The Role of Independent Directors

In order to comply with relevant codes of corporate governance, most public organizations have the token independent director on the board. What is the role and significance of the independent director? Whose interests do independent directors protect and are independent directors truly independent?

First a definition, an independent director is one who is brought in from outside the company and does not have pecuniary interest in the organization. The Central Bank of Nigeria defines an independent director as “ a director who has no direct material relationship with the bank or any of its officers, major shareholders, subsidiaries and affiliates; a relationship which may impair the director’s ability to make independent judgments or compromise the director’s objectivity in line with Corporate Governance best practices ”.
The SEC code of corporate governance stipulates that an independent director should be free of any relationship with the company or its management that may impair, or appear to impair, the director’s ability to make independent judgments. A test of independence would also include whether or not family members or related businesses are employers or suppliers of the organization in question.

Independence connotes freedom from conflicts of interest, a personal characteristic of confidence and an ability to question the obvious. Given that companies appoint their independent directors, can any director really be independent? . In Nigeria, it is commonplace to see independent directors selected strictly to add to the glamour content or political clout of a company. This is wrong! Appointing independent directors should not merely be a matter of compliance but should be a strategic move to increase the oversight capability of a board. To guard against senior management selecting independent directors who may tick all the regulatory boxes but are secretly beholden to the interests of majority stakeholders, the decision to select independents should be a board decision ratifiable by the shareholders.

Independent directors are meant to lend objectivity and a bias-free judgment to the decision making function of the board. According to consensus in some compliance circles, the independent director is to represent minority shareholder’s interests.
This view is enunciated in the Central Bank of Nigeria 2007 guideline for the appointment of independent directors which states that “independent directors are to serve as a check on the management of banks by providing unbiased and independent views to Boards of banks and represent minority shareholder’s interests”

The independent director as with other directors, has a fiduciary responsibility to act in the best interest of the company. According to Kevin Kwok. “ The challenge for independent directors is, in the light of diverse interests of different shareholders, that they find the right balance and ensure that the important decisions taken by a company’s board and management are equitably aligned to these sometimes competing interests. And to do so without fear or favour.”
Asides from providing unbiased opinions, independent directors are also able to act as mediators between opposing point of views within the board and between management and the board. Furthermore, independent directors help lend credibility to the organization. They send a message that an organization is open to scrutiny and value independent thinking

A cursory look at the board composition of companies in Nigeria show that companies have only one independent director in keeping with the letter of corporate governance guidelines in Nigeria. For example, the Securities and Exchange Commission prescribes that at least one member of the board should be an independent director. This is also echoed by industry-specific codes such as that issued by NAICOM. However, the CBN guidelines on the appointment of independent directors specify that there should be at least two independent directors on the boards of banks.

Companies should move beyond the mere required minimum to tap into the objectivity and diversity that independent directors may bring.
To be sure, one may argue that independent directors may be disinterested because they do not have a stake in the fortunes of the company. However, this is where the issue of character comes in. Companies should only select individuals with a track record of competence and commitment to whatever endeavor they undertake.

Also, another criticism of independent directors is that they lack enough information about what is going on underneath the board level thus may be unable to provide sound direction. This weakness can easily be remedied by giving directors especially, those who serve on specialist committees such as audit and risk, access to the employees who work in that area.

In the same vein, an understanding of their role should guide independent directors to be selective about the boards they join. They should only join boards where the management has a demonstrated commitment to business integrity and where the board is not a mere figurehead who rubberstamps executive management’s decision. The investing public must also clamor for greater responsibility for company failures to be placed on all board members including independents. This will help sanitize the role of the independent director.

Presently, the SEC code of corporate governance does not specify what the role, duties and responsibilities of the independent director are. It might be helpful if the SEC does this to make sure that this role meets its potential.