Introduction

Transmutation of directors refers to the change or transition in the role of a director of a company or within a group structure from an executive capacity to a non-executive capacity and vice versa. Directors are appointed to serve as either Executive Directors (EDs) involved in the day-to-day management of the company or as Non-Executive Directors (NEDs) appointed to provide objective strategic guidance to the company and are not involved in the daily affairs of the company.

Within the category of NEDs, is a subset known as Independent Non-Executive Directors (INEDs). INEDs are appointed to bring neutrality to the board and are expected to provide independent and unbiased guidance to the company. They are barred from having any material relationship with the company or its officers to ensure their impartiality.

Balancing the need for transmutation with governance standards

The roles of EDs and NEDs are distinct yet complementary as they both serve to provide leadership to the company. Therefore, transitions between these roles are to be anticipated in a company or within a group structure due to various governance and strategic reasons, such as ensuring leadership continuity, leveraging experience, retention of talent and expertise, maintaining effective oversight, stakeholder representation, and cost management.

While the rationale for the transition may be valid, its implementation should align with established governance principles, particularly those that delineate executive and non-executive roles on the board. Strategic and management needs should not be allowed to override sound governance practices.

The need to ensure a balance between the strategic need for the transition and sound governance practice has led to regulators issuing guidelines on what is considered permissible transition and what is expressly prohibited. Notably, the Nigerian Code of Corporate Governance 2018 (NCCG 2018), the Central Bank of Nigeria (CBN) Guideline for Commercial, Merchant, Non-Interest and Payment Service Banks (CBN Governance Guidelines 2023) and the Securities and Exchange Commission’s (SEC) Circular dated 19th June 2025 explore this issue of the transition between executive and non-executive roles in a company or group structure.

Permissible transmutations

In recognition of the strategic needs for transmutations, the concept of “cooling-off period” in relation to directors’ transition was introduced. Cooling-off period refers to the stipulated time that must elapse before a director appointed in a capacity in a company or group structure can take up a role in another capacity in the same company or group structure.

a. The SEC Circular mandates a 3-year cooling-off period before an ED can be appointed to the Board of a CMO or Public Company as the Chairman. The tenure of such an ED as the Chairman is limited to 4 years.¹

b. The CBN Governance Guidelines 2023 mandates a 2 year cooling period before an ED of a Bank can be appointed as an NED in the same Bank;² before an ED of a Bank can be appointed to the Board of its Financial Holding Company (FHC), in any capacity (excluding as an INED)³ and before an NED of a Bank can be appointed as an ED in the same bank.⁴

Prohibited transmutations

A consistent theme across the NCCG 2018, the CBN Governance Guidelines 2023, and the SEC Circular is the prohibition or discouragement of transmutation involving INEDs, i.e., transition of an INED to a NED or ED and vice versa.

a. The NCCG 2018 discourages the reclassification of an existing NED into an INED on the same board.⁵

b. The CBN Governance Guideline 2023 prohibits an ED or NED from transitioning into an INED in the same bank or group structure and vice versa.⁶

c. The SEC Circular prohibits the transmutation of INEDs of Capital Market Operators and Public Companies to EDs within the same company or group structure.

This position is understood, as the objectivity and independence expected of an INED cannot be retroactively conferred through a change in designation alone. Their independence is not just a label and must be evident from the outset. Any transmutation involving INEDs compromises their ability to provide objective judgment and erodes their neutrality. The SEC Circular describes the practice as a “worrying trend”. In addition, the CBN guidelines prohibit transitions between Executive and Non-Executive roles in a FHC.

Navigating prohibited transmutations

As earlier noted, transmutation of directors may be desired for varying strategic reasons. However, when such transitions are expressly prohibited or limited by regulatory guidelines, companies are faced with a critical issue of what alternatives exist.

Companies may, for a limited period (advisable not exceeding 2 years), consider relying on the exited directors in an unofficial advisory capacity. This would allow the company to seek guidance on specific matters by drawing on the exited directors' institutional knowledge and experience. It must be clearly understood that the exited director would be acting in an informal capacity and the Company is not obligated to act on their advice. Companies should, however, be cautious not to rely on the exited directors' advice for an extended period or they risk creating a shadow director.

Additionally, companies, particularly those with group structures, can hold joint board meetings as this allows sufficient oversight and cross-pollination of ideas, as directors of companies within the group may provide guidance on issues of concern. Joint strategy sessions may also be organized.

Ultimately, Companies should prioritize succession planning as an effective tool in ensuring that they are ready for the retirement or resignation of a director or even sudden exits. Succession planning aids in tenure tracking and ensures that a talent pipeline exists for quick replacements without affecting business operations and governance.

Conclusion

Despite the strategic and management needs for the transition between Executive and Non-Executive roles, it must be subject to good corporate governance. The prohibition placed on transmuting INEDs aligns with the expectation placed on them, and this is recognized across the board. Furthermore, adherence to regulatory guidelines and the principles of transparency and independence ensures that these transitions strengthen governance rather than compromise it, and the company attains its strategic objectives.

1. Securities and Exchange Commission, Circular To All Public Companies And Capital Market Operators On The Transmutation Of Independent Non-Executive Directors And Tenure Of Directors – accessible at https://sec.gov.ng/circular-to-all-public-companies-and-capital-market-operators-on-the-transmutation-of-independent-non-executive-directors-and-tenure-of-directors/
2. Paragraph 7.1, CBN Corporate Governance Guidelines, 2023
3. Paragraph 7.2, CBN Corporate Governance Guidelines, 2023
4. Paragraph 7.4, CBN Corporate Governance Guidelines, 2023
5. Principle 7 NCCG 2018
6. Paragraph 3.5.6, CBN Corporate Governance Guidelines, 2023