4 December 2006
Many in the business community have hailed the independent director as a tool to monitor and improve corporate management and decision making but new research released in Monash Business Review considers a number of factors that may undermine their effectiveness.
The role of independent directors -- those with no direct or indirect connection with the company, other than a board position and shareholding of less than five per cent -- has been growing steadily since the 1980s. In Australia about 38 per cent of the top 250 corporations claim to have a board with a majority of independent directors and all but 19 of the top 250 corporations have at least some independent directors.
The independent director monitors management, corporate performance and compliance with regulation and, where management interests conflict with shareholders' interests, this works as a safeguard. They also assist in making major policy decisions, bring important outside experience and specialist knowledge and, as in the case of James Hardie's Meredith Hellicar, at times become the public face.
However, research by Monash University's Ms Suzanne Le Mire and Australian National University's Ms Kath Hall, suggests that that an independent director's ability to speak out effectively in the decision-making process can be compromised by being part of a strong team.
Ms Hall said there is a real risk that the desire to maintain group cohesiveness can override critical judgment in independent directors.
"Although independent directors may be well placed initially to identify poor governance practices they can quickly be socialised to accept these practices as normal," Ms Hall said. "The independence of these directors is at risk when they become part of inner circles or an 'in-group' where there is strong pressure to conform."
Ms Le Mire said there are some practical steps that companies can take to help avoid compromise. "These include putting protocols in place to ensure independent directors are automatically passed important information; the setting of agendas at the end of each board meeting to allow board members to add any important issues; encouraging independent directors to share ideas and concerns away from the board process; giving independent directors access to independent outside advice and; increasing the awareness of external issues and improving decision-making by giving shareholders and stakeholders indirect input via independent directors."
This research follows a spate of corporate failures, such as Enron (December 2001), World.Com (June 2002), HIH (March 2001), One Tel (May 2001) and Ansett (September 2001). As Justice Owen noted of HIH: 'There was blind faith in a leadership that was ill-equipped for the task. There was insufficient ability and independence of mind in and associated with the organisation to see what had to be done and what had to be stopped and avoided. Risks were not properly identified and managed. Unpleasant information was filtered and sanitised. And there was a lack of sceptical questioning and analysis when and where it mattered'.
For more information on the above stories, or any others in the Monash Business Review, contact Ms Jacqui Golding, Faculty of Business and Economics, on +61 3 9903 2265.
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