SEC bans independent Directors from becoming Executive Directors

SEC bans independent Directors from becoming Executive Directors

The Securities and Exchange Commission (SEC) has prohibited independent directors from transitioning into executive director roles within the same company or group.

In a circular to public companies and capital market operators titled “Circular to All Public Companies and Capital Market Operators on the Transmutation of Independent Non-Executive Directors and Tenure of Directors”, the Commission stated that the practice of allowing Independent Directors to assume executive positions undermines the core principle of board independence and weakens the value of having an impartial voice in company governance.

The Commission also introduced a three-year cooling-off period before a Chief Executive Officer (CEO) can be appointed as Chairman of the same company, aimed at strengthening corporate governance and ensuring a clear separation of roles and oversight.

It stated: “The attention of the Securities and Exchange Commission has been drawn to the prevalence in recent times of the rotation of various directorship positions among individuals within the same entity or group of companies.

“In particular, the Commission observes the worrying trend of the transmutation/conversion of Independent Non-Executive Directors (INEDs) to Executive Directors, including to the position of the Chief Executive Officer.