• Saturday, July 13, 2024
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Criteria for director selection and board composition

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The Companies & Allied Matters Act 1990 (CAMA) describes directors as those “duly appointed by the company to direct and manage the business of the Company”. It also lists as ineligible for appointment, a person less than 18 years of age, of unsound mind, an undischarged bankrupt; or who has been disqualified by a High Court from being a director.

While CAMA requires a minimum of two directors, companies are at liberty to have as many directors as they desire. However, some Codes of Corporate Governance prescribe minimum and maximum requirements. The new Central Bank of Nigeria Code of Corporate Governance requires Banks and Discount Houses to have a minimum of 5 and a maximum of 20 Directors. The NAICOM Code of Corporate Governance for Insurance Companies provide for a minimum of 7 and a maximum of 15 Directors.

The Code of Corporate Governance for Pension Fund Operators on the other hand provides that “the Board shall not exceed the size that will allow it to employ simple and effective methods of work to enable each director to feel a personal responsibility and commitment. The Board shall take into cognizance, the scope and nature of the operations of the company”.

The process of nominating and appointing directors must be transparent and guided by clearly defined criteria. It is in the best interest of the Board to ensure that only suitably qualified persons who bring diverse experience, skills and relevant competencies to the Board are appointed as Directors.

It has been argued that the responsibility for appointing Directors is that of shareholders. Whilst this may be so, the Board should be actively involved in the process. Acting through the Board Nomination (Governance) Committee, the Board should define the criteria for appointment, taking cognizance of the competencies required to ensure effectiveness. 

Thus, whilst recognizing the right of a substantial shareholder to nominate Directors to the Board, the Board should have an input in this regard. Defining criteria (reputation, qualification, relevant experience, etc), identifying specific competency gaps on the Board (technical skills, industry credibility, influence, etc) and codifying a diversity policy allow the Board to have a say in the Director Selection process.

It must be noted that no two Boards are identical. Consequently, there cannot be a standard Board composition template. In general, the size of the company, its business, history, growth phase, diversity in terms of professional experience, skills, gender, etc should be taken into consideration when appointing Directors.  To avoid potential conflict of interest situations, individuals involved with similar business should not be appointed to the company’s Board. Ability to devote the requisite time and attention is also an important criterion. Whist multiple Directorships may be an advantage from the perspective of well-rounded and diversified experience, more often than not, Directors who serve on many Boards may not always have enough time to be effective.

Whilst the Securities and Exchange Commission (SEC) and the CBN Codes of Corporate Governance require Boards to have a minimum of 1 and 2 Independent Directors respectively, it is recommended that every Board should have as many Independent Directors as it can accommodate. This becomes even more imperative in closely held companies as it may sometimes be necessary to neutralize the dominance of an overbearing majority shareholder. The number of Non-Executive Directors on the Board should be more than Executive Directors and it is recommended that the Chairmen be an Independent Director – or at least not a substantial shareholder.

Finally, a significant attribute of a would-be Director is integrity. Integrity connotes sound ethical values, transparency, accountability, commitment and courage. Ethical values to set an appropriate “tone at the top”. Transparency and accountability that ensure all actions pass the test of public scrutiny. Enough time and attention committed to making a good job of it and courage to ask the right questions – or to walk away if that becomes necessary.  The performance of a company is largely dependent on the value added by its Board. It is therefore imperative that the Board is composed of the right mix of individuals with the relevant skills, qualifications, relevant business knowledge and above all strong ethical values.

ADEBISi ADEYEMI