Board Members are Independent But are They Legitimate and Credible?
Institute for Governance of Private and Public Organizations, Policy Paper No. 10, 2018, ISBN: 978-2-924055-46-5
40 Pages Posted: 12 Jul 2018
Date Written: June 7, 2018
That boards should be made up of a majority of independent members, that goal has been achieved in almost every type of organization. While this achievement did undoubtedly raise the quality of governance, it turned out that “independent boards” were not the cure-all medicine that some anticipated.
Already in 2008 in a policy paper on that topic, IGOPP predicted that the concept of directors’ independence would not yield the expected results and would prove disappointing in many respects. That policy paper suggested that the concepts of legitimacy and credibility were far superior to the concept of independence in driving the performance of organizations. For IGOPP, independence – a director’s lack of any personal interests contrary to those of the company – was but a necessary condition for legitimacy.
Events since, in particular the financial crisis of 2008, have backed up the position taken by IGOPP at the time and have generated new legitimacy issues such as the diversity of boards, the representation on boards of stakeholders other than shareholders, the right, contingent upon a minimum holding period, to nominate candidates for the board, age and tenure limits for board membership.
As for board’s credibility, the 2008 policy paper proposed that it hinged on “its experience and expertise relevant to the specific issues and challenges of the organization”, on its in-depth knowledge “of the company’s business model and its drivers of economic and social value”. For IGOPP, credibility also entails integrity and mutual trust between management and board members.
Therefore, this credibility was so important that it would be acceptable, and even necessary, to trade-off some independence if this was the price to pay for raising the board’s credibility.
Since 2008: Profoundly shocked by the discomfiture of so many impeccably governed corporations during the financial crisis of 2008, companies, regulators and all savvy observers of governance had to admit that board independence and general management experience in industries with little in common with the firm to be governed were an insufficient basis for high-performance governance. Boards must also have a high level of expertise and experience about the specific issues and challenges faced by the company they were to govern. The changes in the world of governance since 2008 have validated the position taken by IGOPP back then, and shown that its stance was a prescient one.
However, some have noted that the quest for credibility may be difficult to reconcile with the requirement of board independence. Indeed, if a candidate is highly credible by virtue of a long association with the industry in which the company operates, it may be difficult for him or her to qualify as an independent according to the exacting desiderata now set for an immaculate independence.
IGOPP’s position in 2018 offers some clarification and tackles some of the new issues which have arisen since 2008.
Thus this policy paper proposes a fundamental change in governance with respect to board evaluation, member selection and profile of expertise sought for the board.
Keywords: Board Members, Independance, Legitimacy, Credibility, Stakeholders, Governance
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