Redefining the Term "Independent Board Member" in Egyptian Non-Banking Financial Companies
On December 27, 2023, the Egyptian Financial Regulatory Authority ("FRA") issued Resolution No. 30 of 2023 ("Resolution 30/2023") amending certain provisions of Resolution No. 20 of 2020 regarding the governance of non-banking financial companies ("Resolution 20/2020"). The most significant amendment introduced by Resolution 30/2023 relates to the definition and criteria for "Independent Board Members" in non-banking financial companies operating under the supervision of the FRA.
Background
Prior to Resolution 30/2023, the definition of an "Independent Board Member" under Resolution 20/2020 was relatively broad and lacked specific quantitative thresholds to determine independence. This led to inconsistencies in the application of independence criteria across non-banking financial companies, including factoring companies, leasing companies, microfinance companies, mortgage finance companies, and companies operating in the capital markets sector.
Key Amendments Introduced by Resolution 30/2023
Resolution 30/2023 has introduced a more precise and stringent definition of an "Independent Board Member" by establishing clear quantitative thresholds and expanding the scope of relationships that would disqualify a person from being considered independent. The key amendments include:
1. Shareholding Threshold
A board member shall not be considered independent if he/she, his/her spouse, or any of his/her minor children directly or indirectly hold shares representing 5% or more of the company's capital or voting rights. This threshold provides a clear quantitative measure to assess independence based on shareholding.
2. Business Relationship Threshold
A board member shall not be considered independent if he/she, his/her spouse, or any of his/her minor children have business dealings with the company that exceed EGP 500,000 annually. This threshold aims to ensure that board members do not have material business relationships that could compromise their independence and objectivity.
3. Employment and Management Relationships
The resolution maintains the prohibition on independence for individuals who:
- Are employees or executives of the company or its subsidiaries;
- Have been employees or executives of the company or its subsidiaries within the preceding three (3) years;
- Are employees or executives of the company's parent company or any entity that holds 25% or more of the company's shares;
- Receive remuneration from the company beyond their board fees (excluding pension benefits).
4. Professional Service Relationships
A board member shall not be considered independent if he/she, his/her spouse, or any of his/her minor children:
- Provide professional services (legal, accounting, consulting, etc.) to the company or its subsidiaries;
- Are partners or employees of a firm that provides professional services to the company or its subsidiaries, where such services exceed EGP 500,000 annually.
5. Family Relationships
The resolution prohibits independence for individuals who have family relationships (up to the second degree of kinship) with:
- The company's chairman, vice chairman, or chief executive officer;
- Any shareholder holding 25% or more of the company's shares;
- Any executive or senior manager of the company.
6. Cross-Directorships
A board member shall not be considered independent if he/she serves as a board member or executive in another company where any of the following persons also serve as board members or executives:
- The company's chairman, vice chairman, or chief executive officer;
- Any shareholder holding 25% or more of the company's shares.
7. Tenure Limitation
To maintain fresh perspectives and prevent entrenchment, a board member shall cease to be considered independent after serving on the board for more than nine (9) consecutive years, regardless of whether such service was continuous or interrupted.
Implementation Timeline
Non-banking financial companies are required to comply with the amended independence criteria within six (6) months from the effective date of Resolution 30/2023 (i.e., by June 27, 2024). Companies must review their current board composition, assess the independence of existing board members against the new criteria, and make necessary adjustments to ensure compliance.
Impact on Corporate Governance
The amendments introduced by Resolution 30/2023 represent a significant enhancement to corporate governance standards in Egypt's non-banking financial sector. By establishing clear, quantitative thresholds and expanding the scope of disqualifying relationships, the FRA aims to:
- Strengthen the independence and objectivity of board members in overseeing management and protecting shareholder interests;
- Enhance transparency and accountability in corporate decision-making;
- Align Egyptian governance standards with international best practices;
- Increase investor confidence in the integrity and effectiveness of corporate governance in non-banking financial companies.
Practical Considerations for Companies
Non-banking financial companies should take the following steps to ensure compliance with Resolution 30/2023:
- Conduct a comprehensive review of current board members' independence status against the new criteria;
- Identify board members who no longer qualify as independent under the amended definition;
- Develop a plan to appoint new independent board members where necessary to maintain the required proportion of independent directors;
- Update corporate governance policies and board charters to reflect the new independence criteria;
- Implement robust disclosure mechanisms to provide transparency regarding board members' independence status;
- Establish ongoing monitoring processes to ensure continued compliance with independence requirements.
Conclusion
Resolution 30/2023 marks an important step forward in strengthening corporate governance in Egypt's non-banking financial sector. The refined definition of "Independent Board Member" with its clear quantitative thresholds and comprehensive disqualifying criteria will enhance board effectiveness, promote accountability, and bolster investor confidence. Non-banking financial companies must act promptly to review their board composition and ensure full compliance with the new requirements by the June 27, 2024 deadline.
Malack El Masry
Partner
(+971) 503977689
[email protected]
Charlotte Jackson
Senior Associate
(+971) 50 9910 387
[email protected]
Source: IN'P Ibrahim & Partners (inp.legal)