Independent Directors: Are there any roles for them?

In continuation of our discussions on independent directors [see here, here and here], this article discusses the fundamental issue of the role of independent directors. The necessity of discussing the role of independent director is predicated on establishing the reason for contemporary corporate governance codes providing for this category of directors who are not usually specifically mentioned in company law statutes. Moreover, the issue of the role of independent directors is a major area of weakness in respect of the four corporate governance codes currently in force in Nigeria.

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Undoubtedly, all the four corporate governance codes in force in Nigeria have provisions regarding independent directors, but their provisions regarding the role of these independent directors are grossly inadequate where any provision on the matter exists at all. The Code of Corporate Governance for Banks in Nigeria Post-Consolidation (2006 CBN Code) merely provides for Nigerian banks to have independent directors, but failed to stipulate any role for such independent directors. The Code of Corporate Governance for Licensed Pensions Operators 2008 (2008 PENCOM Code) merely provides that one of the members of the nomination committee of a relevant company should be an independent director. It also vests the responsibility of leading the committee that would assess the performance of the chairman of the company concerned on an independent director. In the case of the Code of Corporate Governance for Insurance Industry in Nigeria 2009 (2009 NAICOM Code), it provides that an “independent director is critical in the evaluation of the performance of the board and management and mediates where interests of management, the company and its shareholders may diverge, such as, executive remuneration, succession planning, changes of corporate control, takeover defences, large acquisitions and audit function.” It further provides that an independent director should chair the audit and compliance committee, and that the membership of the establishment and governance committee should include an independent director. In the case of the Code of Corporate Governance in Nigeria 2011 (2011 SEC Code), it has no provision on the role of an independent director in spite of the fact that it has the broadest definition of independent director. This is one of the major failings of the 2011 SEC Code. The absence or inadequate stipulation of roles for independent directors in the corporate governance codes in force in Nigeria makes one wonder why the corporate governance codes provided for them in the first place.

A study of the corporate governance codes of numerous jurisdictions reveals that there are specific roles usually reserved for independent directors. The reservation of special roles for independent directors justifies the necessity of specifically providing for their presence on the boards of directors of the companies concerned. The special roles which independent directors play in the companies in which they are present, as gleaned from the corporate governance codes of other jurisdictions, include the following:

(a)          Chairman of the Board of Directors

In some jurisdictions, the chairman of the board of directors is required to be an independent director.  This is so where the same person is not occupying the positions of the chairman of the board of directors and that of the chief executive officer of the company. Some other jurisdictions merely require the chairman to be independent at the time of his appointment. In other words, it is recognised that the chairman may lose his independence subsequently. In corporate governance codes with such provisions, long tenure is considered an impediment to the independent status of a director.

(b)          Senior (or Lead) Independent Director

In some jurisdictions, there is a provision for the appointment of a Senior Independent Director (SID) or Lead Independent Director (LID) from among the independent directors. The SID or LID is usually different from the chairman of the board of directors. He could be referred to as the alternate to the chairman. In some other jurisdictions, the SID or LID is required where the same person is the chairman of the board of directors and the chief executive officer of the company. Another role of the SID or LID is that he chairs the meeting of non-executive directors which, among other things, appraises the performance of the chairman. Furthermore, the SID or LID provides a sounding board for the chairman and serves as an intermediary for the other directors when necessary. Also, he is required to be available to shareholders if they have concerns which contact through the normal channels of chairman, chief executive officer or other executive directors has failed to resolve or for which such contact is inappropriate

(c)           Board Committees Membership

Before the recent global financial crisis, there were three board committees which were recognised by nearly every corporate governance code as being crucial in the institutionalisation of the tenets of good corporate governance in companies. These are the nomination committee, the remuneration committee and the audit committee. However, following the recent global financial crisis, another board committee is beginning to attract attention. This is the risk management committee. The trend discernible from contemporary corporate governance codes is to constitute these crucial committees either entirely with independent directors or to have their membership to be made up of majority of independent directors.  Where independent directors constitute the entirety of the membership of such committees, it places independent directors in a strong position to play major roles in the works of such committees.

(d)          Executive Session

The term “executive session” refers to a meeting of the non-executive directors in which executive directors or members of management of the company are deliberately excluded from being present. The importance of providing for such meetings in corporate governance codes is to forestall any ill-feeling or misconception that may be engendered if the non-executive directors hold such meetings in the absence of any authority for such meetings in a statutory or regulatory instrument. If the non-executive directors or independent directors are to perform the responsibilities exclusively reserved for them, then they must hold some exclusive meetings to achieve such objective.

