In an earlier post last week, it was contended that there are some inadequacies in the independent directorship practice in Nigeria which detract from the utility of having independent directors on boards. [See here] These adequacies of the provisions of the existing corporate governance codes in Nigeria are indicators that the regulatory framework for independent directorship in Nigeria requires further improvements. There is no corporate governance code currently in force in Nigeria that captures all the criteria by which the independent status of an independent director may be evaluated. The Code of Corporate Governance in Nigeria 2011 issued by the Securities and Exchange Commission takes the credit for being the corporate governance code in Nigeria with the broadest provision on this issue. Nevertheless, its provisions on the subject matter, as have been pointed out in a recent article [see here], still fall short of international best practice on the matter.
There are nine discernible criteria for ascertaining the independent status of independent directors that can be gleaned from a perusal of the corporate governance codes of several countries. We shall briefly look at these criteria so as to highlight them with a view to their being included in future reviews of the corporate governance codes in Nigeria. It must be stated upfront that these nine discernible criteria cannot be said to be exhaustive, especially given the peculiar circumstances of Nigeria. The nine criteria appear below.
1. Employment test
A director who is an employee of the company on whose board he sits cannot be independent. This is so because he has an additional interest in the company that is sufficiently material to influence his decisions in his handling of the affairs of the company. Thus, every executive director of a company cannot be an independent director of the same company. The employment test is not limited to present employment. A director who has been an employee of the company in the last couple of years is also adjudged not to be independent. There is no consistency in corporate governance codes on the cool off period. However, a period of three years and five years seem to be common in a lot of corporate governance codes.
2. Shareholding test
The shareholding of a director can affect his independent status. A director who is also a substantial shareholder of the company is considered not to be independent because of the large stake he has in the company through his shareholding. It is believed, and rightly too in my opinion, that the huge investment in the shares of the company is adequate to colour his decisions in handling the affairs of the company. Apart from a director who is a substantial shareholder, under this test any director who represents a substantial shareholder on the board of a company is similarly considered not to be independent.
3. Familial relationship test
Family relationship too is a bar to being considered independent. Accordingly, anybody who has a family relationship with either a director who does not satisfy the employment test or shareholding test is also considered not to be independent. There is some disparity as to the degree of familial relationship that is sufficient to constitute a bar to independence. While it is clear that direct family members are obviously caught in the loop, there is an absence of such uniformity in relation to other family members, for example, in the case of extended family members. It is however noteworthy that family relationship can be a criterion for impugning the independent status of a director.
4. Material business dealings test
Having material business dealings with the company on whose board a person sits as a director is also a bar to independence. Thus, where a director is a big customer of the company or a major supplier of the company, he cannot be said to be independent because he has additional business interests in the company which is capable of colouring his judgment and interfering with his independence of character which independent directors are expected to have.
5. Professional, consultancy and advisory relationship test
Similar to the material business dealings test above is the professional, consultancy and advisory relationship test. A director who directly or through his firm offers extra services to the company on whose board he sits, in the nature of professional, consultancy or advisory services is considered not to be independent on account of the professional, consultancy or advisory services he renders to the company. Some corporate governance codes provide for a look back period regarding this criterion, but there is no consistency in corporate governance codes on the length of the look back period.
6. Additional income test
Where a director receives compensation from the company beyond his director’s fee and allowances (for example, sitting allowance and transport allowance), he is adjudged not to be independent. Examples of additional payments which constitute an impediment to the independent status of a director are performance-related pay scheme, participation in incentive plans, share-based remuneration schemes (such as, share options), and pension scheme. Some corporate governance codes provide that the additional payment should be substantial to constitute an impediment.
7. Long tenure test
A director who has served for a long period of time on the board is considered not to be independent. The rationale for this provision is that such a director would have attained some familiarity with the executive directors on account of his long period on the board which is capable of tainting his independent status. There is no uniformity in corporate governance codes on the length of time on the board that amounts to long tenure. However, period of nine years is popular.
8. Affiliation test
A director who is affiliated with another company or director is adjudged not to be independent. The two dimensions to the affiliation test relate to companies in the same group (for example, holding and subsidiary companies) and board cross-membership and/or interlocking directorship.
9. Omnibus clause
Strictly speaking, this is not a test. It is a catch-all phrase usually inserted in corporate governance codes to take care of test situations that may arise in future which the corporate governance code did not specifically provide for. This is so because it is recognised that the criteria listed may not be exhaustive in view of the fact that new developments in future could introduce a dimension which the corporate governance code did not envisage and so did not provide for it specifically.
Granted that the above criteria for determining the independent status of independent directors can be gleaned from a careful perusal of various corporate governance codes, they cannot be said to be exhaustive. There are some factors which in practical terms can still impugn a director’s independence but which have not found their way into corporate governance codes yet. However, these tests constitute a basic starting point. As basic as these tests are, there is no corporate governance code in force in Nigeria at the moment that provides for all the criteria. Thus, the tests for determining the independent status of independent directors in Nigeria reveal an aspect of the inadequacies in the provisions of the corporate governance codes presently in force in Nigeria in relation to independent directorship. In a subsequent post, another aspect of the inadequacies on independent directorship situation in Nigeria would be explored.
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