CHANGES IN NIGERIAN LAW ON DIRECTORSHIP & CHAIRMANSHIP OF CAPITAL MARKET OPERATORS AND PUBLIC COMPANIES

1. SEC Discontinues Rotation of Directors within Group of Companies

The Securities and Exchange Commission (“SEC” or “Commission”) is empowered by Section 355(1)(r)(iv) of the Investments and Securities Act (ISA) 2025 to prescribe corporate governance standards for regulated entities. The section provides as follows:

355 (1) The Commission shall make rules and regulations for the purpose of giving effect to the provisions of this Act and shall, in particular and without prejudice to the provisions, make rules and regulations which may include the underlisted and other incidental matters …

… (r) without prejudice to the provisions of any law, specifying for the protection of investors, prescribing…

(iv) corporate governance standards for public companies and regulated entities

In line with its supervisory regulation, the Commission recently observed the prevalence of the practice of many groups of companies rotating various directorship positions among individuals within the same entity or group of companies. In particular, the Commission observed the worrying trend of the transmutation/conversion of Independent Non-Executive Directors (INEDs) to Executive Directors, including to the position of the Chief Executive Officer.

In the view of the Commission, this practice clearly erodes the neutrality of the transmuting INEDs, compromises their ability going forward to provide objective judgment and is generally antithetical to the principles which underpin independent directorship as outlined in both the Nigerian Code of Corporate Governance (NCCG) and the SEC Corporate Governance Guidelines (SCGG).

Accordingly, the Commission has now directed the discontinuance forthwith of the transmutation of INEDs into Executive Directors within the same company or its group structure by public companies and significant public interest capital market operators.

Under the Nigerian law, public companies are those whose shares are traded or sold to the public through public offerings. Under Section 21(1) of the Companies and Allied Matters Act (“CAMA”) 2020, public companies are companies other than a private company. Section 22(1) of CAMA states that a company will be treated as a public company unless its memorandum and articles do the following:

1. Restricts the transfer of its shares;
2. Limit the number of members to 50;
3. Prohibit invitation to public to subscribe to the company’s shares.

Also, significant public interest capital market operators refer to capital market participants whose operations have substantial implications for investors and are subject to stricter governance, regulatory and audit requirements as determined by the SEC. Section 24 of the Financial Reporting Council of Nigeria (Amendment) Act, 2023 (the interpretation section) defines public interest entities as follows:

1. Governments and government organizations
2. Listed entities on any recognised exchange in Nigeria
3. Non-listed entities that are regulated
4. Public limited companies
5. Private companies that are holding companies of public or regulated entities
6. Concession entities
7. Privatised entities in which government retains an interest
8. Entities engaged by any tier of government in public works with annual contract sum of N1 billion and above and settled from public funds
9. Licensees of government and
10. All other entities with an annual turnover of N30 billion and above.

Effective immediately, the transmutation/conversion of Independent Non-Executive Directors (INEDs) to Executive Directors, including to the position of the Chief Executive Officer, is now prohibited.

2. What the CAMA 2020, the Nigerian Code of Corporate Governance (NCCG) and the SEC Corporate Governance Guidelines (SCGG) say on Independent Directorship Appointment

Rotational directorship is a mechanism by which directors retire periodically and may offer themselves for re-election or re-appointment at the annual general meeting. According to Section 285(1) CAMA, unless the articles of a company state otherwise, all directors are required to retire from office at the first annual general meeting of a company. And at the annual general meeting of subsequent years, one-third of the directors or the number nearest to one-third shall retire from office. Section 285(2) CAMA further provides that the directors to retire are those who have been the longest in office since their last election.

Rule 12.9 of the Nigerian Code of Corporate Governance provides that the tenure for INEDs should not exceed three (3) terms of three (3) years each. It encourages companies to rotate board members by the periodic appointment of directors in order to encourage fresh perspectives, new ideas and energy.

The above is the complete opposite of transmutation of directorship positions, which refers to the change in the status of a director from one category to another within a company’s board structure or group structure. Under this practice, a person who was formerly an executive director may be converted to become an INED within the same entity or vice versa. Where this happens, the independence and freedom of such a director are tainted. This clearly contradicts the qualifications of an INED under Nigerian law.

Section 275(1) CAMA defines an independent director as one who:

1. Has not been an employee of the company or its group within the last five years
2. Has not had a material business relationship with the company (directly or indirectly) within the last five years
3. Has not been a substantial shareholder
4. Has not been a director in the company’s parent or subsidiary
5. Is not a close family member

The Nigerian Code of Corporate Governance expatiates on CAMA by adding corporate governance best practices which provides the following criteria for an INED:

1. Does not possess a shareholding in the company the value of which is material to the holder such as will impair his independence or in excess of 0.01% of the paid-up capital of the company;
2. Is not a representative of a shareholder that the ability to control or significantly influence Management
3. Is not, or has not been an employee of the company or group within the last five years;
4. Is not close family member of any of the company’s advisers, directors, senior employees, consultants, auditors, creditors, suppliers, customers or substantial shareholders;
5. Does not have and has not had within the last five years, a material business relationship with the company either directly, or as a partner, shareholder, director or senior employee of a body that has or has had such a relationship with the company;
6. Has not served at the directorate level or above at the company’s regulator within the last three years
7. Does not render any professional, consultancy or other advisory services to the company or the group, other than in the capacity of a director;
8. Does not receive, and has not received additional remuneration from the company apart from a director’s fee and allowances, does not participate in the company’s share option or a performance-related pay scheme, and is not a member of the company’s pension scheme;
9. Has not served on the board for more than nine years from the date of his first election.
10. Has not served as an employee or executive of the company or group within the past five years

Guideline 4 (4.2) of the SEC Corporate Governance Guidelines provides the following qualities for an INED

1. Shall not be a partner or an executive of the company’s statutory audit firm, internal audit firm, legal or other consulting firm that has material association with the company.
2. Has not been a partner or an executive of any such firm for three financial years preceding his or her appointment

INEDs play the role of

1. Providing objective oversight
2. Ensuring accountability in the board’s decision-making
3. Strengthening checks and balances on executive management

The above criteria are designed to ensure objectivity, independence of judgment and freedom from conflict of interest in order to sustain stakeholders trust and confidence.

In light of the above, transmutation from an oversight role to an executive management position is a practice that may compromise the objectivity and independence of the director and eventually give rise to a conflict of interest.

3. SEC sets a maximum tenure for directorship in Significant public interest capital market operators.

In order to discourage the improper rotation of directors and executive directors of regulated companies, the Commission has directed that the tenure of directors of all capital market operators considered significant public interest entities, as determined by the Commission, would be limited to 10 consecutive years in the same company and a total of 12 consecutive years within the same group structure.

4. Restriction on the appointment of CEO or Executive Director who seeks to be appointed as Chairman

In addition to the limitation of tenure, the SEC has further imposed a “cool-off period” restriction on a Chief Executive Officer or Executive Director who steps down after 10 or 12 consecutive years, as the case may be. Effective immediately, the affected CEOs and executive directors cannot be appointed as chairman until the expiration of a 3-year “cool-off period”. The tenure of such a former Chief Executive Officer and Executive Director as Chairman shall be for a maximum of 4 years and no more.

It is important for all regulated companies to review their board composition in order to comply immediately with the new directives.

Source: Koriatlaw