By Elizabeth Idigbe, Deborah Okpiaifo and Sandra Ifejika

An independent director is a non-executive director with no material or pecuniary connection to the Company, other than approved directors’ remuneration and sitting fees. The concept of an independent director was first introduced in Nigeria in 2003 by the Securities and Exchange Commission’s (SEC) in its Code of Corporate Governance for Public Companies. Other legislations such as the Companies and Allied Matters Act (CAMA) 2020 and Nigerian Code of Corporate Governance (NCCG) 2018 have subsequently adopted the concept.   

The reason for the creation of the INED role is to ensure the presence of directors who are independent and objective, on the Boards of companies, particularly public companies. 

CAMA’s independence requirement, stated in Section 275 (3) is that the director does not have direct or indirect ownership interest exceeding 30% in the company, has not dealt with the company in sums exceeding N20 million and has never been an auditor of the Company. On the other hand, the NCCG has a much stricter independence requirement, which includes that the director – 

• Does not own more than 0.01% of the paid-up share capital 
• Does not represent a shareholder which can significantly influence management 
• Has not been employed by the company or group within the last five years 

• Is not closely related to any of the company’s directors, employees, substantial shareholders, customers, consultants, or other professional partners 
• Has not had a material business relationship with the company in the last five years 
• Has not served at directorate level or above at the company’s regulator within the last three years 
• Does not receive additional remuneration from the company other than standard directors’ fees and sitting allowances 
• Has not served on the Board for more than nine years.  

A comparative study of the two laws will reveal that CAMA’s requirements are very wide, compared to the NCCG’s proverbial ‘eye-of-the-needle’ test. It should be noted that in many companies, persons who hold 30% of shares are regarded as substantial shareholders and are often able to influence management. In addition, there are other INED provisions in CAMA, such as the requirement for nomination of independent directors at public companies by substantial shareholders, which appear to be at odds with the concept’s raison d’être.  

However, it could be argued that this may not be the case as the rationale of CAMA 2020 provisions may be that just picking anyone randomly to be an independent director without any stake in the business may be counterproductive. The other qualifications in the CAMA to a large extent still bestow independence on the director even when he has shareholding or has been nominated by shareholders who hold what could be termed substantial shares. The very important consideration is to ensure that there is clarity as to the expectation of the independent director role on the board and to make it clear that they are expected to work in the ultimate interest of the company. The Company should have policies which would guide the independent director in carrying out their functions. 

This argument can be related to the appointment of the Company Secretary, who is often nominated by the substantial shareholders who often puts the management team in place. Should this reduce the Company Secretary’s duty of independence as the custodian of good Corporate Governance in the company? The answer is no and the same can apply to the Independent director. 

Training of the independent director is key to help in the understanding of their duties and responsibilities. Also, knowing the skill set members of the board possess, in relation to the company’s needs will go a long way to determine whether the independence requirement is being fulfilled.  

International best practices in corporate governance agree on the point that the INED’s independence should be clear. The UK’s Corporate Governance Code 2018 has independence requirements which are very similar to those in the NCCG. The US has not adopted a universal corporate governance code for US companies, but has various provisions in its state and federal laws, regulations, and listing rules. However, the New York Stock Exchange (NYSE) defines an INED in the as one who the board “affirmatively determines” has no “material relationship” with the company “either directly or as a partner, shareholder, or officer of an organization that has a relationship with the company.”  

While there is no gainsaying the fact that where there appears  to be a  conflict of positions, CAMA, being the primary law will prevail. We recommend that courts apply the mischief rule of interpretation when determining issues pertaining to independent directors. This rule requires one to consider the legislator’s intention when interpreting a law and it may not be too far from the position we have proposed above. 

Should you require advice on this subject, please send an email to info@punuka.com