Are current measures of director independence focusing on the wrong things, and should there be a measure of collective board independence? These questions arise from an insightful governance study by Dr Robert Kay and Dr Chris Goldspink of Incept Labs.
The authors’ paper, ‘Rethinking Independence’, was published earlier this year as part of a research series for Governance Leadership Centre.
The paper draws on data collected for the AICD that involved interviews with more than 100 Chairs of Australian listed and private companies, not-for-profit organisations and government authorities. By drawing on qualitative research, the paper adds a useful perspective to academic studies on board independence that are based on quantitative research methods.
The authors said: “These interviews illustrated a significant mismatch between the general commentary on independence and the way Chairs viewed its contribution to both governance and performance.”
Those interviewed strongly favoured the separation of the CEO and Chair roles – a practice favoured in Australia but less so in the United States, where the role of Executive Chairman is more common. One Chair commented: “I think power corrupts, and absolute power corrupts absolutely. So why chance it, when we have a system that can work pretty well?”
Chairs were less forthright in their support for boards that have a majority of independent directors. One said: “The idea that you staff the board with a whole lot of independents, who may or may not know… about the company or its industry, is, I think, a weakness in some of the governance requirements of the day.”
Others were negative on the concept of majority board independence. One commented: “Anyone who calls for a majority of independent directors a board are just idiots.”
The authors said many Chairs saw an important role for independent directors on boards and believed they could add considerable value. But the worth of independent directors was highly contextual.
There were mixed views on director tenure and renewal as it relates to director independence. The ASX Corporate Governance Principles and Recommendations, while recognising the value that long-serving directors offer boards, recommends boards regularly assess whether a director who has served for more than 10 years has become too close to management to be deemed independent.
One Chair commented: “You need a mix of people that have seen the cycles. So you need long-tenured people as well as renewal on boards, and I’m very much against mandatory term limits for directors. I think it’s a matter of having an effective director performance evaluation process that will lead you to move people along if they are no longer able to contribute.”
A strong theme across the study was the need to consider director independence as a state of mind, more so than a structural characteristic of governance. “I think independence is an attitude of mind much more than anything else,” said one Chair.
Download the full report below.