Independent directors are the trustees of good corporate governance. An active and involved board consisting of professional and truly independent directors plays an important role in creating trust between a company and its investors. To be considered independent a director must have no relationship with any firm related to the company nor be a nominee for a shareholder or any other supplier of finance to the company.Being an independent director means not only asking the right questions, including the hard ones but also drill down to the detail if the answers are not satisfactory. However, the director should not cross the line and second guess management.
A board’s fundamental objective is to build long-term sustainable growth in shareholder value, so corporate policies that encourage excessive risk-taking for the sake of short-term increases in share price are inconsistent with sound corporate governance. The independent directors can create an environment in which a culture of performance with integrity can flourish. In the event of a collapse, independent directors cannot defend themselves by saying that they were not consulted. Culture of a company is dependent on the tone at the top. Therefore, any wrong doing generally boomerangs to the top, either that they supported or ignored the redflags.
Certain independent directors spend much time talking of independence of others, specifically auditors, with an attitude of ‘holier than thou’. Let me play devil’s advocate for a moment and present the following case;
If 10 meetings were to be held in a year, and an independent director is paid Rs 100,000 per meeting, he would make a cool 1,000,000 rupees for approx 30 hours of meetings and most of the time this will be more than the audit fees. It raises an unsettling question: could that kind of cash compromise the ‘independence’ of independent directors? If not why would they think that it would compromise the auditor’s independence?
In addition, the independent directors have ‘prior’ or ‘insider’ information about material facts, such as dividends and future plans which could enrich those who are armed with such knowledge. The company boards are obviously the most well-informed. Would this compromise ‘independence’? It could be one reason that more shareholders and others are now jostling for a place on company boards than any time before.
Until the shareholders start challenging the contribution by independent directors, strictly follow up on insider trading and demand better governance, it will be an approach of see no evil, hear no evil and therefore do nothing to compromise your position on the board.