The ninth principle of the Nigerian Code of Corporate Governance, 2018 provides that “Directors are sometimes required to make decisions of a technical and complex nature that may require independent external expertise.”
Given the increasingly complex nature of the transactions that Directors are required to consider and approve, it is imperative that the Board has access to robust expert advice to ensure it has complete understanding of transactions and the implications for the enterprise to enable them take optimal decisions. Such transactions include financing and investment, business restructuring – mergers and acquisition, business combinations, etc.
The Code recommends that the Board should ensure that Directors, especially non-executive directors (NEDs) – who may not have all the competencies and skill-sets in their midst to grapple with the technicalities of complex transactions – have access to independent professional advice where they consider it necessary to enable them effectively discharge their fiduciary responsibilities.
Such independent professional advice shall be obtained as set out in the Company’s governance policies and at the Company’s expense.
The intention of the Code is clearly to ensure that directors discharge their responsibility to the optimum, notwithstanding their limitation as far as certain transactions are concerned.
Traditionally, Boards would typically consider engaging independent advisers in situations specifically required by law – obvious conflict at Board level or a related party transaction with a Director.
The global trend is to encourage the Board to seek independent advice in relation to a broader range of issues, most notably significant or “transformational” transactions by the Company.
While the Code does not set a standard for what may be deemed a “technical and complex decision”, the definition appears to be subject to the circumstance of each company’s operations as well as the skillset available on the Board.
Alex Bennet in his book, “The Decision-Making Process for Complex Situations in a Complex Environment” describes a complex decision as a choice to be made on a matter having peculiar information with numerous alternatives which all have the potential to trigger an impactful change therefore requiring an increased attention around coordination or specialized expertise before the choice is executed.”
Travers Smith LLP in their paper on “Independent Expert Advice for Non-Executive Directors” provide some useful guidance to NEDs when faced with complex transactions.
Directors should be mindful that if the transaction is subsequently unsuccessful, there are potential liability and reputational issues for the entire Board and not just the executive directors. It is therefore important to ensure that all appropriate steps are taken to minimise this risk of failure.
Where the Company is considering a transaction, which involves some Directors or a Management Buy Out, separate legal and financial advice should always be taken by the other directors – especially the Independent Directors.
If the Company is considering entering into a large, complicated or potentially hostile transaction, NEDs should carefully consider whether they should retain independent advisers to assist them in their consideration of the transaction. This will be particularly relevant where the information is voluminous, the deal complex or the timetable aggressive.
NEDs should make sure that they are provided with all relevant material information which has been produced in relation to the transaction and not a “watered down” summary which simply argues the benefits. NEDs need to be able to fully understand the potential downsides of a transaction (as well as the upsides).
Equally, board packs should be concise enough to be readable and demand-led. NEDs (and their independent advisers) should be given direct access to the company’s legal and financial advisers to enable them to discuss the transaction (and not necessarily in the presence of the executive directors).
It is also imperative that NEDs should make sure that a proper assessment of the risks has been undertaken and properly factored into the terms of the particular transaction.
Where due diligence has been limited, NEDs should understand the material omissions and the risks associated with such omissions. If red flags have been identified during the due diligence process, NEDs should establish whether they have been addressed properly.
The Board will in the normal course of business be required to evaluate proposals, projections and underlying assumptions presented by Management which may require an independent perspective in order to reinforce a potential opportunity or highlight the landmines in what had been presented by Management as a not-to-be-passed opportunity.
Read also: The Nigerian code of corporate governance 2018: Principle 6, non-executive directors
The Code recommends that the Board should ensure that all external consultations are made in compliance with the Company’s governance policies and at the Company’s expense.
This re-emphasises the need for the Board to define appropriate governance policies that align with the Company’s unique business operations and structure.
Generally, individual directors do not have authority to commit the Company to a contract, including one to provide professional advice to the director on matters relating to their role.
Thus, the Company should have a Policy statement regarding seeking independent professional advice which must essentially require the prior approval of the Board, include details of the nature and reasons for seeking the independent professional advice, the nature of fees amongst other details.
It is essential that a Letter of Engagement detailing the Board’s expectations and scope of such engagement is executed. It is good practice that the fee for such engagement is not success based as this could affect the independence of the expert. A fixed fee arrangement is preferable.
To be effective, the Board should ensure that such independent advisers are given direct access to all information and Company resources that will enable them offer the appropriate advice.
The often-significant costs associated with seeking independent expert advice is a major disincentive to going this route. The Board should consider the cost-benefit trade-off when considering seeking external advice.
As Board members act in a collective capacity, trust and confidence are critical to consensus-building in the decision-making process. As such, the exercise of individual right to seek expert professional advice must be sparingly used.
In the event of an allegation of breach of their fiduciary responsibilities of due care and diligence, evidence that Directors sought and relied on independent advises could be marshalled in their defense.
This is not to say that Directors can abdicate their statutory responsibility under the cloak of acting on expert advice. In the case of ASIC Vs Healey (2011) FCA 717, the US Federal Court held that Directors cannot substitute reliance on the advice of Management or external professionals for their own attention and examination of an important matter that falls specifically within the scope of the Board’s responsibilities. Directors are expected to apply an enquiring and unbiased mind to the information before them.
