To fulfil its mandate effectively and provide the required leadership to Management, Board independence is imperative and familiarity that comes with longevity is a threat to Board independence. There is a healthy debate in favor and against tenure limits for Directors.
The Company and Allied Matters Act (CAMA) clearly provides for the appointment, removal, age limit and resignation of Directors. However, it does not prescribe tenure limit. The Nigerian Code of Corporate Governance (NCCG) 2018, Sectoral Codes and the respective Memorandum and Articles of Association and Board Charter provide guidance in this regard. Principle 7.2.9 of the NCCG 2018 recommends that the tenure of the Independent Non-Executive Directors (INEDs) should be limited to three terms of three years to enable periodic refreshing of the Board. The Code however leaves the issue of tenure limit for Executive and Non-Executive Directors to the discretion of the Board, depending on the peculiarities of the Company.
The Central Bank of Nigeria (CBN) Code of Corporate Governance for Banks and Discount Houses 2014 provides that Non-Executive Directors (NEDs) of banks are to serve on the Board of a bank for a maximum of three (3) terms of four (4) years each in order to ensure continuity and injection of fresh ideas. The CBN Code also provides that the tenure of the Chief Executive Officer (CEO) of a bank is to be in accordance with the terms of engagement with the bank but subject to a maximum period of ten (10) years. Such tenure may be broken into periods not exceeding five (5) years at a time after which such a person would cease to be eligible for appointment as the CEO in the bank or in any of its subsidiaries.
Similarly, the Code of Corporate Governance for the Telecommunications Industry 2016 provides that a Director may serve on a Board for a period of three (3) terms of Five (5) years each. The Code of Corporate Governance for Insurance Companies in Nigeria does not specify any term limits for Executive Directors. However, it provides that Non-Executive Directors are not permitted to be re-nominated and appointed for a period exceeding 3 terms of 3 years each.
The Code of Corporate Governance for Licensed Pension Operators does not specifically provide for the tenure of directors of a Pension Fund Operator. Howbeit, the Pension Commission (PenCom) released a Circular on March 9, 2020 which provides that the Managing Director or any Executive Director of a Pension Funds Operator (PFO) can only be appointed as a Chairman of a PFO after a cooling period of three (3) years has lapsed. Additionally, the Circular provides that a person cannot be appointed as an Independent Non- Executive director of a PFO if he has served on the Board for more than Nine (9) years from the date of his first election.
Director tenure and “board refreshment,” are corporate governance flashpoints as investors and shareholder activists view director tenure as integral to issues of board composition, succession planning, diversity, and, most of all, independence. The merits of tenure limits for Directors include the following:
- By establishing Director tenure limits, the Board makes room for rejuvenation and the onboarding of Directors with new skillsets and novel experiences. As businesses evolve, the skillsets required on the Board for effectiveness change and a periodic refreshing would ensure that the Company’s strategy remains relevant in the changing times particularly in the age of disruption where technology is rapidly changing the nature of business operations.
- There is the need to safeguard the independence and sound-judgement of Directors. When Directors stay on the Board for too long, there is the tendency to develop an allegiance towards Management, engendered by familiarity, which would diminish the leadership role of the Board. This could also lead to a situation where the Board is unable to check the excesses of Management and objectively criticize Management proposals.
- Tenure limits make it easier to achieve diversity on the Board as it allows for a continuous flow of innovative ideas and perspectives on the Board and its decision-making process, and prevents stagnation, boredom, and loss of commitment that can sometimes set in when Board members serve long terms. The success of an organization is the reward of an effective Board as such the Board must not become a ceremonial appendage.
On the other hand, the following are some arguments against tenure limits:
- The cost of recruiting new directors is a major demerit of limiting the tenure of Directors on the Board. The process of identifying and appointing suitable replacements and the onboarding process could be quite cumbersome. Beyond the cost, recruiting a director with the right fit can be time consuming and sometimes the Board settles for an unsuitable or ill-fitting Director.
- A reasonable length of service on the Board would confer on the Directors a deeper understanding of the Company’s business which will position them to contribute more effectively to the discussions and the opportunity to set out long-term strategic goals.
Length of service on the Board is generally viewed positively, however, the global trend towards board tenure is that there should be a limit and an exit plan for Directors. In France, Directors are not considered independent if they have served on the Board for more than twelve (12) years. In the United Kingdom, publicly traded Companies must either terminate the appointment of a Director after nine (9) years of service or explain why they believe an extended tenure has not compromised the director’s independence.
Public companies in the United States generally do not have specific term limits, though some indicate in their bylaws a “mandatory” retirement age for directors (typically between 72 and 75years) which can generally be waived by the Board. The Council of Institutional Investors in the United States, which represents many public pension funds, urges its members to consider length of tenure when voting on directors at corporate elections and this is due to the council’s concerns that Directors become too friendly with Management if they serve for extended periods.
Bringing this all together, whilst there are significant advantages that accrue from setting tenure limits, one cannot overlook the demerits of such tenure limits. Having long-term directors has been seen as beneficial to board dynamics as well as to the relationship between the Board and Management. Typically, new directors require at least three years to acquire sufficient company-specific knowledge. It is important to strike a balance as contemplated by the provisions of the NCCG and the Sectoral Codes of Corporate Governance (now mostly reduced to guidelines) to refresh the Board periodically, whilst retaining those Directors that have knowledge of the business to create the right balance for Board effectiveness and preserve institutional memory.
Bisi Adeyemi is the Managing Director/CEO, DCSL Corporate Services Limited. Kindly forward comments and reactions to badeyemi@dcsl.com.ng