Associate Director, Governance Compliance and Risk,
The Conference Board of Canada
Independent of What? The Thorny Issue of Director Independence
Regulators around the world have issued clear and repeated guidance that boards should strive for complete director independence. Directors should be independent of management and have a degree of independence from the organization that they are serving as directors. The prevailing assumption underlying this direction is that directors with this independence will be more likely to ask good questions, provide clear oversight, better identify risks and overall perform at a higher level as directors.
On the surface, it is easy to agree that directors that are not enmeshed in the corporation’s culture and operations would be able to provide the necessary outside perspective to serve as excellent directors. However, as with many things (and regulations in particular) there are some pretty significant unintended consequences of the drive for director independence. We will explore just two issues that seem to come up frequently in discussions with boards.
1. Independence prioritized over industry experience
In discussions with boards, there is a recognized need for directors to have significant industry or sector experience in order to perform their role effectively. Many boards dedicate significant time, energy and resources creating training opportunities for new directors to help them understand the foundations of the company, its competitive landscape and the industry grouping that it is in. The emphasis on independence, particularly when applied mechanically, can result in directors needing to take a crash course in the business fundamentals. In a worst case scenario, directors without sufficient knowledge or perspective on the industry may find themselves captured by management guidance and unable to ask the right questions to help provide guidance to the organization.
2. Diversity of type rather than diversity of perspective
Independence also enters into the board diversity discussion as many boards who report themselves to be diverse are often focused on diversity in types of experience in industry or role. For example, a board with CEOs from telecommunications, mining and retail operations that also happens to have a CFO, Auditor, and HR expertise would be considered diverse. However, it is also likely that each of these individuals would be indistinguishable if compared on the attributes of race, gender and age. There is a direct link between the definition of independence and the emphasis on diversity of type rather than perspective.
If independence were measured based on the qualities of independent thinking, then many boards who today profess to be diverse may find themselves to be lacking diversity of thought and risk being subject to group–think.
The question of director independence will not go away, but increasingly boards and even regulators are starting to recognize that there have been some trade-offs related to the focus on this one issue. The use of skills matrices, board evaluations and training to address gaps are helping boards to overcome the obstacles created by an overzealous and somewhat limited approach to independence.
For a much more thorough and engaging review of this issue, I encourage you to read The Directors College faculty member Dr. Richard Leblanc’s excellent chapter “Director Independence, Competency and Behaviour,” in the recently published The Handbook of Board Governance, 2016.
About the Author
Michael Bassett is the Associate Director, Governance, Compliance and Risk at The Conference Board of Canada. He leads the Conference Board’s research in these areas. In addition to his research role, he manages the Conference Board’s Council for Excellence in Canadian Crown Corporations and Corporate Ethics Management Council. Prior to joining the Conference Board, Mr. Bassett worked at the Ottawa-based Institute on Governance. He has also worked in the non-profit sector and for the provincial government of British Columbia. Mr. Bassett was also a member of the Board of Directors of the Ethics Practitioners Association of Canada from 2013 to 2015. Mr. Bassett has a Master of Arts degree in Political Economy and a double honours undergraduate degree in Economics and Journalism from Carleton University.