Dependency of ‘independent’ directors

The very concept of independence of any sort or type is an illusion. There exists no such idealism in reality. Every man and institution is dependent. Even with legal recognition, to think that individuals would act ‘independently’ with no external trappings or considerations is abject foolishness and stupidity. Despite this reality, there are directors on the board who are classified as independent.

Independence is something that has to be claimed. Rarely is it given on a platter, regardless of what official regulations might say. Once claimed, it has to be preserved and protected by a resolute will. Only those who are qualified and skilled will be able to command independence.

Independence cannot be absolute. In most cases, it is defanged by circumstances and the demands of change. Since it is impossible to be fully independent, the least that is expected of the independent director is that he/she will not blatantly bend over backwards to concede to and accept the demands, reasonable or otherwise, of other board members or the management.

All expressions of independence are not meant to be taken seriously. Wild independence can be extremely dangerous. It is something all boards must be aware of and prevent from interfering with the smooth working of the organization. Independence of thought is not meant to create a Frankenstein’s monster who at the drop of a hat starts to behave like a bull in a China shop.

Regulatory frameworks usually demand that only non-executive directors must be appointed and recognized as independent directors. Some jurisdictions ask for the appointment of a senior independent director who is expected to be the go-between the chairman and the board of directors.

In the United Kingdom, it is a requirement that the chairperson must hold regular meetings with the non-executive directors without the presence of the executive directors. Non-executive directors are also required to meet without the presence of the chairperson, with the senior non-executive director taking the lead.

If the process of appointment to the board is tough, it should be even more stringent in relation to the appointment of non-executive independent directors. The board must pay special attention to the principle of ‘conflict of interest’.

It is generally accepted that a stay of more than two terms, not exceeding six years cumulatively, as an ‘independent director’ leads to a gradual loss of independence. Hence, most regulators like the independent directors to be removed and replaced after a tenure of six years or so.

Independent directors are also required to be identified as independent with a prominent disclosure in the annual report of the organization. To be accepted as independent the nominees must meet the test of independence. The board must determine whether the director is independent in character and judgment and that no relationships or circumstances will impact or cloud the views or opinions of the independent directors.

While developed countries do not necessarily specify the certifications required to be a director, in Pakistan directors must have some formal certification to be accepted on the board. There is greater reliance placed on the onboarding methodology and mechanism adopted for newcomers to the board. The chairperson is expected to regularly evaluate the training, learning and development needs of the directors.

In our country, the Pakistan Institute of Corporate Governance and a few other institutions are designated to maintain a data bank of eligible independent directors. The 2017 Companies Act requires that independent directors under any law, regulations or code must be selected from the data bank(s).

In our corporate culture, the selection and appointment of directors or independent directors are not devoid of elements of nepotism and favouritism. Only those known to either the chairperson or the promoters’ families are considered as candidates for the board. In the local corporate corridors, it is not uncommon to hear remarks like: ‘this director is becoming a troublemaker’ or ‘he/she has begun to ask a lot of questions, when is the term expiring?’.

The preference of family-owned and operated businesses is to find complaint directors who would acquiesce to the whims of the chairperson. This approach gives to the boards a court jester who dances to the tunes of the majority of directors.

An important aspect relating to independence is whether the individual being brought in adds to the prestige of the institution or the institution is conferring pride and recognition upon the individual by choosing him/her as a director. This aspect is extremely critical for the maintenance of independence of thought and action.

The internationally accepted cornerstones of independent director codes require upholding the highest ethical standards of integrity and probity. Act objectively and consistently while exercising the assigned tasks/ duties and exercise responsibilities in the interest of the company. One must also devote sufficient time and attention to the professional obligations that lead to making informed and balanced decisions.

Independent directors must be individuals who have the appropriate skills, knowledge, qualifications and experience in the domains of finance, law, general management, sales and marketing, administration and corporate governance, with direct links to the nature of the company’s business.

The success of an independent director is dependent upon how much importance the chairman accords to the views and opinions of the independent directors. The chairperson must, as part of their direct responsibility, provide to the CEO, senior management and other directors unbiased advice, perspective and sound counsel.

The role of an independent director is to be the innovative product developer when it comes to the governance of the company. The major distinction with an ordinary director who works to promote business on behalf of the shareholders is that the independent director has to have no material relationship with the company.

The standards and tests for being ‘independent’ are severe, strict and demanding. In our culture, the maintenance of these is always a tall order.

The writer is a senior banker and a freelance columnist.