Independent directors are non-executive directors of a company that has no direct link to the executive management, an employee of the company, a major shareholder, supplier, or customer of the company. He is also one who does not have any personal interest or contractual relationship with the company. Section 275 of the Companies and Allied Matters Act 2020 (CAMA) states that a public company should have at least three independent directors. Section 275 (3) goes further to define an independent director as “a director of the company who or whose relatives either separately or together with him or each other, during the two years preceding the time in question was not an employee of the company, did not make or receive from the company payments more than N20,000,000 or own more than 30% share or other ownership interest, directly or indirectly in an entity that made to or received from the company payments or more than the amount stated or act as a partner, director or officer of a partnership or company that made to or received from the company payments of more than such amount”. The appointment of these non-executive directors is highlighted below.
Appointment of Independent Directors
The Securities and Exchange Commission (SEC) produced the Code of Corporate Governance (SEC CODE) to guide public companies in Nigeria on the criteria to be met for the appointment of independent directors. Although the Code is limited to public companies, it also encourages other companies not covered by it to use the principles set out in the Code as a guide in conducting its affairs.
Section 4.3 of the SEC Code provides “that the Board should comprise a mix of executive and non-executive directors, headed by a Chairman. The majority of the Board members should be non-executive directors and that at least one of whom should be an independent director”. He is one who is not a part of the management of the company and who holds no substantial shares of the company. Section 5.5(c) also provides that every public company should have a minimum of one independent director on its board.
Criteria to be appointed as an independent director
According to Section 5.5 of the corporate governance code, the qualifying criteria to be appointed as an independent director are;
- The candidate to be appointed is one whose shareholding directly or indirectly does not exceed more than 0.1% of the paid-up share capital of the company.
- The candidate must not represent a shareholder with the ability to control or significantly influence company management.
- He must not have served in any executive capacity in the company or the group of which it currently forms part for three (3) financial years preceding the appointment.
- The candidate to be appointed must not have any significant relationship or affiliate with the company or group and is free from any business or other relationship which could materially interfere with his/her capacity to act in an independent nature.
- The candidate must not be a significant supplier to or customer of the company or group.
- The independent director to be appointed is not a partner or an executive of the company’s statutory audit firm, internal audit firm, legal or other consulting firms that have the material association of the company and has not been a partner or an executive of any such firm for three financial years preceding his/her appointment.
The power to appoint and remove directors of a company is vested in the hands of the shareholders of the company at the annual general meeting (AGM).
On the appointment of the independent directors, where the independent director is to be appointed in the first instance Section 272 of CAMA provides that the number and names of the first directors shall be determined in writing by the subscribers of the memorandum and articles of association or a majority of them or the directors may be named in the articles.
For the subsequent appointment of independent directors to the Board of directors, Section 273 of CAMA provides that the members at the annual general meeting may re-elect or reject directors and appoint new ones, and in the event of all the directors and shareholders dying, any of the personal representatives can apply to the Court for an order to convene a meeting of all the personal representatives of the shareholders entitled to attend and vote at a general meeting to appoint new directors to manage the company and if they fail to convene a meeting, the creditors if any may do so.
Furthermore, where there is a casual vacancy as a result of death, resignation, retirement, or removal of an independent director, Section 274 of CAMA provides that the Board may appoint new directors to fill up the casual vacancy. Where this occurs, the person to fill the casual vacancy may be approved by the general meeting at the next annual general meeting and if not so approved, he immediately ceases to be a director.
Following the resolution by the shareholders at the annual general meeting or by the Board in filling out casual vacancies, an independent director becomes duly appointed effective from the date of the decision to appoint the same.
Appointment of Independent Directors under the Code of Corporate Governance
Section 13 of the Code of Corporate Governance provides that the Board should have a written defined, formal and transparent procedure for the appointment of the Board of directors and the Board should also ascertain whether nominees for the position are fit and proper and are not disqualified from being directors.
Section 13.4 provides that shareholders of the company should be provided with biographical information of the proposed directors which includes;
- The name, age, qualification, and country of the principal residence.
- Whether the appointment is executive, non-executive, or independent and any proposed specific area of responsibility.
- The current directorship and appointment with statutory or regulatory authorities in the preceding five (5) years.
- Shareholding in the company and its subsidiaries and finally,
- Any real or potential conflict of interest, including whether he is an interlock director.
It is important that companies adhere to the corporate governance principles in ensuring that the independent director appointed by a company is in accordance with the set principles. Independent directors are expected to uphold the interest of the company above any other interests as the position of independence is critical in the evaluation of the performance and management of the Board to ensure good governance.