Can A Non-Executive Director Become An Independent Director On The Same Board In Nigeria? What The Nigerian Code Of Corporate Governance 2018 Says

Introduction

Companies in Nigeria frequently consider reclassifying an existing Non-Executive Director (NED) as an Independent Non-Executive Director (INED) on the same board. The reasons are often practical: achieving quick compliance with board independence requirements, leveraging the director’s existing knowledge of the company’s business, saving recruitment time and costs, and avoiding the lengthy onboarding process for a complete outsider.

However, this seemingly convenient practice is not as simple as it looks. The Nigerian Code of Corporate Governance, 2018 (NCCG) imposes very strict criteria for independence. Failure to comply fully can expose the company to poor corporate governance ratings, regulatory scrutiny, and reputational harm.

In this article, we examine the distinction between a Non-Executive Director and an Independent Director and analyse what the Nigerian Code of Corporate Governance 2018 really says about such reclassification.

Distinction Between a Non-Executive Director and an Independent Non-Executive Director

According to the Nigerian Code of Corporate Governance, 2018 (NCCG), an Independent Non-Executive Director is a Non-Executive Director who is free from any relationship with the company or its management that could interfere with the exercise of his or her independent judgment. Such a director is required to serve as an effective check and balance on the Board and management.

On the other hand, Non-Executive Directors (NEDs) are important members of the Board who provide objective scrutiny of management proposals and actions. However, they are not subject to the same stringent independence requirements as Independent Directors.

Can a Non-Executive Director Become an Independent Director?

The Nigerian Code of Corporate Governance 2018 (NCCG) expressly states that the reclassification of an existing Non-Executive Director (NED) into an Independent Non-Executive Director (INED) on the same board is not desirable. (See Principle 7.5 of the Code).

While the Code does not impose an outright prohibition, it discourages this practice. The underlying concern is that a sitting Non-Executive Director would, in most cases, have developed close working relationships with the company’s management, fellow directors, or other stakeholders over time. Such relationships may impair, or reasonably appear to impair, the director’s ability to exercise the level of objective and independent judgment required of an INED.

Nevertheless, reclassification is not impossible. Where a company elects to pursue this route, it must undertake a thorough and transparent assessment to ensure full compliance with both the NCCG 2018 and the provisions of the Companies and Allied Matters Act (CAMA) 2020.

Key Factors to Be Considered Before Reclassifying an Independent Director

The Nigerian Code of Corporate Governance, 2018 (NCCG) sets out detailed and stringent criteria that must be satisfied before a person can be appointed or reclassified as an Independent Non-Executive Director (INED). These requirements are designed to ensure that INEDs remain truly independent. The major factors include (Principle 7.2):

• Shareholding Threshold: The proposed INED must not hold more than 0.01% of the company’s paid-up share capital and must not possess any material shareholding in the company.
• Independence from Controlling Shareholders: The proposed INED must not be a representative of, or connected to, any shareholder who has the ability to control or significantly influence the management of the company.
• Employment History (Five-Year Look-Back Period): The proposed INED must not have been an employee of the company within the preceding five years.
• Family Relationships: The proposed INED must not be a close family member of the company’s directors, senior employees, advisers, consultants, auditors, creditors, suppliers, customers, or substantial shareholders.
• Business Relationships: The proposed INED must not have had any material business relationship with the company, whether directly or indirectly, within the preceding five years.
• Regulatory Affiliation: The proposed INED must not have served at directorate level or above in the company’s regulator within the preceding three years.
• Professional and Advisory Services: The proposed INED must not provide any professional, consultancy, or advisory services to the company or its group, except in his or her capacity as a director.
• Remuneration and Benefits: The proposed INED must only receive directors’ fees and allowances. He or she must not participate in the company’s share option schemes, performance-related pay schemes, or pension schemes.
• Tenure: The proposed INED must not have served on the Board for more than nine (9) years from the date of his or her first election.

Separate CAMA 2020 Requirement: Section 275(3) of the Companies and Allied Matters Act (CAMA), 2020 sets out a separate statutory definition of an independent director for public companies. Under this test, the proposed director and his or her close relatives must not, within the two years preceding appointment, have been an employee of the company; must not have made to or received from the company payments exceeding N20,000,000.00; must not own more than 30% of an entity that made or received such payments, or act as a partner, director or officer of such an entity; must not own, directly or indirectly, more than 30% of the company’s shares; and must not have acted as the company’s auditor. This CAMA 2020 test applies alongside and is not a substitute for the NCCG 2018 criteria set out above, and a company relying on reclassification should confirm that the proposed director satisfies both.

Please note that the listed criteria are not exhaustive. The fundamental requirement is that an Independent Non-Executive Director must at all times be free from any relationship or circumstance that may impair, or appear to impair, his or her ability to exercise objective and independent judgment. The Board is required to annually assess and confirm the continued independence of each INED.

Conclusion

In conclusion, while it is possible for a Non-Executive Director to be reclassified as an Independent Non-Executive Director on the same board in Nigeria, the Nigerian Code of Corporate Governance 2018 strongly discourages the practice. The Code’s position reflects the critical importance of ensuring that independent directors remain genuinely free from any relationship that could compromise their objectivity.

Companies considering this option must approach the process with utmost care, conducting a rigorous evaluation against all the independence criteria and ensuring full disclosure to shareholders and regulators where required.