring on board their expertise and experience. Independent directors play a pivotal role in neutralizing conflict on the board and ensure an added layer of accountability, credibility, and unbiased decision-making.
In Nigeria, the need for Independent Directors has been underscored by the Nigerian Code of Corporate Governance (NCCG) 2018 as well as the respective sectoral Codes. According to the NCCG 2018 an Independent Non-Executive Director 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 amongst other criteria holds not more than 0.01% of the paid-up capital of the Company. The SEC Code of Corporate Governance and the sectoral Codes contain similar provisions in this regard.
On 7th August 2020, the President of Nigeria assented to and signed into law the Companies and Allied Matters Act, 2019 (“CAMA 2019”) – the primary legislation for corporate practice in Nigeria which repealed the 30 year old Companies and Allied Matters Act, 1990 (“CAMA 1990”). The new CAMA remarkably introduces a lot of novel provisions including single shareholder companies, electronic filing, signatures, share transfers, and virtual meetings amongst others.
Section 275 of CAMA 2019 provides that a public company shall have at least three Independent Directors. The Section further defines an Independent Director as a Director of the company who or whose relative either separately or together with him or each other, during the two years preceding the time in question was not an employee of the company; did not make to or receive from the company payments of more than N20,000,000 or own more than a 30% share or other ownership interest directly or indirectly in an entity that made to or received from the company payment of more than N20,000,000 or act as a partner, director, officer of partnership or company that made to or received from the company payments of more than such amount; did not own directly or indirectly more than 30% of the shares of any type or class of the company and was not engaged directly or indirectly as an auditor for the company.
Arguably, by the progressive requirement for of three, the higher the presumption of the level of the Boards’ independence.
The twist in the tale is however the threshold for independence under Section 275(3) of CAMA – a Director who owns no more than 30% interest in the company and has made to or received payments from a company not more than ₦20milion. It is noteworthy that Section 275 is silent on the definition of “payments”.
Clearly, within the context of the foregoing provisions of the Codes of Corporate Governance, an individual holding up to 30% interest in the Company’s shares or who receives payment of up to ₦20 million from the company cannot be considered independent. It will appear that this is one of the provisions of the new CAMA that needs to be amended in order not to legislate a lowering of the threshold for the Independent Director. Clearly, this cannot be the intention of the law.
Bisi Adeyemi is the Managing Director/CEO of DCSL Corporate Services Limited. Kindly forward comments and reactions to badeyemi@dcsl.com.ng