Understanding the Evolving Role of Non-Executive Directors (NEDs) in Corporate Governance

Dear Valued Clients,

We are excited to share with you an in-depth analysis of a pivotal development in corporate governance, arising from the recent landmark case of Odua Investment Company Limited v. Mrs. Bolanle Oguntola CA/IB/469/2022. This case challenges the traditional understanding of Non-Executive Directors (NEDs), with far-reaching implications for corporate governance and the legal landscape surrounding NEDs in Nigeria.

Background: Traditional View of NEDs

Non-Executive Directors have historically played an essential role in providing strategic oversight and independent guidance within companies, without being involved in the daily operations or management. Their independent status is what makes NEDs so valuable to corporate governance, as they are entrusted with responsibilities such as overseeing executive decision-making, ensuring ethical conduct, and enhancing corporate accountability.

The traditional view has been that NEDs are not employees, but rather individuals who offer their expertise and act as external monitors on corporate boards. However, this long-held belief has been significantly challenged in the Odua Investment case, which has now brought into question whether NEDs can, in certain circumstances, be classified as employees and thus subject to employment law protections.

The Case: A Paradigm Shift for NEDs

The case Odua Investment Company Limited v. Mrs. Bolanle Oguntola (Appeal No. CA/IB/469/2022) was heard by the Court of Appeal in Ibadan on 16th July 2024. The key issue before the court was whether the removal of a Non-Executive Director should be treated as an employment matter or remain within the realm of corporate governance.

In this case, the appellant (Odua Investment Company Limited) argued that NEDs are distinctly separate from employees, and their removal is governed by corporate law under the Companies and Allied Matters Act (CAMA). They maintained that disputes related to the removal of NEDs should fall within the jurisdiction of the Federal High Court, based on Section 251(e) of the Constitution, which governs company matters.

Conversely, the respondent (Mrs. Bolanle Oguntola) contended that her appointment as a NED created an employment relationship, meaning her removal should be classified as an employment matter, falling under the jurisdiction of the National Industrial Court of Nigeria (NICN). She argued that her dismissal invoked protections under Section 254C(1) of the Constitution, which deals with labor disputes and employment matters.

Court of Appeal’s Ruling

The Court of Appeal ruled in favor of the respondent, Mrs. Oguntola, in a decision that has significantly blurred the lines between corporate governance and employment law. The court upheld that in certain cases, Non-Executive Directors can indeed be classified as employees and, as such, are entitled to employment law protections.

The key takeaways from the court’s decision include:

• NEDs as Employees: In circumstances where the nature of the relationship between the company and the NED reflects employment characteristics, NEDs can be considered employees, which introduces significant legal implications for both the NEDs and the companies that appoint them.
• NICN’s Jurisdiction: The court ruled that the NICN has the jurisdiction to hear disputes related to the removal of NEDs, effectively challenging the traditional view that such matters fall exclusively under corporate law and the jurisdiction of the Federal High Court.

Implications for Corporate Governance

The decision in this case has profound implications for corporate governance and the management of Non-Executive Directors. Here are the major takeaways for companies:

1. Blurring of Employment and Governance Lines

The distinction between Executive Directors, who are responsible for managing the day-to-day operations of a company, and Non-Executive Directors (NEDs), who focus solely on providing oversight and strategic direction, has been significantly blurred by this ruling. NEDs may now be entitled to employment protections traditionally reserved for regular employees, such as the right to pursue claims for wrongful termination. To avoid this, companies must ensure that NEDs’ letters of appointment clearly and explicitly limit their role to that of a Non-Executive Director, safeguarding their independent status.

2. Legal Precedents and Future Cases

This ruling sets a precedent that may influence future cases related to NED removal, leading to an increased likelihood of employment disputes involving NEDs. It also opens the door for further legal interpretation regarding the role and rights of NEDs under Nigerian law. Boards of companies must now be prepared to navigate this more complex legal landscape.

3. Impact on Corporate Governance Practices

Companies must reassess their corporate governance frameworks, particularly their processes for the appointment and removal of NEDs. It is crucial for companies to review and possibly revise NED contracts to include clear terms that define the nature of the relationship. Doing so will help ensure that companies are not caught off-guard by future employment claims from NEDs.

Additionally, the shift in the jurisdictional debate means that companies will need to be cautious when handling matters involving NEDs, as disputes that were previously confined to corporate governance could now fall under employment law. This could alter how companies perceive the role of NEDs, potentially affecting the independence of NEDs who may now be treated as employees under the law.

What Should Companies Do Next?

Given this ruling’s potential impact on corporate governance and employment law, companies should take proactive measures to avoid future legal complications:

• Review and Revise NED Contracts: Clearly define the terms of appointment and the roles and responsibilities of NEDs. It is crucial that companies address the nature of the relationship with NEDs to avoid disputes about whether NEDs are employees or independent contractors.
• Strengthen Corporate Governance Policies: Companies should ensure their corporate governance policies are robust and capable of addressing the complexities introduced by this case. This includes being mindful of how NEDs are appointed, treated, and, if necessary, removed.
• Monitor Legal Developments: As this ruling sets a significant precedent, it will likely lead to further developments in both corporate and employment law. Companies must stay informed about any changes or additional rulings that may influence their governance practices.

For more guidance on this evolving area of law and to discuss how this ruling may affect your organization, feel free to reach out to us.