Ensuring the unbiased performance of independent directors
Corporate governance regulations approved by Saudi Arabia’s Capital Market Authority (CMA) serve as the reference point for businesses operating in the Kingdom.
These regulations define the rights and responsibilities of shareholders and board members and ensure transparency in a company’s overall operations. They also aim to regulate the conduct of a company’s board of directors in dealing with shareholders, employees, and other stakeholders.
We will discuss key features of these regulations about the role of the board of directors in a series of articles. Today’s will focus on independent board members. According to the rules, an independent board member is a nonexecutive member of the board who “enjoys complete independence in his/her position and decisions.”
The CMA regulations say that an independent director shall be able to perform “his duties, express opinions and vote on decisions objectively with no bias.”
Due to the important role of an independent board member, the board of directors is required to annually assess their performance to ensure “there are no relationships or circumstances that affect or may affect his/her independence.”
In its last amendment, the CMA has set certain conditions to evaluate an independent director’s performance. The following conditions, if met, are seen as factors affecting the independence of a board member:
1. If an independent director holds 5 percent or more of the shares of a company or any other company in the same business group; or is a relative of somebody who owns 5 percent or more shares.
2. If he/she is a representative of a legal person who owns 5 percent or more of the company’s shares or any other company in the same group.
3. If he/she is a relative of any board member or senior executive in the company or any sister company.
4. If he/she is a board member of any company within the group of companies for which he/she is nominated to be a board member.
5. If the director worked as an employee during the last two years in the company or with any party dealing with it or another company from its group, such as auditors and major suppliers, or to be the owner of controlling shares with any of those parties in the last two years at the time of nomination.
6. An independent director must not have a direct or indirect interest in the business and contracts that the company makes with other parties.
7. Any interest that enables an independent member to collect money from the company other than the remuneration for members of the board or any of its committees, as well as participating in any activity that would compete with the company, or trading in one of the branches of the company’s activity.
Another important factor that should be assessed annually is an independent director’s duration of association with the board. If a director spends more than nine years, consecutively or not, as part of the company’s board, his independence is called into question.
• Dimah Talal Alsharif is a Saudi legal consultant, head of the health law department at the law firm of Majed Garoub and a member of the International Association of Lawyers. Twitter: @dimah_alsharif