SEC Bans Independent Directors From Becoming Executive Directors

The Securities and Exchange Commission (SEC) has prohibited Independent Directors from transitioning into Executive Director roles within the same company or group.

In a circular to public companies and capital market operators titled “Circular to All Public Companies and Capital Market Operators on the Transmutation of Independent Non-Executive Directors and Tenure of Directors,” the Commission stated that the practice of allowing Independent Directors to assume executive positions undermines the core principle of board independence and weakens the value of having an impartial voice in company governance.

The SEC also introduced a three-year cooling-off period before a Chief Executive Officer (CEO) can be appointed as Chairman of the same company, aimed at strengthening corporate governance and ensuring a clear separation of roles and oversight.

It stated: “The attention of the Securities and Exchange Commission has been drawn to the prevalence in recent times of the rotation of various directorship positions among individuals within the same entity or Group of companies.

“In particular, the Commission observes the worrying trend of the transmutation/conversion of Independent Non-Executive Directors (INEDs) to Executive Directors, including to the position of the Chief Executive Officer.

“This practice clearly erodes the neutrality of the transmuting INEDs, compromises their ability going forward to provide objective judgment and is generally antithetical to the principles which underpin independent directorship as outlined in both the National Code of Corporate Governance (NCCG) as well as the SEC Corporate Governance Guidelines (SCGG)”.

The Commission directed “the discontinuance forthwith of the transmutation of INEDs into Executive Directors within the same company or its Group structure by Public Companies and significant public interest capital market operators”.

The SEC in the circular also streamlined the tenures on CEOs and Board Chairmen, barring CEOs from becoming chairmen directly from their positions.

“In addition, pursuant to its powers under Section 355(r)(iv) of the Investments and Securities Act (ISA) 2025 to prescribe corporate governance standards for regulated entities, the Commission hereby directs that, the tenure of Directors of all Capital Market Operators considered as significant public interest entities, as determined by the Commission, would be limited to 10 consecutive years in the same company and a total of 12 consecutive years within the same group structure.

“Furthermore, a Chief Executive Officer or Executive Director who steps down after 10 or 12 consecutive years, as the case may be, cannot be appointed as Chairman until the expiration of a 3-year “cool off period”. The tenure of such former Chief Executive Officer and Executive Director as Chairman shall be for a maximum of 4 years and no more”.

The Commission added: “The foregoing directives take immediate effect and compliance is mandatory. Public Companies and Capital Market Operators are therefore required to take the directives into account in their board appointments and succession planning.

“Kindly note that years already served by the affected appointees will count towards computing the exit date for the 10 and 12 years’ tenures respectively.”

SEC Bans Independent Directors From Becoming Executive Directors is first published on The Whistler Newspaper