Independence cannot be codified through statute or rules, but without rules it’s like ‘survival of the fittest’ for minority shareholders. Like in many countries around the world Sri Lanka also should have better rules to ensure minority shareholders are protected and the capital market develops in a transparent manner with ‘fit and proper’ independent directors contributing to good governance. The following 12 rules used in developed markets may be considered by regulators to ensure listed companies get the composition, selection and nomination of independent directors right.
1) Where the Chairman of the Board is a non-executive director, at least one- third of the board should comprise independent directors and in case of an executive chairman, at least half of the board should be independent.
2) Where a person is an independent director of a business conglomerate (parent company, subsidiary, associate and any affiliate), he may be elected as an independent director to a maximum of five companies of such conglomerate/group.
3) There should be limits to the number of companies that a person may be elected as an independent director (ID). This may vary depending on whether a person is a full time ID or practicing a profession or in employment or business, as well as eyeing an ID.
4) The term of an independent director is limited for five consecutive years, for the same company. Been an independent director for five years for the same company, it is highly possible that the IDs objectivity and loyalty are compromised and the other directors cannot decide that this would not interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
5) After the first 5 year period, an independent director shall become ineligible for election as such in the same company, unless he first undergoes a “cooling off” period of two years. During the “cooling off” period, such person should not engage in any activity that, under any relevant rules, disqualifies him from being elected as independent director.
6) the maximum period an ID may serve the same company be limited to 10 years. However, after serving for 10 years, a person is perpetually barred from serving as an independent director for such company, without prejudice to his being elected as such in other companies outside of the business conglomerate. The perpetual ban aims to encourage companies to appoint new persons to serve as independent directors, thereby allowing for the possibility of introducing new and innovative ideas for the company.
7) A director along with his/her immediate family members who hold more than 5% of the total issued share capital of the company or any affiliate (subsidiary, associate, JV in a group) is not independent.
8) A person may not qualify to be an ID, if he/she or an immediate family member is, or has been within the last three (or two) years, employed as an executive officer of the same company.
9) A person may not qualify to be an ID, if he/she or an immediate family member is, or as been within the last three (or two) years, employed as an executive officer of another company where any of the listed company’s present executive officers at the same time serves or served on that company’s board.
10) A director is not independent if he/she;
➡️ is a current partner or employee of a firm that is the company’s or a group company’s internal or external auditor;
➡️ has an immediate family member who is a current partner of such a firm;
➡️ has an immediate family member who is a current employee of such a firm and personally works on the company’s audit.
➡️ was a partner of the external audit firm within the last two years.
11) A person may not qualify to be an ID, if he/she is a current employee, or an immediate family member is a current executive officer, of a company that has made payments to, or received payments from, the listed company for property or services in an amount which, in any of the last two fiscal years, exceeds the greater of Rs10 million, or 2% of such other company’s consolidated gross revenues. (Limits are random)
12) A director may not qualify to be independent, if he/she has received, or has an immediate family member who has received, during any twelve-month period within the last two years, more than Rs1,200,000/- (random amount) in direct compensation from the company, other than director and committee fees or other compensation for prior service.
A few of the above rules may appear to be similar to the CSE continuing listing requirements or the SEC code, but they’re not. The local rules are diluted to benefit anyone other than minority shareholders.