“Independent Non-Executive Directors bring a high degree of objectivity to the Board for sustaining stakeholder trust and confidence” -Principle 7 of the Nigerian Code of Corporate Governance 2018(NCCG, 2018)
To encourage neutrality and independence of opinion on the board of directors (the “Board”), the Nigerian Code of Corporate Governance 2018 (the “Code”) requires companies to appoint Independent Non-Executive Directors (“INEDs”) on their Boards. INEDs are non-executive directors (“NEDs”) who are usually appointed based on their skillset, experience and strength of character; and they are expected to be independent in character and judgment and free from such relationships or circumstances with the company, its management, or substantial shareholders as may, or appear to impair his/her ability to exercise independent judgment.
The Code requires INEDs to be the majority members of Nomination & Governance, Remuneration and Audit Committees and provides that individual committee charters should state where INEDs are required. The Code also provides that the Chairman of the Remuneration Committee should be an INED.
It is pertinent to note that independence is a key factor in the effective performance of an INED’s role. Accordingly, the Code states that an INED must meet the following criteria to establish his or her independence:
- Holds not more than 0.01% of the paid-up capital of the company;
- Is not a representative of a shareholder that has the ability to control or significantly influence management;
- Is not, or has not been an employee of the company or group within the last five years;
- Is not a close family member of any of the company’s advisers, directors, senior employees, consultants, auditors, creditors, suppliers, customers or substantial shareholders;
- Does not have, and has not had within the last five years, a material business relationship with the company either directly or indirectly;
- Has not served at directorate level or above at the company’s regulator within the last three years;
- Does not render any professional, consultancy or other advisory services to the company or the group, other than in the capacity of a director;
- Does not receive, and has not received additional remuneration from the company apart from a director’s fee and allowances;
- Does not participate in the company’s share option or a performance-related pay scheme, and is not a member of the company’s pension scheme; and
- Has not served on the Board for more than nine years from the date of his first election.
The Code however clarifies that these criteria are not exhaustive and gives Boards the power to ascertain the continued independence of each INED annually. The Nomination & Governance Committee of an organization is tasked with the responsibility of conducting the annual assessment of an INED’s independence. In addition, a reclassification of an existing NED as an INED on the same Board is prohibited under the Code. Therefore, a NED who meets the independence criteria listed above cannot be reclassified as an INED.
In conclusion, it is important for the Board to provide clarity to an INED on the expectations of his or her role. These expectations can be communicated via an engagement letter or during an induction programme. The Board should also ensure that the appointment process of an INED is transparent and the remuneration of the INED adequate, to avoid compromising the INED’s independence. It is hoped that the implementation of the prescriptions of the Code especially as it relates to INEDs will help to strengthen corporate governance across Nigerian corporate entities.
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