Board Effectiveness: More Independent Non-Executive Directors

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By ADEYEMI Bisi

MON, OCTOBER 10 2016-Corporate Governance literature is replete with definitions of the concept of independence and what qualifies a director as being “independent”. The CBN, SEC, NAICOM and NCC Codes provide guidance with respect to who is notan independent Director. For the purpose of this treatise, the definition proffered by Prof. Fabian Ajogwu, SAN in his book – Corporate Governance in Nigeria: Law & Practice is most apt.  He defines an Independent Director as “someone whose only nontrivial professional familial or financial connection to the corporation, its chairman, CEO or any other executive officer is his or her directorship”. The simple test of independence is that an individual should be independent of management, independent in character and judgement such that he or she is able to the exercise objective and unfettered judgement. The intention here is not to attempt to re-define what the codes have so clearly and adequately addressed but to stir a discourse on an emerging trend on the subject of Director Independence.

Corporate governance failures around the world triggered widespread changes to regulations and policy including new requirements for Directors. Discussions around independence as a criteria for Board appointment, the preference for a majority of Directors to be independent Non-Executive Directors and how these should translate to greater independence of the Board are front burner issues in the corporate governance landscape.

The draft Financial Reporting Council (FRC) Code of Corporate Governance (“The draft Code”) provided that the number of independent Non-Executive Directors on the board of a public sector entity shall not be less than half of the number of Non-Executive Directors on the board. The Code contains a similar provision with respect to the boards of private companies.

Proponents of the view that a majority of the Directors on a board should pass the test of independence, argue that a board with a majority of independent Directors is most likely to serve the best interest of the Company as a whole – shareholders and other stakeholders.  In his argument in favour for more independent Directors, Dr. Ulysses Chioatto MAICD, Executive Director and Head of Research at the Australia and New Zealand Institutional Shareholder Services is of the view that “The requirement for director independence is solidly based on the need for fiduciaries to not be in a state of conflict between their personal interests and those who they serve”.

Emphasizing the importance of independence, Prof, Ajogwu shares the view that independence is critical to ensuring that the Board of Directors fulfils its objective oversight role and holds management accountable to shareholders. In support of this view, he argues that if the majority of the Directors on the Board are genuinely independent, they have the power to implement board decisions, even where these are contrary to the wishes of management or a majority shareholder. This power not only creates a more desirable board culture but also imposes a responsibility on the Board to be especially diligent in making decisions. An independent Board is a key structure to assure shareholders that the company will be run competently, and in the best interest of all shareholders. (Corporate Governance in Nigeria: Law & Practice).

In jurisdictions like Australia where the preponderance of independent Directors on the Board is now a regulatory requirement, critics argue that independent Directors are unlikely to have prior or recent experience with the company, have no background in the industry in which the company is doing business and that the part time nature of the job makes it difficult to acquire a depth of knowledge comparable with full time executives. These factors are likely to create a situation where the directors will fail to serve the interest of stakeholders.

On the other hand, whilst recognizing that the requirement for independence has the potential to inappropriately elevate that quality above other necessary and useful factors such as skill, knowledge of the industry and experience, there is no gainsaying that shareholders and prospective investors need to have the assurance that the Board is sufficiently possessed of appropriate neutrality required when reviewing management proposals or performance.

Beyond the provisions of the various Codes and guidelines on the qualifications of an Independent Director, the importance of independence to the proper functioning of the Board and recognizing that the Board is ultimately responsible for its own effectiveness, the Board retains the ultimate discretion in its judgement to determine if a Director is truly independent and should exercise this discretion in the best interest of the enterprise and its stakeholders.

ADEYEMI, Bisi is the Managing Director DCSL Corporate Services Limited. Email:badeyemi@dcsl.com.ng|www.dcsl.com.ng

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