THE CONCEPT OF THE INDEPENDENT ADMINISTRATOR
I. Concept of the Independent Administrator
The concept of the independent director originated in the USA, with the first recommendations on corporate governance issued by the Securities and Exchange Commission (SEC) in 1940.
It was not until 1978 that US regulations required listed companies to set up audit committees composed exclusively of independent directors.
This concept was also popularised in Great Britain in the 1990s, before being followed in France in 1995 with the first Vienot(1) report on corporate governance.
In Africa, the sub-regional regulators were not on the sidelines in promoting this concept, which became compulsory for financial institutions in CEMAC (Central African Economic and Monetary Community) member countries under Regulation 408 signed on 06 October 2008.
In Tunisia, the question of the Independent Director finds its legislative framework in the provisions of Law n°2016-48 of 11 July 2016 relating to Banks and Financial Establishments, in particular articles 47 and 60, as well as the conditions required by BCT Circular n°2021-05 relating to the definition of a governance framework for Banks and Financial Establishments, in particular articles 20, 23, 24 and 25, and CMF General Decision no. 23 of 10 March 2020 relating to the criteria and procedures for appointing independent members to the Board of Directors and the Supervisory Board and the representative of minority shareholders, in particular articles 2, 3, 4 and 5.
However, this concept has not been addressed by the Commercial Companies Code, Articles 189 to 223 of which deal in great depth with the conditions of appointment, remuneration and responsibilities of directors of public limited companies, without mentioning independent directors.
II. Qualifications of an Independent Administrator
1. Formal criteria - the case of Tunisia
In addition to the conditions of good repute, integrity, impartiality, honesty, confidentiality, competence and experience appropriate to their duties, candidates for the position of independent member of the Board of Directors of a bank or financial institution in Tunisia must satisfy a number of requirements, including but not limited to the following:
- Be a natural person and enjoy his/her civil rights;
- Not have, at the date of the application for the position of Independent Director, any direct or indirect interest with the company concerned, one of its shareholders or directors, or a third party likely to affect the independence of his decision and the confidentiality of information or to place him in a situation of real or potential conflict of interest;
- Not to be, or to have been during the five (5) years preceding the submission of the application, Chairman and Chief Executive Officer, Chief Executive Officer, Deputy Chief Executive Officer, Chairman of the Executive Board, Sole Chief Executive Officer, or an employee of the company in question or of a company belonging to the same group as the company in question;
- Not be an ascendant or descendant or spouse of the Chairman and Chief Executive Officer, Chief Executive Officer, Deputy Chief Executive Officer, Chairman of the Management Board or employee of the company concerned by his application or of a company belonging to the same group as the company concerned by his application.
- Not be a service provider, in particular an advisor, customer, supplier or employee of the company concerned.
- At least a Master’s degree (or equivalent) and at least 5 years’ professional experience in the financial sector, particularly in risk assessment and internal audit.
It is clear that the above-mentioned criteria drawn from Tunisian regulations remain valid in many other countries, as they obey in their entirety the obvious rules for reinforcing the notion of independence.
2. The profile of the independent administrator
The emphasis placed on the formal criteria mentioned above should not conceal other fundamental imperatives, such as professional skills and behavioural aspects.
The independent director must have the capacity to adapt and assimilate that enables him or her to focus easily in the exercise of his or her function on the specific skills for which he or she has been chosen. If the director’s field of experience is far removed from that of the company, he or she should acquire knowledge of the company’s activities as quickly as possible.
The Independent Administrator must therefore in particular:
- Be familiar with the workings of the Board of Directors and the company’s rules of governance.
- Get to know the business sector in which the company operates, so as to become familiar with the specific issues it faces.
- Develop your skills in the areas where they will be most in demand thanks to the possibility of following training programmes (now an obligation under BCT Circular 2021-05).
- Bringing in professional or personal experience that provides an outside perspective that is useful to the company: the fact that the director is from outside the company should enable the Board of Directors to benefit from greater intellectual openness.
