Peter Crow
  • Home
  • About
  • Musings
  • Research
  • Contact

Understanding 'independence'

17/5/2019

0 Comments

 
Picture
For years, independence has been held up as a desirable—even necessary—attribute of boards; the moot being that independent directors are a prerequisite if boards are to consider information objectively and make high quality decisions. In practice, the listing rules of most stock exchanges state that at least two directors must satisfy independence criteria, and many directors' institutes promote independence as a desirable attribute.
But does the presence of independent directors actually lead to improved business performance? Notable investor, Warren Buffett, has his doubts.
Buffett took the opportunity at the annual meeting of Berkshire Hathaway, an investment firm, to question the merit of appointing independent directors. He said that many independent directors cow-tow to the chief executive, an assertion that is tantamount to suggesting that the balance of 'power' and 'control' lies with the chief executive not the board. If this is correct, directors are not acting in the best interests of the company (as the law requires). Thus, independence becomes meaningless. 
Buffett's solution is to recommend that directors need to have skin in the game. But if they do, what is their motivation likely be? Will the holding of shares lead to directors becoming more effective?
Long-standing research(*) suggests that, as with other static attributes of boards (board size and the board's  'diversity' quotient are topical examples), 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, HSBC (USA), Mainzeal (New Zealand), Carillion (UK) and CBA (Australia), amongst many others, 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 completely. Independence can be helpful, if directors think critically and  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 (also called ‘diversity of thought’) is hardly a silver bullet. Better to pursue cognitive diversity, to ensure a range of different approaches to tackling problems. Context is crucial too: 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 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, the actions of boards (function) trumps what they look like (form). Emerging research suggests that board effectiveness has three dimensions, namely, the capability of directors (technical expertise, sector knowledge, wisdom, maturity);  what the board does when it meets (determine purpose, strategy and policy, monitor and supervise management, provide an account to shareholders and other stakeholders); and how directors behave (individually and collectively). 
(*) see Larcker & Tayan (2011) Corporate governance matters, for example. 
0 Comments



Leave a Reply.

    Search

    Musings

    Thoughts on corporate governance, strategy and boardcraft; our place in the world; and other topics that catch my attention.

    View my profile on LinkedIn

    Categories

    All
    Accountability
    Artificial Intelligence
    Conferences
    Corporate Governance
    Decision Making
    Director Development
    Diversity
    Effectiveness
    Entrepreneur
    Ethics
    Family Business
    Governance
    Guest Post
    Language
    Leadership
    Management
    Monday Muse
    Performance
    Phd
    Readings
    Research
    Research Update
    Societal Wellbeing
    Speaking Engagements
    Strategy
    Sustainability
    Teaching
    Time Management
    Tough Questions
    Value Creation

    Archives

    April 2025
    March 2025
    January 2025
    December 2024
    November 2024
    October 2024
    September 2024
    August 2024
    July 2024
    May 2024
    April 2024
    March 2024
    February 2024
    January 2024
    December 2023
    November 2023
    October 2023
    September 2023
    August 2023
    July 2023
    June 2023
    May 2023
    April 2023
    March 2023
    February 2023
    January 2023
    December 2022
    November 2022
    October 2022
    September 2022
    August 2022
    July 2022
    June 2022
    May 2022
    April 2022
    March 2022
    February 2022
    December 2021
    November 2021
    July 2021
    June 2021
    March 2021
    February 2021
    September 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    November 2019
    October 2019
    July 2019
    June 2019
    May 2019
    April 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    August 2018
    July 2018
    June 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013
    October 2013
    September 2013
    August 2013
    July 2013
    June 2013
    May 2013
    April 2013
    March 2013
    February 2013
    January 2013
    December 2012
    November 2012
    October 2012
    September 2012
    August 2012
    July 2012
    June 2012
    May 2012
    April 2012
    March 2012

Dr. ​Peter Crow, CMInstD
© Copyright 2001-2025 | Terms of use & privacy
Photo from Colby Stopa
  • Home
  • About
  • Musings
  • Research
  • Contact