Another Perspective on the Subject of Independent Directors

The effectiveness of corporate Boards through adherence to corporate governance best practices continues to receive a lot of regulatory attention and the requirement to appoint Independent Directors is one of the several interventions by regulators in this regard. A recurring provision in the various Codes of Corporate Governance is that the Board of a listed company should be comprised of at least one (1) Independent Director.

The Securities and Exchange Commission (SEC) Code, the National Insurance Commission (NAICOM) Code, the National Pension Commission (PenCom) Code and the Code of Corporate Governance for the Telecommunications Industry (NCC Code) all provide for a minimum of one (1) Independent Director, while the Central Bank of Nigeria (CBN) Code provides for a minimum of two (2) Independent Directors on the Board. The intention of the requirement is that the Independent Director will exercise objective and independent judgement free from personal interests and external influence.

The basic criteria stipulated by the codes is that an Independent Director should – not be a substantial shareholder (owns less than 0.1%); not be a shareholder representative with the ability to control management; not have been employed and is not related to a person employed by the company in the three (3) years immediately preceding his appointment; not have been a contractor or professional adviser to the company and should have the “ability to exercise independent judgement”. Proponents of the concept of Independent Directors have argued that the requirement for a Director specifically designated as “Independent” stems from the premise that Directors with business/personal relationships or equity stakes in the business may not be capable of objectively analyzing situations and taking decisions in the best interest of all stakeholders. The Independent Director is therefore expected to be a governance watchdog and a sounding board.

Critics on the other hand have argued that by merely stipulating the qualification criteria for Independent Directors without any mechanism or means of determining an individual’s ability to not only exercise but constructively express independent judgment, regulators have unwittingly created an ineffective governance tool forgetting that the independence of mind is not assured by the independence of an individual’s position.

It is common knowledge that many companies and boards limit the search for new directors to the personal and professional networks of sitting/existing board members. Sadly, this is also how Independent Directors are appointed, meaning that ab initio, the Independent Director is not in the true sense of the word “independent” given his direct or indirect affiliation or relationship with a sitting Board member. It has been argued that the concept of independent directors is not realistic within the context of the peculiarity of our environment as it is impracticable to find individuals who can be said to be truly independent as contemplated by the Codes.

A critical factor therefore to the issue of whether or not an individual so appointed as “Independent Director” is actually independent or not would be the process through which he or she is appointed to the Board. So, rather than tick the appropriate boxes against the criteria laid down in the relevant Code of Corporate Governance, the Board should look beyond these and ensure that the process of appointing the individual is transparent, objective and as independent of sitting Directors as possible as the inadequacies of the appointment process tends to detract from the utility of having independent directors on the Board

The recommended best practice for appointing an Independent Director is to engage a consultant to recruit and recommend suitable candidates for consideration by the Nomination and Governance Committee for onward recommendation to the Board for approval. It is the responsibility of the Board, in addition to the criteria defined by the applicable Code of Corporate Governance to set out in clear terms the profile of the individual that would best fit the role.

Whilst many public and regulated companies are in compliance with the requirement to appoint Independent Directors, the desired impact of having this type of Directors on corporate Boards is yet to fully materialize. Dr. Nat Ofo in his Article on Independent Directors in Nigeria: Myth or Reality (January 2013) is of the view that the various provisions of the Corporate Governance Codes in Nigeria are laden with inadequacies which are clear hindrances to achieving the purpose for which Independent Directors are required to be on the boards of public companies. He is of the view that the inadequacies are pointers to the fact that at present, independent directorship is still largely a myth in Nigeria particularly as their impact is neither felt nor appreciated.

Ultimately, it is desirable that all directors should exercise objective and independent judgement as a Board composed of directors who are able to exercise independent judgement is most likely to serve the best interest of all stakeholders.

The regulatory framework for independent directors requires significant improvement. None of the codes sufficiently capture criteria by which the independent status of an independent director can be evaluated. Rather than a check-list than can be easily ticked off, global corporate governance practices point to the “independence of mind and character” as the ultimate test of independence. Given the peculiarity of the cultural nuances in our society, the test of affiliation is one which would appear quite relevant in the process of appointing an independent director and a criterion which regulatory authorities should take into account in future code reviews. Ultimately, the integrity of the process and the underlying intention to appoint a truly independent director for the value such an individual will bring on board are paramount.