Independent Directors: Myth Or Reality
By
Hakeem Ogunniran, LL.M, MBA, FCIS Immediate Past President, ICSAN 2009 Annual Conference

Outline
• Corporate Governance Challenge
o Governance Imperative – OECD Principles.
o Board Independence
• Independent Directors
o Definition
o Standards of Independence
o Comparative Perspectives
 United Kingdom, USA, European Model, India, etc
• Nigeria – A Tale of Four Codes!
• Independent Directors – Myth or Reality?
• Closing Thoughts
Corporate Governance Challenge
• The Agency Problem – Trade off between authority and accountability.
o Authority and Responsibility Models
• Variety of stakes in the modern corporation – beyond the stake of the legal equity holders.
• Significant diversification of equity capital – further widening the gap between shareholders and managers.
• Rise and dominance of institutional investors – and other ‘professional’ investors
Governance Imperative – OECD Principles
• Protecting and Facilitating shareholders' rights
• Equitable treatment of all shareholders; including minority and foreign shareholder.
• Disclosure and transparency – accurate information on financials, performance, ownership and governance;
• Recognising the rights of stakeholders established by law or mutual contract;
• Board Management and Structure
o Key Roles and Functions
o Ability to exercise independent decision
o Number, Roles and Function of Independent directors.
Corporate Governance: Board Independence
• Composition and Structure
o Number, Quality, Qualifications
• Non-Executive Directors
• Separation of the Roles of Chairman/Chief Executive
• Rigorous Selection Process
• Strict Rules on Board Committees
• Family and Interlocking Directorships
• Independent Directors

Who is an Independent Director?
• Definition and standards vary from one jurisdiction to the other.
• Several parameters for determining what constitutes ‘independence’.
• A general definition is
o ‘A non-executive director who hold no posts other the position of a director, and who has no professional, familial or financial relationship with the company or its major shareholder which may prevent him from making objective judgements independently’
Standards of Independence
• Independence of Qualification.
o Independent Directors should have a separate personality and possess some special qualifications
 Legal and administrative requirements on the qualifications to become the director of a listed company.
 Basic knowledge on the operation of listed company laws, administrative regulations, bye-laws, and rules
• Independence of Legal Status.
o Independence is in consonance with legal and/or administrative regulations.
o No relationship with the company, managers, major shareholders which may affect his independent and objective participation in decision making.

Standards of Independence
• Independence of Declaration of Will
o Not representing any shareholders’ interest or have any business relationship or material relationship with the company.
o Must exercise independent declaration of will upon the board’s decision on matters such as strategy, performance measurement, remuneration, standards of appointment, removal, etc.
Comparative Perspectives
• United Kingdom - Higg’s Definition
o A non-executive director is considered independent when the Board determines that the director is independent in character and judgement and there are no relationships or circumstances which could affect, or appear to affect, the director’s judgement’
o Both Higg’s Report and the combined Code consider the independent directors essential for protecting minority shareholders and significant to the firm’s decision-making process.
o Both recommend that half of the Board, excluding the Chairman should be independent.
Comparative Perspectives
• United States – NYSE Rules
o Director or immediate family member:
 Not to be an executive of the company receiving $100000
 Not affiliated in any professional capacity
 Not to be one who or whose immediate family members work on another company where the executives of the company serve on the compensation committee
o Director or his immediate family member is an executive officer of a company involved in substantial dealings with the firm – i.e. More than $1 million or 2% of the firm’s consolidate 3 years revenues.
o Family is defined to include spouse, parents, children, in-laws, and anyone(other than domestic employees) who share such person’s home.
Comparative Perspectives
• European Union.
o Recommendations of the Commission of the European Communities to member States. (see also The EU Company Law Action Plan – 15/2/08.
o Definition of ‘independence’ should be based on at least the following situations
 Not to be an executive or managing director of the company or an associated company within the last five years.
 Not to be an employee of the company or an associated company within the last three years.
 Not to receive or having received significant additional remuneration from the company apart from fees received as non-executive or supervisory director.
 within the last three years.
European Union.....
 Not to be or represent in anyway the controlling shareholders
 Not to have or have had, significant business relationship with the company or a related company.
 Not an employee or partner of the firm’s present or former external auditors

Comparative Perspectives
• India – Clause 49 of Listing Agreement.
• A non-executive director who:
o Has no material pecuniary relationships or transactions with the company apart from receiving director’s compensation
o Is not related to promoters or management at the board level or at one level below the board
o Is not a partner or an executive of a statutory audit legal or consulting firms associated with company in the last three years.
o Is not a supplier , service provider or customer of the company – including lessor/lessee type relationships.
o Is not a substantial shareholder of the company – i.e owning 2% or more of the company’s voting shares.
Nigeria – A Tale of Four Codes
• Code of Corporate Governance For Banks in Nigeria Post Consolidation –Section 4.0. and 5.0
o The number of non-executive directors should exceed that of executive directors subject to a maximum of 20.
o At least two non executive board members should be independent directors who, though appointed by the bank, shall be accountable to the shareholders and the CBN.
o No clear-cut definition on what constitutes ‘independence’.

