Sunday, 27 September 2015

ROLE OF THE INDEPENDENT DIRECTOR IN CORPORATE GOVERNANCE

The role of the Independent Non-Executive Director (INED) in achieving Board effectiveness has been enshrined in almost all the Corporate Governance Codes in Nigeria.

The Securities and Exchange Commission’s CG Code defines an  INED as a Director who is not a substantial shareholder of the Company (holds less than 0.1%); is not a representative of a shareholder who has the ability to control Management; had not previously been employed by the Company; is not an immediate family of an individual who is or has been in any of the past three financial years employed by the company; is not a professional adviser to the company other than in a capacity of a director and is not in a significant contractual/business relationship with the Company.

The CBN Guidelines on the appointment of Independent Directors  defines an INED as a person with no direct material relationship with the Bank or any of its officers, major shareholders, subsidiaries and affiliates; a relationship which may impair the director’s ability to make independent judgments or compromise the Director’s objectivity in line with Corporate Governance best practices.

The PENCOM CG Code contains a curious provision in Section 4.1.5, viz –  “The relationships set out in 4.1.4 (a) to (d), are not intended to be exhaustive and are examples of situations,  which could make a director not to be deemed as independent. If the PFA/PFC however wishes, in spite of the existence of one or more of these relationships, to consider the director as independent, it shall disclose in full, to the Commission, the nature of the director’s relationship and explain why he should be considered independent”. This supports the position that independence is a state of mind and should not always be inferred from the existence of (or the lack of) any relationship.

It has been argued that a fixed tenure is key to sustaining the independence of the INED. In this regard, the CBN Code specifies a maximum tenure of 8 years, whilst the draft National Code fixes tenure at 9 years. The SEC and PENCOM Codes are silent on tenure. The cap on tenure of Independent Director is based on the assumption that familiarity impairs the independence of an individual, as it is deemed a difficult task to maintain a forceful degree of objective oversight and rationally to scrutinize the plans and proposals of management at arm’s length once close friendships and long-term associations have developed.

However, this assumption may not always be correct going by the assertion that Independence is a state of mind and is not dependent on tenure. A person who is independent will always remain independent and a person seeking his personal benefit will always try to do so. And perhaps the longer the Independent Director stays, the greater is the fear of him because the Board knows he is tough and not a person they can meddle with?

Apart from serving as a check on the Board by providing unbiased and independent views, the Independent Director ensures an appropriate balance in the boardroom, shares an unbiased perspective to strategies and employs neutrality in his dealings. He also is expected to exhibit expert skills in ensuring that a balance of knowledge, skills, judgment and other resources is achieved. He owes a duty to all stakeholders to protect their interest at all times and generally act in the long term interest of the Company and not only in the narrow interest of shareholders.

To safeguard and sustain the independence of the INED, it is important that the appointment process is transparent and follows laid down criteria. Professional Associations and CG Consultants are a veritable resource in this regard. The INED should disclose all matters that may compromise his/her independence and maintain arms length relationship with other Board members and Management whilst not compromising cordiality.

Economic considerations or self-interest that places the Independent Director in conflict of interest situations should be avoided. The remuneration he/she receives should be adequate to compensate for the time and effort deployed by the INED, but not of a quantum that would affect independent reasoning.

The INED is expected to possess requisite academic/professional qualification; sufficient relevant experience; interpersonal skills (diplomacy, strength of character, good judgment); integrity and high ethical values; should be able to commit adequate time & effort and should be willing to learn.

The INED may be removed like every other Director following the strict procedure set out under the Companies and Allied Matters Act. This process gives the Director a right of response and he could use this to blow the whistle in the event that he is being removed on account of his stance with respect of an unethical issue. Similarly, the CBN Code requires that the INED should notify the CBN of the reasons he is exiting the company before the expiration of his/her tenure.

It is recommended that proper induction and orientation programme is conducted to acquaint the INED with his/her responsibilities and with the operations of the Company. The importance of ethical business performance – the moral fibre of the entity, openness to new ideas, appropriate disclosures and willingness to share information, attitude to criticism and feedback and the ability to engage in constructive conflict are attributes of the Board that will engender the effectiveness of the INED.

Ultimately, sustaining the independence of the Independent Director is a function of the ethical culture of the Board on which he/she sits and the personal integrity of the director. (businessday)