In this second part of this series reviewing specific provisions of the Code of Corporate Governance in Nigeria 2011 (2011 SEC Code) issued by the Securities and Exchange Commission, we shall be considering the provisions of the 2011 SEC Code on board composition vis-à-vis international best practices on board composition. [sociallocker][See the first part here.]
In view of the centrality of the board of directors in the institutionalisation of the tenets of good corporate governance practice in an organisation, the composition of the board of directors of any organisation is significant in the determination of the organisation’s corporate governance practice. The responsibility of directing and managing the affairs of a company are imposed on the board of directors of the company by the Companies and Allied Matters Act, Cap. C20, Laws of the Federation of Nigeria 2004 (CAMA) and corporate governance codes, where applicable. Accordingly, section 244(1) of the CAMA describes directors as those “persons duly appointed by the company to direct and manage the business of the company.”
In the first place, one of the best practices in respect of board composition is that directors are allowed to determine the actual size of the board of directors. However, in doing so the directors are to ensure an adequate balance of skill, experience and knowledge on the board to enable it effectively and efficiently discharge its responsibilities. Thus, ordinarily, corporate governance codes will not normally impose limits on the numbers of directors that should be on the board of directors. There are some cases though when some corporate governance codes have imposed maximum number of directors that a board should have.
Secondly, another important issue on the composition of boards of directors relates to the mix of executive and non-executive directors on the board of directors. It is a general requirement that the non-executive directors should be more in number than the executive directors. Furthermore, most contemporary corporate governance codes provide for much more than the presence of non-executive directors on the board of directors. They provide that there should also be present on the board of directors some independent non-executive directors. Such corporate governance codes usually prescribe the stringent conditions by which the independent status of such directors is to be determined. [See here] In most corporate governance codes which require independent directors to be on board, the emphasis is that they should constitute a majority of members of the board of directors. The reasons for this stipulation are not far-fetched. Independent directors usually constitute the entirety or majority of crucial corporate governance committees, such as nomination or governance committee, remuneration or compensation committee, and audit committee. Also, the chairman of the board of directors is generally required to be independent, at least during the time of his appointment. Independent directors are also relevant in dealing with those matters in which other directors (for example, executive directors) and management may be conflicted.
Thirdly, gender diversity consideration is a contemporary issue in relation to board composition. Gender diversity is attracting increasing attention globally; so much so that some countries have taken radical decisions regarding solving the “problem”. There are numerous studies which have shown that the percentage of women on boards in relation to male has been low worldwide. In some jurisdictions, quotas have been imposed to increase women’s presence in the boardroom. There are sound arguments in support of increasing the population of women in boardrooms. According to Lord Davies, the “business case for increasing the number of women on corporate boards is clear. Women are successful at university and in their early careers, but attrition rates increase as they progress through an organisation. When women are so under-represented on corporate boards, companies are missing out, as they are unable to draw from the widest possible range of talent. Evidence suggests that companies with a strong female representation at board and top management level perform better than those without and that gender-diverse boards have a positive impact on performance. It is clear that boards make better decisions where a range of voices, drawing on different life experiences, can be heard.” However, it has been noted that though “many companies pay at least lip service to the question, boards of major corporations remain largely what some critics call ‘pale, male and stale’”.
Fourthly, multinational companies try to balance their boards to reflect the nature of their business and their internationality. This has resulted in some companies balancing the composition of their boards to take into accounts “home country nationals and foreigners, ethnic minorities and dominant ethnicity in a culture”. It has been rightly observed that this “can create logistical issues, but companies in some countries (e.g. the traditionally trade-oriented economies of the U.K., the Netherlands and Switzerland) manage to achieve it better than others”.
The 2011 SEC Code is in substantial compliance with international best practice on board composition. It did not prescribe a maximum board size. Rather in section 4.1, it provides that the board of director “should be of a sufficient size relative to the scale and complexity of the company’s operations and be composed in such a way as to ensure diversity of experience without compromising independence, compatibility, integrity and availability of members to attend meetings.” Furthermore, section 4.3 states that there should be a mix of executive directors and non-executive directors on the board of directors with the non-executive directors being in majority and that at least one of the non-executive directors should be an independent non-executive director. It is worthy of note that the definition of independent director in section 5.5(a) of the 2011 SEC Code is substantially consistent with contemporary definition for the term. Its major shortcoming relates to its failing to take into account the facts that the receipt of additional income from the company and long tenure on the board could impede the independent status of a director. Another major inconsistency of the 2011 SEC Code with international best practice on board composition is in not providing that the majority of board members should be independent non-executive directors or at least, constitute a majority of non-executive directors who themselves constitute a majority of the directors on the board as is the case in South Africa. [See here.] This particular setback in the 2011 SEC Code has a negative repercussion on board committees being consistent with international best practice. The insufficiency in the number of independent non-executive directors on boards has made nonsense the obvious advantages that should have been derived from providing for independent directors to be on the boards of companies. This is a major failing on the part of the 2011 SEC Code as far as board composition is concerned.
In the next article in this series which shall be published on Monday, 4th February, we shall consider the adequacy or otherwise of the provisions of the 2011 SEC Code on board committees. Meanwhile, should you have any comments on the board composition, kindly share them using the comments area of this post below. If you are already a registered user, you will be required to log in to comment on this post; otherwise, you will have to register before posting your comment. Registration is simple and FREE.