» Across the pond
with David Anderson
David Anderson is President of the Anderson Governance Group
Barometer of quality
The question of director independence
is likely to be raised.
W
hen a company is in the news
regarding its governance
the question of director
independence is likely to be
raised. Justified or not, the degree of director
independence is often viewed as a barometer of
the overall quality of governance, because many
see it as a necessary (though not sufficient)
condition of fair dealing and an unbiased
assessment of managerial performance.
Director independence is always on the
radar of shareholders, regulators and
exchanges, whether they are based in Canada,
the US or the UK. Directors are feeling the
mounting scrutiny, rising in parallel with public
mistrust of powerful corporations, resentment
of their ‘over-paid’ executives and suspicion
of behind-the-scenes dealing. Once doubt is
raised over the quality and ethics of corporate
decisions, the independence of the board
comes into question.
Independence is so attractive because of the
view that an independent board would be able
18 w w w . c h a r t e r e d s e c r e t a r y. n e t
to function in its oversight and advisory capacity
without reference to management. Independent
thought provided by such a board in reviewing
the work of management may result in better
decision-making that is more in line with the
long-term interests of the company.
Even boards that are considered sufficiently
independent are still suspected to lack
independence of mind. This isn’t aided by the
fact that boards often self-certify as to their
independence. If only directors were entirely
free to exercise judgement, the reasoning goes,
boards would be effective at standing up to
self-interested others. Board performance would
then be improved, board decisions would be
fairer and corporations would be more ethical.
But is this true? While the concept of director
independence is as highly valued in the UK as
it is in North America, approaches to achieving
that end differ in practice.
From a North American point of view,
British boards look a little weak on director
independence, given that about half of directors
are executive directors. That seems a bit at odds
with the other feature of British boards; a clear
separation of chair and chief executive, which
aims to enhance board independence.
From a British point of view, North American
boards might seem in danger of being out-of-
touch, as they tend to favour being composed
almost entirely of independent directors.
While in Canada the board leader is often an
independent chair, as in the UK, board leaders
in the US tend to be of the combined chair and
chief executive variety.
The more ‘pure’ independence model has
the apparent advantage of providing role-clarity
and avoiding potential ‘built-in’ conflicts of
interest because directors don’t have to be
trusted to switch hats from ’management’
to ‘governance’. Using an independence
criterion when selecting directors also provides
management with a board composed of more
non-executive directors, who may bring fresh
insight from outside the industry.
In speaking with shareholders, directors and
executives operating within these models, it
becomes clear that no system has answered
this question to everyone’s satisfaction. I
would offer, though, that informed North
American observers are seeing the very real
benefits of having the inside knowledge of
executive directors around the boardroom
table. Some argue that management’s hand
may be strengthened by a purely independent
board as directors are too removed from the
business and lack the requisite knowledge and
confidence to act with resolve.
However, British boards may do well
to consider the legitimate concerns of
stakeholders and take deliberate action to
reinforce the independence of the board. In
addition, adopting a stakeholder engagement
process is a good way of reaching out to
stakeholders in order to understand their
concerns and communicate how appropriate
board independence is achieved, as well as
how it is balanced with the additional value-
adding capabilities of the board, such as its
skills, experience and knowledge, which all join
together to make it effective.
» About the author
David Anderson MBA PhD ICD.D is the
President of the Anderson Governance
Group based in Toronto. He can be
reached at david.anderson@taggra.com
and +1 (416) 815 1212.