Nigeria – A Tale of Four Codes
• NAICOM Code of Good Corporate Governance for the Insurance Industry – Section 5.04(ii –iv)
o Membership of the Board shall include at least one Independent Director - who shall not represent any shareholding interest nor hold any business interest.
o The independent Director shall be appointed by the Board to be ratified by the Annual General meeting(AGM) for a period to be determined at the AGM.
o The Independent Director is critical in the evaluation of the board and management; mediate where the interests of the company, mgmt and shareholders may diverge – such as executive remuneration, changes in corporate control, large acquisition and audit function.
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• Code of Corporate Governance For Licensed Pension Operators – June 2008.
o The number of non executive directors (excluding the Chairman) shall at all times equate the number of executive members, if applicable.
o Each Board shall have at least one Independent Director
o An independent Director shall be one who has no relationship with the company, its related companies(i.e.subsidiary, associate or parent) or officers that could interfere, or be reasonably be perceived to interfere with the exercise of his independent business judgement, which is in the best interests of the company.
Code of Corporate Governance For Licensed Pension Operators – June 2008
• A director shall not be considered to be independent based on the following factors
o Employment for any form of service with the company for the current or any of the last three financial years.
o Employment of his immediate family member – spouse, child, adopted child, step-child, brother, sister and parent) within the last three years,
o Accepting any compensation from the company or any of its related companies other than compensation for Board service within the last three years.
o Substantial shareholder or partner (5% equity or more) o r executive officer of any profit making organisation to which the company made or received substantial payments within the last three years.
• NB In spite of the existence of any of these situations, the PFA/PFC shall disclose to PENCOM if it wishes to consider the director as independent.

Nigeria – A Tale of Four Codes
•
• SEC Draft Code of Corporate Governance – 2009
o An independent director is a non-executive director who:
o Is not a substantial shareholder of the company, that is one whose shareholding, directly or indirectly, does not exceed 0.1% of the company’s paid up capital;
o Is not a representative of a shareholder that has the ability to control or significantly influence management;
o Has not been employed by the company or the group of which it currently forms part, or has served in any executive capacity in the company or group for the preceding three financial years;
SEC Draft Code of Corporate Governance – 2009
o Is not a member of the immediate family of an individual who is, or has been in any of the past three financial years, employed by the company or the group in an executive capacity;
o Is not a professional advisor to the company or the group, other than in a capacity of a director;
o Is not a significant supplier to or customer of the company or group;
o Has no significant contractual relationship 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 independent manner ;

o Is not a partner or an executive of the company’s statutory audit firm, internal audit-firm or other consulting firm that have material association with the company and has not been a partner or an executive of any such firm for three financial years preceding his/her appointment.
o An independent director should be free of any relationship with the company or its management that may impair, or appear to impair, the director's ability to make independent judgements.
o Every public company should have a minimum of one independent director on its Board.
Independent Directors – Myth Or Reality?

• Key Issues
o No statutory recognition – Company Law does not recognise degrees of Directors. Equal obligation on ALL directors to act in the best interest of the company. (S. 279(6) of CAMA).
o Achieving Board independence through independent directors’ ability to exercise objective judgement in corporate matters – is a mirage’
o Implementation of the rules on independence directors is questionable – Reactive and not Proactive
o Largely compliance-orientation. Driven by regulation and compliance mentality.
Independent Directors – Myth Or Reality?
• Lack of ‘independence’ in the office of independent directors.
o Faulty appointment – Still by the Board and ratified the AGM – Appointed from impartial source.
o Compounded by lack of knowledge, lack of time, information and no personal motivation.
• Independent Directors are expected to protect minority shareholders – Diminish the perceived independence of independent directors.
• Exclusion of ex-executives – Throwing away valuable experience?
Independent Directors – Myth Or Reality?
• Reality of Independent Directors
o Global consensus that independence is crucial to ensuring effective boards that can provide oversight on management performance.
o Although no statutory requirement for independent directors in most jurisdictions, they’re provided by Codes of Corporate Governance made by statutorily empowered Regulators and Authorities.
o Notion of ‘independence’ somewhat consistent the legal and fiduciary obligations of directors.

Independent Directors – Myth Or Reality?
• Independent directors occupy a unique position in the governance of a company, its board and management.
o He is able to exercise objective judgement on corporate matters independently.
o He plays a neutral role in critical areas where the interest of the management, the company and shareholders may conflict.
o Other Roles of independent directors include : participating in strategy formulation, management oversight, protecting shareholders’ rights.

CLOSING THOUGHTS
• There are some valid arguments in support of the view that Independent director is a myth.
• However, it is hardly open to question that, properly implemented, the independent directorship framework may add significant value to corporate management.

LASTLINE!
• To be a good independent director:
o “Non-executive directors need to be sound in judgement and to have an inquiring mind. They should question intelligently, debate constructively, challenge rigorously and decide dispassionately. And they should listen sensitively to the views to the views of others, inside and outside the board”.
o Derek Higgs (2003)