Introduction
The Securities and Exchange Commission (“SEC” or the “Commission”) on 19th June 2025, officially prohibited Independent Non-Executive Directors (“INEDs”) from transitioning into Executive Director (“ED”) roles, including Chief Executive Officer (“CEO”) positions, within the same company or group of companies.
In a circular issued to public companies and capital market operators (“CMOs”), titled “Circular to All Public Companies and Capital Market Operators on the Transmutation of Independent Non-Executive Directors and Tenure of Directors” (the “Circular”), the Commission stated that allowing INEDs to take on executive roles undermines board independence and compromises the objectivity essential to effective corporate governance.
This initiative aims to preserve the neutrality of INEDs and strengthen Nigeria’s corporate governance framework. This article explores the rationale behind the SEC’s decision, key provisions of the circular, and its implications for companies and stakeholders.
Understanding the Roles: Independent vs. Executive Directors
To fully appreciate the intent of the SEC’s circular, it’s important to understand the distinction between Independent Non-Executive Directors and Executive Directors.
- Executive Directors (EDs) are full-time employees involved in the daily operations and management of the company. They typically participate in strategic decision-making, operational execution, and high-level negotiations.
- Independent Non-Executive Directors (INEDs), by contrast, are not involved in day-to-day operations. Appointed for their objectivity and external perspective, INEDs provide independent judgment on issues like risk management, internal controls, strategy, and executive compensation.
Why Did the SEC Issue This Circular?
The circular was issued pursuant to Section 355(r)(iv) of the Investments and Securities Act (ISA) 2025. The move was prompted by a growing trend in public companies and CMOs where INEDs were transitioning into executive roles, including CEO and even Chairman positions within the same entities or their corporate groups.
According to the SEC, such transitions create a conflict of interest. They erode the neutrality expected of INEDs, weaken their ability to provide independent oversight, and run contrary to the principles outlined in the National Code of Corporate Governance (NCCG) and the SEC’s Corporate Governance Guidelines (SCGG).
In simple terms, when an INED assumes an executive role within the same company, their prior independence becomes questionable. This undermines the very purpose of having independent directors. By addressing this issue directly, the SEC aims to reinforce sound corporate governance, boost investor confidence, and cultivate a culture of transparency and accountability in company leadership.
Key Highlights of the SEC Circular
The circular outlines three major regulatory provisions that public companies and relevant CMOs must now follow:
- Prohibition on INED-to-Executive Transitions
INEDs are now strictly prohibited from assuming executive positions, including CEO roles, within the same company or within affiliated entities. This rule is intended to maintain the impartiality and independence that INEDs are meant to provide. - Tenure Limits for Directors in High-Impact Entities
The SEC has introduced a cap on how long directors may serve:
- A director may serve for a maximum of 10 consecutive years in a single company.
- Within a group of affiliated companies, total service is capped at 12 consecutive years.
These limits apply to CMOs that the SEC classifies as having significant public interest – typically large, complex entities that could materially impact market integrity or the investing public.
3. Cooling-Off Periods and Chairmanship Restrictions
To limit the undue concentration of power:
- A former CEO or Executive Director must observe a three-year cooling-off period before becoming eligible to serve as Chairman of the same company or any within its group.
- Once appointed, such a Chairman may serve for a maximum of four years.
This provision is designed to prevent “boardroom recycling,” where former executives retain influence through board appointments.
What Does This Mean for Companies and Market Operators?
The circular reflects the SEC’s firm commitment to enhancing corporate governance, protecting investors, and promoting diverse and independent boards.
Companies must now:
- Review current board structures to ensure compliance with the new rules.
- Revise succession plans to avoid non-compliant transitions.
- Avoid reappointing insiders to oversight roles without observing the mandated cooling-off periods.
- Track and document director tenure rigorously going forward.
Conclusion
The era of directors rotating indefinitely through key positions within the same corporate ecosystem is drawing to a close. The SEC has set a new governance standard — one that insists on true independence for INEDs, imposes term limits, and limits the concentration of power within corporate boards.
By embracing these reforms, Nigerian companies can build more resilient institutions, strengthen public trust, and become more competitive in the global marketplace.
