Listed company directors are facing a shake-up on a move by the Capital Markets Authority (CMA) to cap the period one can serve as an independent board member at six years from nine.
The proposed changes, contained in the Capital Markets (Securities) (Public Offers, Listing and Disclosures) Regulations 2023, also seek to set clear parameters on cross directorship to address potential conflicts of interest where individuals sit on boards of multiple related or associated companies.
“Going forward, Regulation 2(1) of the Capital Markets (Securities) (Public Offers, Listing and Disclosures) Regulations 2023 provides that a director shall cease being independent after six years of continuous service,” said the CMA.
Prior to the current code’s implementation in 2016, such directors would serve for unlimited number of years as long as they received support of the shareholders.
Given that the regulator requires that independent directors constitute at least a third of the board, companies will be forced to either retire directors whose six-year terms expire, or add numbers to their board membership to continue accommodating them on redesignation without flouting the rules.
Either option is set to lead to an injection of new blood into boardrooms, in the process diversifying them further in terms of age, expertise and potentially gender.
The new regulations, which are awaiting parliamentary approval, are meant to improve corporate governance among listed firms. They are an overhaul of existing ones that have been in place since 2002 —with periodic updates over the years.
Under current requirements in the CMA’s corporate governance code, independent directors are expected to serve for a term not exceeding nine years —cumulative or consecutive— after which they are redesignated as non-independent, non-executive directors.
Independent board members are normally tapped by companies on account of experience and expertise in their respective fields, a consideration that naturally limits the pool of individuals who fit the bill for such posts.
Companies have in the past argued that finding knowledgeable and experienced directors is a difficult task that has forced them to share the few in the marketplace.
The CMA defines an independent director as one who does not have a material relationship with the company or its majority shareholders and senior management, either through family or business links.
The rules also bar those who have been employed by the company in the last three years from independent director roles.
The independent director should also not hold a material direct or indirect interest in the company or any subsidiaries within the group —with a holding of more than five percent being considered the material threshold.
Further, the CMA stipulates that independent directors ought not to hold cross-directorships or significant links with other directors through involvement in other companies or bodies.
The lack of a firm definition on what constitutes a cross-directorship has however been cited as a problem by issuers since the code was put in place in 2016, since it leaves them at risk of being accused of flouting rules on conflict of interest with some of their board appointments.
“Cross directorship is yet to be defined by the Authority. To enhance clarity, the CMA will engage stakeholders including the issuers to establish clear parameters and define cross directorship in order to prevent potential conflicts of interest thereby upholding the integrity of governance practices,” said the CMA.
The clarity on cross directorships will be welcomed by issuers given that the 2023 regulations review will make it mandatory for firms to observe the code of governance, which previously was seen as voluntary.
“The transition is clear: all principles, guidelines and recommendations outlined in the Code of Corporate Governance Practices for Issuers of Securities to the Public, 2015 will now be enforceable as mandatory requirements,” added the CMA.
Overall, listed firms have recorded an improvement in adherence to corporate governance principles over the last five years.
The 2023 state of corporate governance report published by the CMA last week showed their annual weighted overall score went up to 75.71 percent from 72.27 percent last year.
The annual review covers accountability, risk management and internal control, board operations and control, rights of shareholders, commitment to good governance, transparency and disclosure, ethics and social responsibility and stakeholder relations.
On the metric of board operations and control, the issuers scored 71.64 percent, with the CMA saying that it had identified the redesignation of independent directors and enhanced gender and minorities representation in boards as areas of improvement.