4.3 Definition of an independent board member

in the composition of the NIIF’s six-person board, which has only two government representatives even though the government holds a 49 percent share of the SIF. Nonexecutive directors could be recruited from the public sector, private sector, or academia. For example, all six nonexecutive directors of NSIA are currently from the private sector. However, nonexecutive directors from the private sector or academia nominated and appointed by a public sponsor or government entity are to some extent still beholden to the appointing entity, which could affect their independence. For instance, the

NTMA’s nine-member board, which oversees ISIF, has six nonexecutive directors who are appointed by the Minister for Finance, giving them ties to the government. • Ideally, most of the board should be composed of independent directors.

The function of the board is not to be representative but to be independent in a manner that is in the interest of the owners (Block and Gerstner 2016).

The makeup of the board should put a premium on independent directors, with no ties to the owner(s) or SIF (see box 4.3 for the definition of independent directors). Such directors can bring fresh thinking, specialized industry skills, and openness to debate, which can help guard against board capture by vested interests and can add value to the SIF’s strategic direction (World Bank 2014).

BOX 4.3

Definition of an independent board member

An independent board member, or director, means a person who

• Has not been employed by the company or its related parties, including its major shareholder, in the past five years; • Is not an adviser or consultant to the company or its related parties and is not affiliated with a company that is an adviser or consultant to the company or its related parties; • Is not affiliated with a significant customer or supplier of the company or its related parties, including banks or other financial institutions owned by any of the major shareholders; • Has no personal service contracts with the company, its related parties, or its senior management; • Is not affiliated with a nonprofit organization that receives significant funding from the company or its related parties; • Is not employed as an executive of another company where any of the company’s executives serve on that company’s board of directors; • Is not a member of the immediate family of an individual who is, or has been during the past five years, employed by the company or its related parties as an executive officer; • Is not, nor in the past five years has been, affiliated with or employed by a present or former auditor of the company or of a related party; and • Is not a controlling person of the company (or member of a group of individuals or entities that collectively exercise effective control over the company) or such a person’s close relative, widow, in-law, heir, legatee, and successor of any of the foregoing or the executor.

Related party means, with respect to the company and its major shareholders, any person or entity that controls, is controlled by, or is under common control of the company and its major shareholders.

Source: IFC 2012.