- Be able to devote all the time necessary to the performance of his duties and not have executive responsibilities in other companies that are too demanding, especially when the independent director is required to take part in the work of the Board’s specialised committees.
III. Independent Administrator and performance
The Basel Committee stresses that the board of directors must be able to carry out its duties and that its composition must allow for effective oversight. To this end, the board must include a sufficient number of independent directors (BIS Report July 2015 -point 47).
Furthermore, although studies dealing with the impact of the degree of independence of the board of directors on the performance of banks are not abundant , some reports and studies can be cited :
According to Charreaux and Pito l-Be lin (1991)(2), independent directors have complete freedom in their decision-making. His independence enables him to provide appropriate responses to problems of conflicts of interest that may exist between directors and shareholders.
In a study on the impact of the board of directors on the financial performance of Tunisian companies, Professors Bouaziz Zied and Triki Mohamed found that the independence of the board had a greater or lesser impact on the financial performance of companies, measured by the ROE and ROA ratios and Tobin’s Q (extract):
‘The Board of Directors plays an essential role as an internal governance mechanism in companies. In fact, its effectiveness depends on the presence of several factors, the most important of which are related to the characteristics that essentially concern the independence of its members, the size of the board, the combination of decision-making and control functions, the degree of independence of the audit committee and the gender diversity of the board. To test the validity of our hypothesis, which stipulates the existence of a deterministic board characteristic on financial performance measured by three different ratios, namely ROA(3) , ROE(4) and Tobin’s Q(5), we developed three linear regression models. Our empirical validation was conducted on a sample of 26 companies listed on the Tunis Stock Exchange (Bourse des Valeurs Mobilières de Tunis) over a four-year period (2007-2010). The estimated models show satisfactory results, demonstrating the importance of the impact of board characteristics on the financial performance of Tunisian companies.
The findings mentioned above are confirmed by a study carried out on a sample of 69 European banks spread over several countries (Germany, the United Kingdom, Spain, France and Italy) over the period 1996-2005, in which Busta (2008) observed that banks with a strong presence of independent directors had a better performance measured by the Tobin Q, the ROA and the ROIC (Return on Invested Capital).
These findings converge with those of Cornett et al (2009) who observed a positive impact of independent members on bank performance expressed by the return on assets (ROA), due to increased supervision of managers.
Thus, on the basis of the literature, we can conclude that the higher the level of independence, the more the board of directors allows its members to take moderate decisions and adopt strategies that influence the company’s performance.
In Tunisia, the legislator has not set an upper limit, but has required a minimum of two independent directors. Banks and financial institutions are therefore called upon to strengthen the independence of their Boards in order to improve good governance and even better financial performance.
IV. Legal Status of Independent Administrator
It was noted in the first paragraph that the Code of Commercial Companies (CSC), which constitutes the most favorable and authoritative legal framework for corporate governance in Tunisia, has not dealt with or even referred to the concept of the independent director. The essential legal question is whether this ‘independent director’ can derogate from the status of the director of public limited companies as defined by the CSC. In other words, can independent directors constitute a legal category of directors? Is it legally justified to differentiate between traditional directors and independent directors and thus establish a categorization?
In other words, can so-called independent directors have specific regulations, legal status and powers that differentiate them from traditional directors? Can they be specifically designated and have rights or obligations that conventional directors would not have?
(1) In France, the Vienot Report (Marc Vienot, Chairman of Société Générale) is one of the reports that makes recommendations on corporate governance. This report is a code of good conduct and not a legally binding text.
(2) Gérard Charreaux: Université de Bourgogne | UB – Institut d’administration des entreprises Doctorat d’Etat en Sciences de Gestion
(3) ROE: Return on Equity,
(4) ROA: Return on Assets,
(5) Tobin’s Q = Market Value of Assets/Replacement Cost of Assets