SEC prohibits independent directors from becoming CEO

The Securities and Exchange Commission (SEC) has issued a directive prohibiting Independent Non-Executive Directors (INEDs) from transitioning into executive positions, including the role of Chief Executive Officer (CEO), within the same company or affiliated group structure.

In a circular dated June 20, 2025, the Commission addressed all public companies and capital market operators, emphasizing its stance on what it termed the “Transmutation of Independent Non-Executive Directors and Tenure of Directors.”

The regulator argued that allowing INEDs to assume executive positions compromises their neutrality and impairs their capacity for objective oversight, which contradicts the foundational principles of independent directorship.

“This practice clearly erodes the neutrality of the transmuting INEDs, compromises their ability going forward to provide objective judgment and is generally antithetical to the principles which underpin independent directorship as outlined in both the National Code of Corporate Governance (NCCG) as well as the SEC Corporate Governance Guidelines (SCGG),” the circular stated.

As a result, the SEC directed an immediate end to the practice in all public companies and significant public interest capital market operators.

In addition, the Commission introduced a tenure policy that limits the service duration of directors. Under the new rules, directors may serve no more than 10 consecutive years in a single company, and no more than 12 years within the same group structure. A mandatory three-year “cool-off period” is also now required for CEOs and executive directors before they can be considered for appointment as board chairmen.

The new guidelines further restrict the tenure of former CEOs or executive directors who are appointed as chairmen, limiting their service in the role to a maximum of four years.

The SEC cited Section 355(r)(iv) of the Investments and Securities Act (ISA) 2025 as the legal basis for its authority to enforce corporate governance standards for regulated entities.

These directives take effect immediately, with the Commission mandating full compliance. Public companies and capital market operators are instructed to incorporate the new rules into their board appointments and succession planning strategies. The Commission also clarified that any previous years served by affected individuals will count toward the newly established tenure limits.