The Independent Director Who Wasn't
Kola Agro-Allied Plc is listed on the Nigerian Exchange, has a market capitalisation of about N48 billion and a nine-member board. Its only independent non-executive director, Mrs Okafor, resigned last month, citing governance concerns after the board approved a N2.1 billion lease of farmland from a company owned by the chairman's brother-in-law. The annual report, already signed, states that the board has one independent director and that the company applies the Nigerian Code of Corporate Governance 2018 in full. The SEC has now written to the company secretary seeking clarification. The chairman proposes to replace Mrs Okafor with his long-standing legal adviser and to redesignate a former managing director of the company's largest supplier as the independent director. He also wants the resignation letter kept confidential until after the AGM, which is six weeks away. The company secretary must advise the board on independence, disclosure and the regulator's inquiry.
1. Can the two proposed directors be properly described as independent? Set out the process the board should follow and the risks of the chairman's proposal.
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Conclusion: Neither candidate can be presented as independent without a transparent, reasoned board decision, and on the facts both fail the substance test.
Why: Independence is about the absence of material relationships, not the label used in the annual report. A long-standing legal adviser has a professional relationship with the company and the chairman; a former managing director of the largest supplier has a recent commercial relationship. The NCCG 2018 independence criteria generally exclude recent employment, professional advisers, significant suppliers or customers and close family ties. The proposed designations would also contradict the statement that the board already applies the Code in full.
Process: The board should establish or reconstitute a nomination and governance committee of independent-minded directors; agree written independence criteria and a cooling-off period; run a search that considers skills, diversity and shareholder interests; minute the assessment of each candidate; and disclose the criteria and any departure in the next report. The chairman should recuse himself from the nomination discussion. If no genuinely independent candidate is available before the AGM, the honest course is to disclose the vacancy and explain the interim arrangement, not to mislabel a conflicted director.
Risk: The chairman's approach invites SEC or NGX challenge, a qualified compliance statement and loss of credibility with minority shareholders. Independence is tested by substance and by the quality of challenge in the boardroom, not by paperwork.
2. How should the company respond to the SEC letter and handle the resignation letter?
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Immediate response: Acknowledge the SEC letter in writing within the deadline, confirm who is handling the matter and provide a factual chronology. Do not let the chairman's preference for confidentiality become a misleading response.
Substance: The company should disclose the resignation, the related-party lease and the board's assessment. Personal reasons can be protected, but governance concerns that are material to investors cannot be buried. The company secretary should check the NGX listing rules and NCCG 2018 disclosure expectations, prepare a board-approved market announcement if the information is material, and correct the annual report's compliance statement if it is no longer accurate. The board should also table the resignation letter, the related-party papers and the minutes for legal review.
Reasoning: Regulators punish concealment more heavily than the underlying defect. A candid response preserves the chance to remediate through governance changes; a misleading response converts a disclosure issue into an enforcement and credibility issue. Legal privilege can protect advice, not the facts. The board should appoint a senior independent director or the audit committee chair to lead the response and keep the SEC informed of remedial steps. If the resignation letter alleges a breach of duty, the board should consider an independent investigation and notify insurers.
3. What should the board do about the lease and the AGM?
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Conflict management: The chairman must recuse from all discussions and votes on the lease. The remaining directors should obtain an independent valuation, compare it with market rents, and assess whether the transaction is on arm's length terms. If the lease is material, it should be treated as a related-party transaction, disclosed in the annual report and, where the articles or listing rules require, approved by disinterested shareholders.
AGM: The AGM should proceed only with accurate disclosure. The board can explain the vacancy, the interim composition and the remediation plan; it should not use delay simply to manage embarrassment. If the audited accounts or the compliance statement are materially misleading, the board should consider correcting them before the meeting and explaining the correction.
Governance: The board should adopt a written related-party policy, a register of interests and a standing agenda item on conflicts. The company secretary should ensure minutes record recusals. Minority shareholders should have a clear channel to raise concerns. The long-term fix is a credible nomination process and a board that can demonstrate independence in substance, not just in the annual report.