ASSESSING THE SUITABILITY OF THE CORPORATE GOVERNANCE LEGAL FRAMEWORK OF ETHIOPIAN SHARE COMPANIES TO INTRODUCE THE CONCEPT OF INDEPENDENT DIRECTORS IN ETHIOPIA

Abstract

Currently, the concept of independent director is consistently accepted as an established norm of good corporate governance in most jurisdictions‟ Corporate Governance Codes and has been set as a universal standard in the recommendations of best practices by influential intergovernmental economic organizations (such as OECD, WB, and IMF) and the listing rules of major stock exchanges. These rules require/recommend the majority of independent directors on company boards and establishment of board sub-committees comprised entirely or the majority of independent directors that should lead the process of appointment, removal, and remuneration of executive directors/managers. This study claims that an independent director is a concept whose time should come to Ethiopia. By relying on the best practices of other jurisdictions and strong support in the corporate governance theories, the paper argued that introducing this concept would rectify the inadequacies of the current legal framework to deal with the corporate governance problems of the 21st century. It will also enhance Ethiopia‟s compliance with international corporate governance standards, contributing to its effort to attract foreign investment. Further, companies will hardly compete in the foreign markets for capital unless they introduce independent directors on the board, at it has become a mandatory requirement in the listing rules of major stock exchanges. Hence, the study aimed to assess the current legal framework to answer whether the same is suitable to introduce independent directors in Ethiopian share companies and the need therein. The research has employed a doctrinal methodology and adopted a qualitative approach to data collection, analysis, and interpretation. The study generally found that the current legal framework is far behind the contemporary global standard concerning the concept of independent directors and is also unsuitable for introducing the same. Among the factors that make it unsuitable are: the absence of the underlying foundation that separates executive directors‟ roles from that of non-executive directors; the total prohibition of non-shareholders to become company directors; non-recognition of board sub-committees; the absence of a formal procedure for the appointment and remuneration of directors; and unfettered power of shareholders on the appointment, removal, and remuneration process of directors. Accordingly, the study recommended amendments to the current legal framework to; expressly separate the role of the executive and non-executive directors; allow non-shareholders to join company boards; recognize board sub-committees and require independent directors to comprise the same; reduce the influence of shareholders in the process for appointment, remuneration and removal of directors by requiring such process to be led by the board sub-committees.