Ideas & Debate

Pros and cons of lead independent director

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Managing the human dynamic on any board is challenging. FILE PHOTO | NMG

Winston Churchill aptly said “Difficulties mastered are opportunities won.”

I remembered this during a recent discussion with an old friend about the merits and demerits of having a lead independent director (LID) on a board. The role of the lead independent director evolved in the United States corporate governance practice due to the fact that the role of the chairperson and CEO were typically held by one person resulting in a lack of independent leadership of critical board functions. It is now a recommended board governance practice regardless of whether the chairperson is independent of management or not.

If you have sat on a board or observed board engagements you will know that boards are made up of humans and, subsequently, are prone to the vagaries of human dynamics.

Human dynamics are replete with positive, neutral and negative engagements which burnish the surface of the board’s interrelationships. The positive engagements enhance the board’s own interactions with management, providing rich insights and constructive challenge to management’s performance.

The negative engagements should technically be the building blocks of board maturity as members learn how to resolve conflicts that occur either between themselves or between themselves and management. But they can be very draining and destructive if the board chairperson makes no attempts to quickly draw everyone back together and move forward back into a positive or neutral territory. Consequently whether a board is functional or dysfunctional is corollary to a board chairperson’s personality and leadership ability.

The South African King III Corporate Governance guidelines recognized this and recommend that boards should appoint a LID in situations where the independence of the chair was in question. Since the King Code is an iterative document that takes into account the dynamism and fluidity of corporate governance situations, King IV goes ahead to recommend that the role of the LID should be a permanent role regardless of whether the chair is independent or not. What’s the thinking behind this?

Marion Plouhinec, in a Harvard Law Forum article titled The Role of the Lead Director, describes the LID as a highly versatile intermediary between the chair, the board and the board’s stakeholders. She says that in normal times they contribute to the good relationships and functions of the board, but in periods of stress the LID is expected to assist in facilitating the resolution of any situation.

The LID is an alternative communication channel for board members, which can be especially useful when they have concerns which they believe have not been properly considered by the chair or board as a whole. Marion opines further on why a LID is necessary, writing that the LID must keep a keen eye on whether the chair is still performing their role to the board’s satisfaction without losing objectivity or independence.

They monitor the relationship between the chair and the CEO and ensures that it is a well-functioning working relationship without becoming too close or powerful. The LID also has the key responsibility to lead the performance evaluation of the chair, taking into account even the views of the executive directors.

Back to the earlier conversation with my old friend on the merits and demerits of having a LID on a board. We both agreed that the clear and present danger of having a LID on a board was the potential to create two centers of power (perceived and actual) on the board.

The de jure or legal leadership power is vested in the board chairperson. Creation of a LID role provides an opportunity for the perception of an alternative power to whom independent board members or even executive directors may choose to align to. It would take a supremely confident chairperson to be comfortable with such a potential power dynamic emerging.

My friend then shared that in his experience, they have circumvented this tension by requiring the audit or risk committee of the board to be charged with overseeing and resolving conflicts that may emerge.

The advantage of this approach has been that the role of conflict management is decentralised to a committee, rather than an individual.

While the committee may be chaired by an individual, this individual has the comfort of stating that it was the committee that made a recommendation that might not be popular with the chairperson. The decentralization also allows the committee to take on a stronger role in ensuring governance is effectively applied where the chairperson is not appropriately vested in the same.

Managing the human dynamic on any board is challenging and a role that requires massive interpersonal skills on the part of the chair. But as Winston aptly says, difficulties mastered are opportunities won for creating a functional and highly effective board.