(e)           Numerical Strength on the Board of Directors

In terms of board membership in contemporary times, it is evident from the contemporary corporate governance codes of numerous jurisdictions that independent directors enjoy numerical strength on the boards of companies. Empirical evidence reveals three popular membership options as far as the number of independent directors on the boards of companies is concerned. First, independent directors are required by some corporate governance codes to constitute a majority of the membership of the board of directors. Second, independent directors constitute a majority of the non-executive directors, who themselves constitute a majority of the board of directors. Third, independent directors constitute at least one-third of the board membership. Unless independent directors enjoy some measure of numerical strength on the boards of companies, they would be grossly handicapped in performing the enormous responsibilities reserved for them. Thus, contemporary corporate governance codes make provisions regarding such matters.

In the case of Nigeria, as we have seen previously [see here], the current corporate governance codes are grossly deficient in relation to the number of independent directors required to be on the board of directors. The 2006 CBN Code requires that the board of directors of a Nigerian bank be made up of at least two independent directors. In view of the average board size of a typical bank in Nigeria, two independent directors would be severely marginalised on the boards of a typical Nigerian bank. Even at that, some banks do not have up to two independent directors on their boards! The situation is even more precarious in the case of the three other corporate governance codes (2008 PENCOM Code, 2009 NAICOM Code and 2011 SEC Code) which prescribe at least one independent director to be on the board of directors of relevant companies. It goes without saying, that presently independent directors are merely decorative; they can neither be active nor effective in fulfilling the roles of independent directors discussed above.

Independent Directors: 111 Frequently Asked Questions Aptly Answered

Next week, we shall discuss the international best practices on independent directorship as can be gleaned from the provisions of corporate governance codes of different jurisdictions, to wrap up the discussion on independent directors. Nevertheless, should you have views on the role of independent directors you wish to share, kindly do so 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.

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2 comments on “Independent Directors: Are there any roles for them?
  1. Omofagsec1990 says:

    COMMENTS ON POSTS DURING THE PERIOD 10/01/2013 TO 01/02/2013
    Re: Separate Meetings for Independent Directors: I feel that the idea of executive sessions needs to be treated with great caution. Such meetings if not well handled can create disharmony and suspicion. When meetings before the meeting occur, people who are not independent minded could be unduly influenced. Such a situation could create camps that are not in the ultimate best interest of the company. Objectiveness could end up being sacrificed. Membership of Board Committees should be sufficient.
    Re: Access to External Professional Advice: The fact that the Company is expected to bear the expense incurred in seeking external professional advice can lead to compromise or abuse if not well managed. Consultants may be selected in a nepotic manner and fees may be agreed without due regard for competitiveness. Where transparency and accountability are not emphasized, particularly in corrupt environments, the desired result may not be achieved.
    Independent Directorship Reality or Myth: The criteria for determining independence need to be critically scrutinized. As long as Directors have the right to make nominations to the Board subject to approval by the members in General Meeting, Directors with substantial shareholdings will continue to wield a lot of influence on the candidacy of any individual. The tendency to nominate cronies rather than persons of pre-eminence could be quite high. The nine tests laid down to determine eligibility though helpful could be circumvented fairly easily. The omnibus clause does leave good room for review as new scenarios arise.
    In countries where the practice is to have majority of the members of the Board to be independent, the challenge as to determining true independence could be enormous. I believe that developing countries should strive to have independent directors constitute up to one third of the size of the Board of Directors.

    P. O. FAGBURE (MRS)

    • linda says:

      An independent director is one whose decisions/positions are based on the corporate merits of the subject before the board rather than other extraneous considerations or influences.
      However, the question is: what is it that independent directors bring to Board that the executive and/or non-independent directors do not. The answer is quite intuitive.
      1. Avoidance of potential conflicts of interest: management oversight is an important function of a board of directors. Usually, presence of independent non-executive directors ensures that any material conflict of interest involving directors are properly dealt with.
      2. Protection of minority shareholders’ rights: independent directors have an important role to play in companies where a controlling shareholder has strong control over the management. The presence of a good ratio of independents on the board can help ensure that there is enough representatve voice of the minority shareholders on the Board for their rights to be well protected.
      3. Exercising independent judgement: No matter how well meaning the executive direectors may be, more often than not, being involved in the day-to-day affairs of the companies that they work for, they tend to get myopic. A company can draw many important lessons from the experience and expertise of independent directors.
      4. Investor confidence: having independent directors on board sends a very strong signal to investors that the company is well run and governed, and its board is sound enough to ensure that nothing less than the very best international corporate governance practices are adhered to.
      5. Independent directors as counterbalance: together, a balanced board can steer the company to success. One caveat though is that the independence is a state of mind and depends upon the personal characteristics of each individual.

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