Columnists

Independence of board directors key to big picture

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With the explosion of corporate scandals due to mismanagement and fraud in recent years, the regulators all over the world have been implementing a series of policies aimed at improving corporate governance and ensuring that companies follow ethical and normative rules of business.

Part of this initiative has been to goad companies to nominate a certain percentage of their board to persons who are not affiliated to the company.

These are called independent or non-executive directors (NEDs).

The International Finance Corporation identifies the role and purpose of an independent director as to effectively exercise their best judgment for the exclusive benefit of the company.

It is judgment that is not clouded by real or perceived conflicts of interests.

They sit on the boards of companies in a purely professional capacity without having a hand in the day to day running or other activities of the company.

The point about the independent directors is that they are drawn from a pool of professionals who have had wide industry experience.

What makes this process appealing to the regulators is that independent directors have been known to bring in a fresh perspective as well as check the runaway business behaviour dictated by profits and personal benefit.

In many companies in the US, the independent directors are the ones who often thwart the management from taking decisions that are based on personal benefit as opposed to the interests of the shareholders.

Further, independent directors are tasked with investigating cases of corporate malfeasance and unethical behaviour because of their supposed objectivity.

A non-executive director accepts a higher level of liability by virtue of not being involved in day–to-day decisions.

Sometimes, the executive directors are too intimately involved in operations and do not see the big picture.

It takes some persuasion by the NED to get the executive team to broaden their horizons, move out of their comfort zones, expand into new markets and launch new products.

Every board needs directors in this position, as they are motivated by risk management no matter what their background might be.

In order for NEDs to navigate the challenges and sensitivities of this role, they must be independent minded, but also team players.

They must have a breadth of experience, gleaned from various fields.

Companies should pick people to the board guided by the thinking that produces a rich mix for today’s demands and tomorrow’s results.

Board members must possess good communication skills; be passionate about business and have clear, creative and visionary judgment.

Today’s NEDs must be more engaged, more numerate and more technically competent than ever before.

In the words of Jim Leng, former chairman, Corus Group, “the day of the gifted amateur has long gone’’.