The general consensus among general groups of shareholders is that independent directors improve the performance of a company through their objective view of the company’s affairs. However, at individual levels and with reference to many companies there is a consensus that independent directors pander to the CEO and other management personnel in order to retain their jobs.
This dichotomy arises from the definition of independent director (ID) and it’s interpretation.
The NYSE states:
“no director qualifies as ‘independent’ unless the board of directors affirmatively determines that the director has ‘no material relationship’ with the listed company, either directly or as a partner, shareholder or officer of an organization that has a relationship with the company.”
Nasdaq’s rules say that an independent director must not be an officer or employee of the company or its subsidiaries or any other individual having a relationship that, in the opinion of the company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
Therefore, it is established that the ID has be from outside the company. But in the local scene they’re employed within a group owned by the major shareholder or promoter, or a close friend, or even auditor or advisor of such a group unrelated through direct share holding. Though some of them are ‘independent’ from a legal standpoint, independence in spirit of the law is lacking. I feel that the following parts if the definitions are ignored:
↗️ ‘no material relationship’
↗️ ‘direct or indirect relationship’
↗️ ‘in the opinion of the company’s board of directors’
↗️ ‘interfere with the exercise of independent judgment’
The lack of ‘true’ independence also stems from the fact that most companies utilize the existing board members’ personal network to appoint independent directors. The nomination committees don’t perform an effective role of finding an outside director with the right skills and attitude. I also recognize, Independence is a state of the mind and depends upon an individual’s ability to challenge and ask the important questions. Therefore, I do not want to conclude that, personal friendships outside the board room will necessarily lead to independence being compromised within the confines of the board room.
Let me also list some myths and truths on this complex matter;
• Company with well known/popular names on its board is better governed.
• There is a severe dearth of good candidates for ID.
• IDs merely focus on examining issues from a compliance angle.
• Appointment of IDs automatically improve governance.
• They are not responsible for whistleblowing.
• A senior/ lead ID will lead to good governance.
• IDs must be part of a diverse group of individuals who can examine issues from diverse perspectives and add value to overall performance.
• IDs are required to demonstrate a high level of integrity and honesty.
• IDs are required to commit sufficient time to discharge board duties.
• Have the ability to challenge and ask the difficult questions.
• Nomination committee should do a ‘fit and proper’ test for all directors.
• Be independent watchdogs serving the interests of all shareholders.
Sometimes an independent director at the helm could potentially lead to tension between the executive and independent directors. An alternative is to appoint a Senior/Lead Independent Director. The Senior/Lead Independent Director leads the group of independent directors and functions as a link between them and the executive directors.
Infosys India Case:
Around 2003, Infosys Technologies appointed a Lead Independent Director representing and acting as a spokesperson for independent directors group. The role of the Lead Independent Director as per the company’s annual report is as given below:
• Presiding over all executive sessions of the board’s independent directors
• Working closely with the Chairman, co-Chairman and CEO to finalize the information flow, meeting agendas and meeting schedules
• Liaising between Chairman, co-Chairman, CEO and independent directors group
• Taking the lead role, along with Chairman and co- Chairman, in the board evaluation process.
In conclusion, independence cannot be codified through statute. IDs should demonstrate their ability to engage in constructive challenge which will result in more transparent and effective decisions that benefit the corporate. They should not just toe the line without constructive challenge to safeguard their position.