Criteria for director selection and board composition

The Companies & Allied Matters Act 1990 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.

Size of the Board

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 have increased the minimum requirements, whilst also capping the number of directors.

Composition of the Board

In the light of corporate governance compliance requirements, the process of nominating and appointing directors must be transparent and guided by clearly defined criteria. Directors owe a fiduciary duty to the company to ensure that only suitably qualified persons are appointed to the Board.

Prior to the spate of corporate failures witnessed in the recent past, corporate governance best practices were not given due priority. In many companies, Board appointments were based on considerations such as “federal character”; personal sentiments and relationships; factional or regional considerations; “influence and connections”; family inheritance; and political reasons amongst others.

In recent times, corporate governance has been put on the front burner with industry regulators like the CBN, NAICOM, PENCOM and SEC requiring companies to formalize the process of appointing Directors and requiring the establishment of Board Nomination (Governance) Committees which are expected to be actively involved in the process. The emerging pattern in the selection process places increasing emphasis on competence, experience, reputation, requisite qualification.

Criteria for Selection of Directors

It must be noted that no two Boards are identical. Consequently, there cannot be a standard Board composition template. In general, certain factors must be taken into consideration when appointing Directors. These include the size of the company, its business, history, growth phase, diversity in terms of professional experience, skills, gender, etc.

It is recommended that every Board should have at least one Independent Director, with an appropriate ratio of Executives to Non-Executives (the Codes prescribe a 40:60 ratio with majority being Non-Executive Directors). Further, as a minimum, Directors should possess adequate financial literacy and relevant industry knowledge. 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.

Finally, a significant attribute of a would-be Director is integrity. Integrity connotes sound ethical values, transparency, commitment, courage, accountability and courage. The performance of a company is largely dependent on the value added by its Board. It is therefore imperative that a Board is composed of the right mix of individuals with the relevant skills, qualifications, relevant business knowledge and above all strong ethical values.

It is useful to carry out a periodic evaluation of the Board to ensure that the process of Director appointment and Board composition continue to comply with the Codes and corporate governance best practice,  

 

BISI ADEYEMI

Adeyemi is Managing Director of Deloitte Corporate Services Limited ([email protected])