Opinion
8 Apr 2015 02:35pm

The public do not understand the role of independent directors

Independent directors are the real custodians of our companies, argues Gerry Brown

RBS, Tesco, Enron, Lehman Brothers, Polly Peck, Northern Rock, Arthur Andersen and SwissAir are all companies that have been the subject of major losses in shareholder value and affected the value of the pension funds of millions of people. Their governance and actions have led to major job losses and, in some cases, the government has spent billions of taxpayers’ money to rescue them. As a result, over the years, various UK special investigations have been conducted, reports issued and a number of codes of conduct developed.

In the US, two pieces of legislation have been passed – Sarbanes Oxley and Dodd Frank. Yet, no matter how many codes are developed or laws passed, it is the behaviour of company leaders that counts. Public understanding and perception of the role and importance of independent directors as the real custodians of our companies remains woefully inadequate.

REAL CUSTODIANS

I try to rectify this lack of understanding and knowledge in my new book The Independent Director. So why do I claim that independent directors (IDs, or non-executive directors in old money) are the real custodians of our companies?

Increasingly they have the majority of seats on the boards of public companies. In the final analysis it is the boards that have the responsibility for the strategy and performance of businesses. They also represent all interested parties, not just the shareholders. This is important since, increasingly via their executive representatives, shareholders have become focused upon short term results and it falls to IDs to have concern about the longer term health and strategic direction of the business.

And the increasing mobility of executive directors (and their understandable natural interest in career progression) requires IDs to retain focus upon high calibre management recruitment and/or the associated management succession.

So the role and function of the ID safeguards and helps responsible management. This isn’t just so in the corporate sector but increasingly on the councils of universities, NHS trusts, charities and NGO boards along with numerous other public bodies. Responsibility for company strategy is foremost for most IDs since this, together with ensuring the strength of the senior team, are the key factors that impact the health of companies.

There are also critical roles to play in helping companies deal with issues of globalisation and risk management as well as overseeing merger and acquisition due diligence (along with hostile approaches from predators). Finally, IDs should be the eyes and ears of companies in addition to bringing best practice, experience and contacts from other sectors and geographies.

CHALLENGING AND DIFFICULT

The job of the ID has become more challenging and difficult. This reflects the growing complexity of the nature of the decisions that boards regularly face.

The impacts of different types of ownership and globalisation require IDs to cultivate legal, political, economic, social and cultural understanding. Emerging countries bring their own challenges. And nowadays most IDs and chairmen are members of the main committee. It is essential that knowledge base is founded upon legislative vigilance while also being contemporary and up to date with those specialist areas. Finally it is necessary to visit the business and meet the employees.

The ID should be truly independent in thought, action and spirit. Often executive directors may be too close to situations. The ID is not there to do the executive director’s job but to challenge and open minds to alternative solutions to business problems. This is particularly necessary in times of adversity. In such times of stress, it may be necessary to bring in specialist advisers – strategy consultants, lawyers, accountancy firms, investment bankers, tax specialists, remuneration consultants, head hunters – to help. The ID needs to have a network of contacts to assist or enhance these needs.

Finally, and of great importance, the ID must spend enough time to really understand the business and the sector and to know and understand board colleagues and the executive team, especially the CEO.


Gerry Brown is author of The Independent Director: The Non-Executive Director’s Guide to Effective Board Presence


 

 

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