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Redefining the Term “Independent Board Member” in Egyptian Non-Banking Financial Companies

Non-banking financial companies play a crucial role in Egypt’s financial sector, offering a diverse range of financial services beyond traditional banking activities. These entities, regulated by the Egyptian Financial Regulatory Authority (FRA), significantly impact Egypt’s economy. 

To enhance the regulatory framework for non-banking financial companies, the Financial Regulatory Authority (FRA) recently amended their governance regulations through Decree No.178 of 2023. This amendment specifically focuses on redefining the characteristics of the “Independent Board Member.” 

This article analyzes the recent amendment to the governance regulations for non-banking financial companies in Egypt. It compares the old and new definitions of the “Independent Board Member” term and explores its legal implications. 

According to the old definition, an Independent Board Member was nominated based on expertise, holding a non-executive status and refraining from being a shareholder in the company.  

The recent amendment introduces a more comprehensive and detailed definition. 

Under the new definition, the Independent Board Member is a non-executive member with expertise, without any affiliation within the company, executive board members, accounts manager, parent company, or subsidiaries that may compromise  

independence. The amendment provides five specific instances that nullify independence, namely:. 

  1. If the member or any of their relatives up to the second degree is working or has previously worked for the company, its executive management, the parent company, or its subsidiaries within the two years prior to his appointment to the board. 
  2. If the member or any of their relatives up to the second degree has either direct or indirect interest, in contracts with the company or its subsidiaries within the two years prior to his appointment to the board, unless these contracts are the result of a competitive tender or are without preferential conditions. 
  3.  If the member provided consultancy services, worked as an accountment auditor, partner, or employee, or rendered any other services, whether for the company, its parent company, subsidiaries, or affiliates, within the two years prior to his appointment to the board. 
  4. If the member’s ownership, as an individual, alone or in association with his related group, exceeds 1% of the company’s capital or voting rights. 
  5. If the member was an Independent Board Member for six consecutive years, he cannot be renominated in that capacity until three years have passed since the end of his previous board membership. 

   And in all cases, the independence status of a board member is unaffected if he’s also an independent board member in the parent company or one of its subsidiaries, where the parent company holds a share of no less than 51%, provided that minority shareholders of the subsidiary agree. 

The implications of this amendment are profound, enhancing transparency and fairness in nominating independent  

members. It addresses conflicts of interest, providing a clear framework for handling potential conflicts related to employment, personal interests, and ownership shares. 

Moreover, stringent rules regarding familial or relational ties ensure board members maintain independence from insider influence.  

The introduction of an ownership limit of 1% prevents compromising independence, and the restriction on board membership duration promotes diversity and prevents a concentration of power. 

These governance changes signify a commitment to building a strong and adaptable framework, fostering trust, fairness, and sustainability in Egypt’s non-banking financial sector. 

As companies adapt to these governance rules, it is essential for boards and executives to review current structures and practices. Ensuring compliance with updated regulations is crucial for maintaining a transparent corporate governance framework. Thorough assessments of board compositions, identification of potential conflicts, and proactive measures are advised. 

In conclusion, the recent amendment marks a significant shift towards an improved governance structure. The precise definition for Independent Board Members not only addresses gaps in previous provisions but also establishes specific conditions for transparency and accountability. This legal approach is vital for creating a governance structure that instills confidence, encourages innovation, and ensures the enduring legal success of non-banking financial entities.

Authors:

Rokaya Kaddah, Associates

 

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