In the past couple of weeks, we have been discussing the inadequacies in the provisions of the corporate governance codes presently in force in Nigeria as far as independent directorship is concerned [see here and here].
Another issue that seems to manifest the inadequacies in the provisions of the corporate governance codes in Nigeria in relation to independent directors relates to the number of independent directors usually prescribed for boards of concerned companies. For example, the Code of Corporate Governance in Nigeria 2011 (2011 SEC Code) issued by the Securities and Exchange Commission provides for at least one independent director to be on the board of every public company in Nigeria. A similar stipulation is contained in the Code of Corporate Governance for the Insurance Industry in Nigeria 2009 (2009 NAICOM Code) issued by the National Insurance Commission and the Code of Corporate Governance for Licensed Pension Operators 2008 (2008 PENCOM Code) issued by the National Pension Commission. However, the Code of Corporate Governance for Banks in Nigeria Post-Consolidation 2006 (2006 CBN Code) issued by the Central Bank of Nigeria stipulates a higher minimum number of independent directors on the boards of directors of Nigerian banks. It provides that at least two of the non-executive directors of a bank should be independent directors.
The provisions of these corporate governance codes are of little value unless a crucial question is asked and answered. That is to say, how many independent directors should be on the board of directors of a company? There are two matters to consider in any attempt to answer this question. The first is to consider international best practices of the number of independent directors on the boards of companies in other jurisdictions. The second issue is to ascertain what roles independent directors are required to play which necessitates making provisions in corporate governance codes mandating their presence on boards. This is particularly so since in most jurisdictions, the company law statutes are silent on independent directors. We shall consider the first issue shortly and benchmark the identified international best practices on the number of independent directors on boards against the provisions in the four corporate governance codes in force in Nigeria. The second issue (that is, the roles of independent directors) shall be the subject-matter of the next article on independent directors next week.
A review of the corporate governance codes of several jurisdictions reveals that there is no consistency in practice as far as the number of independent directors on boards is concerned. However, there are some common numbers and these are worth noting. Most countries adopt either of three common practices. That is to say, to have the majority of members of the board of directors to be independent directors (as in Australia, Brazil, Finland, UK and USA) or to have them constitute a majority of the non-executive directors who themselves constitute the majority of members of the board of directors (as in South Africa) or to have independent directors constitute up to one third of the board of directors (as in Greece and Ghana).
Evidently, the provisions of the four corporate governance codes in force in Nigeria are not consistent with international best practice on the number of independent directors that should constitute a typical board of directors. In the case of the 2011 SEC Code, it is noted that it prescribes a minimum of one independent director while also prescribing a minimum of five directors as the total board size of a public company. Assuming every public company has a board size of five members, it means that independent directors would constitute 20 per cent of the board membership of the company concerned. This is lower than one-third. Unfortunately, however, it is not common to find a public company with not more than five-member board. In fact, in listed companies it would be odd to find a company with less than 10 directors. It is also unusual to find a listed company with more than one identified independent director, except for some banks. The situation in banks is different because the 2006 CBN Code prescribes a minimum of two independent directors. Even at that, there are still some banks that have less than two independent directors and this has been so for more than two years! Thus, in terms of numerical strength independent directors in Nigeria are not adequately provided for in any of the corporate governance codes in force in Nigeria. Their prescribe number on boards is inadequate to enable them making any meaningful impact on the boards in which they are members. Obviously, for independent directors to have any meaning impact their number on boards should be substantially enhanced from the present one or two prescribed in corporate governance codes in Nigeria.
The inadequacies in the number of independent directors prescribed by the corporate governance codes in force in Nigeria would become evident when we consider the roles of independent director. This shall be the area of focus next week.
Nonetheless, should you have any comments on the number of independent directors that should be on the boards of Nigerian public companies, 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.