Guiding boards. Growing business.

Independent Directors: A necessity or a regulatory tick-box?

In this era of increased focus on diversity on boards, it is important to view having independent directors as a necessity rather than a box to tick.

Their importance is further brought to the fore in shareholder-controlled boards, where they can offer views and positions contrary to shareholders and management. They also ensure that the views and interests of minority shareholders are protected.

Having independent directors on your board can also serve as a safeguard against conflict of interest and ensure that all decisions taken are in the best interest of the company and all stakeholders.

Let’s consider what the Acts and Codes in South Africa and Ghana say about this.

The Position in South Africa

The Companies Act No.71 of 2008 (the “Act”) and the Companies Regulations 2011 do not provide a definition of who an independent director is. There are, however, portions of the Act that allude to the importance of independent directors. Section 94 of the Act provides that public and state-owned companies are required to have an audit committee with at least three directors, who are required to be independent.

The test for independence is that the director must not be involved in the day-to-day management of the company’s business; or should not be a full-time employee of the company or any related companies and should not have been one in the previous three financial years. The person should also not be a material supplier or customer of the company which in the eyes of a reasonable person can impair the independence of the person. Being in a relationship with any such person also precludes one from being an independent director for the purposes of the audit committee.

It is also important to note that the King Report on Corporate Governance for South Africa, 2016 (King IV) provides that a majority of board members must be independent directors. Despite being non-binding, the code has become a yardstick for companies in terms of compliance with corporate governance requirements. King IV in defining independent directors states that it means an absence of interest, position, association, or relationship which, when judged from the perspective of a reasonable and informed third party, is likely to influence unduly or cause bias in decision-making.

The Position in Ghana

The Companies Act, 2019 (Act 992) does not define who an independent director is and provides no guidance as to how many independent directors should be on the board of a company. However, the Corporate Governance Code for Listed Companies, 2020 (the Code) issued by the Securities and Exchange Commission provides that the majority of directors of a listed company shall be non-executive directors, with most of these being independent. It further states that there shall be at least two independent non-executive directors, one of whom may be the chairperson of the board. There is further provision that one of the independent directors shall be responsible for relations with minority shareholders.

The Code also provides a test for who qualifies as an independent director. The requirements include a person who is not a substantial or majority shareholder of the company, has not been a director of the company for more than nine years, is not a significant supplier or customer of the company, and has not been employed by the company in an executive capacity within the last three years, among others. The significance of these requirements is that an otherwise qualified independent director maybe disqualified years down the line based on factors such as longevity on the board and by association with substantial shareholders, executives, suppliers, and other major stakeholders.

Irrespective of where you find yourself, we encourage you to appoint independent directors on your board – directors who:

  • Bring an independent, objective view that challenges current thinking and provides a balancing element between the different shareholders
  • Provides a fresh and innovative perspective
  • Casts a critical eye over the business without preconception or prejudice given that they do not have ties to the business
  • Brings a level of business knowledge and experience in many areas, as well as new skills and knowledge possibly missing within the existing board
  • Potentially adding more discipline and focus to board meetings
  • Serving as an objective judge of disagreements
  • Potentially bringing benefit from their business and other contacts and connections