…introduces cooling-off period for CEOs transitioning to chairmanship

The Securities and Exchange Commission (SEC) has taken a firm stance on corporate governance by barring independent directors from transitioning into executive director positions within the same company or group.

This move is aimed at preserving the principle of board independence, which the commission believes is compromised when directors shift from an independent role to one that is executive in nature.

In a circular addressed 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 SEC noted that allowing independent directors to assume executive roles undermines the credibility and objectivity expected of such positions.

According to the commission, this practice diminishes the value of having an impartial voice on corporate boards and conflicts with both the National Code of Corporate Governance and the SEC’s own Corporate Governance Guidelines.

The circular further highlighted a rising trend in the rotation of directorship roles among individuals within the same company or corporate group.

Of particular concern to the SEC is the conversion of independent non-executive directors into executive directors, including appointments as Chief Executive Officers (CEOs).

The commission emphasised that such conversions erode the neutrality of the affected individuals and compromise their ability to offer objective judgment, which is the essence of independent directorship.

As part of its directive, the SEC has ordered the immediate discontinuation of the practice, warning all public companies and capital market operators with significant public interest to comply without delay.

Additionally, the SEC introduced a significant policy shift concerning the movement of CEOs into board chairmanship roles.

A cooling-off period of three years is now required before a CEO or executive director who steps down after serving for 10 or 12 consecutive years, depending on whether the tenure is within the same company or group can be appointed as chairman.

When such individuals eventually assume the role of chairman, their tenure in that capacity will be capped at four years.

In its explanation, the commission cited its authority under Section 355(r)(iv) of the Investments and Securities Act (ISA) 2025 to set corporate governance standards.

It announced that directors of capital market operators classified as significant public interest entities will now be limited to a maximum of 10 consecutive years of service within the same company and 12 years within the same group.

Any prior years of service will count toward these limits, and the calculation of exit dates will begin immediately.

The SEC stressed that these directives are effective immediately and must be reflected in all board appointments and succession planning efforts going forward.