For years, independence has been held up as a desirable—even necessary—attribute of boards; the moot being that independence is a prerequisite if boards are to consider information objectively and make high quality decisions. Most stock exchanges, for example, require that at least two directors satisfy independence criteria. Similarly, many directors' promote independence as a desirable attribute.
But does the presence of independent directors lead to improved business performance? Noted investor, Warren Buffet, has his doubts.
Buffett took the opportunity to challenge independent directors at the annual meeting of Berkshire Hathaway, an investment firm. He said many independent directors cow-tow to the chief executive. Such an assertion is tantamount to suggesting that the balance of 'power' and 'control' lies with the chief executive not the board. It also implies that the are not acting in the best interests of the company (as the law requires). In effect, independence is anything but. Buffet's solution is to suggest that directors need to have skin in the game. But if they do, what is their motivation likely be?
Long-standing research(*) suggests that, as with other static attributes of boards (the size of the board and the board's 'diversity' quotient, for example), structural (or, technical) independence per se provides little if any guarantee that board decisions will be of high quality, much less assurance that the board will be effective or that high performance will be sustained. Much storied cases, such as, Mainzeal (New Zealand), Carillion (UK) and CBA (Australia) make the point plain.
If the board's role in value creation is not dependent on structural attributes in any predictable sense, should independence be set aside? Not necessarily. Independence can be helpful, if it means independence of thought; directors who are capable of critical thinking and who exercise both a strategic mindset and wisdom, as they seek to make sense of incomplete data in a dynamic environment. But even this proposal is limited: independence of thought is hardly a silver bullet. Context is crucial. Shareholders and boards must be careful not to fall into the trap of thinking about corporate governance or board effectiveness in deterministic or formulaic terms.
If boards are to have any chance of exerting influence from and beyond the boardroom, directors need to embrace an holistic understanding of how best to work together as they assess information, make decisions and verify whether the desired outcomes of prior decisions are achieved or not. For this, function trumps form. Emerging research suggests that board effectiveness has three dimensions, namely, the capability of directors, what the board does when it meets and how directors behave (individually and collectively).
(*) see Larcker & Tayan (2011) Corporate governance matters, for example.
My intention is to pursue more meaningful exchanges of ideas elsewhere. Challenging problems (how boards influence company performance, for example) need devoted time and space for critical thought and analysis. They cannot be resolved in 140 characters.
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Thoughts on corporate governance, strategy and effective board practice; our place in the world; and, other things that catch my attention.