The Nigerian code of corporate governance 2018: Principle 6, non-executive directors

The Nigerian Code of Corporate Governance, 2018 outlines 28 principles intended to foster an improved corporate governance regime in Nigeria. Principle Six of the Code deals with Non-Executive Directors:

“Non-Executive Directors bring to bear their knowledge, expertise and independent judgment on issues of strategy and performance on the Board.”

A Non-Executive Director (NED) is described as a member of a board of directors of a company or organisation, who is not a member of the executive management team. Typically, a NED is not engaged in the day-to-day management of the organization and is appointed from outside the Company.

In practice, NEDs are chosen based on their extensive experience, knowledge and personal qualities. In addition, they may have key contacts and networks that support company performance.

It is imperative that prior to accepting an appointment as a Non-Executive Director, prospective appointees should ensure they have a comprehensive knowledge and understanding of the company, the sector in which it operates and have undertaken their own due diligence.

A Non-Executive Director should satisfy himself/herself that the values of the entity align with his/her personal values and should be mindful of the reputation they have built and nourished over the years.

A Non-Executive Director should be well acquainted with the legal responsibilities of being a company director and the consequences of infractions. These could be as far reaching as personal liability for which the NED could go to jail or be banned from holding the office of a Director.

Many companies would typically organise induction programmes for newly appointed directors to bring them up-to-speed with the Company’s business activities, operations and organizational structure as well as the expectations of their role and the duties and responsibilities of Directors.

In selecting Non-Executive Directors, the Board should be guided by a clearly articulated selection process that incorporates a diversity policy which will ensure that the Board is composed of Directors that bring different skills set, experience and background as well as age, ethnic, gender and geographical diversity.

The selection process which should be transparent and reasonably free of external influence, should be handled by a Board Committee – typically the Nominations (or Governance Committee). The Committee will articulate the selection criteria and periodically evaluate the composition of the Board to identify resource and competency gaps that will guide the appointment of new Directors.

Whilst the Board is collectively responsible for providing entrepreneurial and strategic leadership to the company, Non-Executive Directors are expected to constructively challenge and scrutinise the performance of Management in meeting agreed goals and objectives.

Non-Executive Directors are not expected to be financial experts. It is however imperative that they are able to understand and interpret financial statements, identify trends in financial reporting and ask the right questions.

To ensure they are able to contribute robustly to Board deliberations, it is imperative that they receive relevant information in a timely fashion.

Non-Executive Directors should in this regard not be at the mercy of Management – i.e. not leave the reporting format and content to the discretion of Management. The Board is at liberty to set the reporting framework – the frequency, format and content of Management reporting.

As an external director, a Non-Executive Director may have a clearer and more robust overview of external factors that could impact the company’s performance than the Executive Directors. It is also useful if the Non-Executive Director sits on other Boards as such Directors bring significant relevant experience on board.

The NCCG Code recognises the significant role that Non-Executive Directors play in achieving Board effectiveness and recommends that in determining the requisite number of board members, the board should consider the appropriate mix of Executive, Non-Executive and Independent Non-Executive members such that majority of the Board are Non-Executive Directors.

It is crucial that NEDs bring an objective perspective to the governance of the organisation. This entails remaining independent from (but supportive of) executive management and being able to query proposals brought to the Board.

Non-Executive Directors can maintain their independence and objectivity by ensuring they are not conflicted or compromised. Regardless of the interest they represent on the Board, it is imperative that they always act in the best interest of the Company to whom their fiduciary responsibilities are owed.

Read also: The Nigerian code of corporate governance 2018: Principle 5, executive directors

To sustain the objectivity and independence of NEDs, there should be a clear separation of responsibilities between the leadership of the Board and executive leadership.

In this regard, the NCCG Code recommends that the Chairman of the Board should be a NED and not be involved in the day-to-day operations of the Company. This separation of power allows NEDs to hold Management accountable.

The Board should set clear and measurable performance indicators against which the performance of Management will be evaluated. The Code recommends that Non-Executive Directors should meet periodically without the Executive Directors to enable them discuss issues of concern.

Finally, Non-Executive Director should find the right balance in their working relationship with Management – neither unduly acquiescent nor unduly intrusive. “An over emphasis on monitoring and control risks non-executive directors seeing themselves, and being seen as, an alien policing influence detached from the rest of the Board.

An over emphasis on strategy risks non-executive directors becoming too close to executive management, undermining shareholder confidence in the effectiveness of board governance”- Higgs Review.

On Thursday & Friday, March 17th& 18th 2022, we will be hosting Non – Executive Directors of various Companies at our Board Effectiveness Masterclass themed “Board Effectiveness: A Key Imperative” and will be honoured to have you join us. For registration and enquiries, please contact [email protected]