How long is a piece of string?
How long should an independent director stay in their role? Do independent directors have an arbitrary life span, 6, 8, 9 years? Both questions are the archetypical “how long is a piece of string.” The commonly held view is that we should mandate term limits, a blunt instrument for what is a complicated issue. Mandated tenures have become the go to position, because for too long, boards have refused to act against ineffectual, poor performing independent directors who show a clear lack of independence.
There is no predetermined answer to the question “how long is a piece of string.” Similarly, how can there be a predetermined length of tenure that ensures independent directors do not lose their independence? The independence of independent directors is, to a greater or lesser extent, reliant on a myriad of factors. Which most, if not all shareholders, stakeholders and commentators have little or no insights into, e.g. independence in thought and action, contribution, behaviour, etc.
I sympathise with and understand the need for a surrogate measure to determine the independence of independent directors. But I do not believe a single measure will offer what is needed. It is also important to remember, most if not all governance codes and regulations have not defined what ‘independence’ or ‘dependence’ means in an easily interruptible or actionable way. Making the identification of a single measure impossible to define.
For example, many of the codes/principles define ‘independent’ so broadly that it is difficult, if not impossible, to classify anyone as independent. The NZ-IOD defines independent as being ‘…independent in every way, intellectually, financially and politically.’ Consider for a moment, ‘financially and or politically’ independent and their relevance and or actionability. Imagine reviewing the appointed directors of District Health Board’s, based on their ‘political’ independence. Canterbury DHB is a good reference point for this question. Or the financial independence of independent directors who receive, for example, 50% or more of their annual earnings from one or two boards, are they ‘financially’ independent? Or are they so reliant on the fees that they would forgo independence to ensure longevity in their role?
The NZX and ASX codes are similarly unhelpful, defining ‘independent,’ as being when an independent director has been with “…the entity for such a period that his or her independence may have been compromised.” Leaving the reader of their codes to determine for themselves what ‘compromised’ means. Neither does the FRC’s Corporate Governance Code define in any meaningful way what ‘independence’ means.
This lack of clarity in the regulatory and or code definitions for determining independence creates problematical situations. Such as was played out at the recent Mainfreight AGM, when shareholders questioned the ‘independence’ of Mr Mogridge (director since 2001), based purely on his length of service. The rumblings suggesting his independence was ‘compromised’ by his length of tenure.
In answering the question on Mr Mogridge’s supposed lack of independence, Don Braid, Mgr. Director said, “It’s about our culture, it’s not pixie-dust,” “It doesn’t just get waved around by whoever sits at this table. It’s worked on hard every day, supported and guided by the directors that we have ... we are comfortable with the six directors we have sitting around this table.” Highlighting the importance Mr Braid and the board of Mainfreight place on culture as core to their success, and their disdain for the inferences about Mr Mogridge’s independence.
For the moment, put aside the perceived lack of independence of Mr Mogridge, because of his length of tenure as the rationale for voting him off the board. If you judge an independent director’s (boards) worth entirely on business performance and shareholder returns. Review Mainfreight’s performance over the past two decades. On this basis, an argument for the removal of Mr Mogridge is also lost. The share price has grown by a factor of approximately 31, they consistently pay good dividends, rate very well on CSR performance. By almost any board performance measure, they have been phenomenally successful.
Why then would you change a winning team? Other than to satisfy a perceived, but unsubstantiated lack of ‘independence.’ Or, as Mr Braid colourfully described in his answer, why follow “blandly inane guidelines set out by ‘knitting club’ directors around the world.”
One must also ask, why would shareholders want to remove someone who the board considers an important cog in the wheel of success. Raising another interesting question, what motive lay behind this agitation? Whatever it was, it was not, shareholder returns, company performance, stakeholder, or community engagement.
Leading me to suggest that, using an independent director’s length of tenure as a surrogate measure for determining their ‘independence’ is plainly inappropriate. It cannot measure many of the traits we expect in an independent director: independence of thought and action, contribution, behaviour, tacit and explicit knowledge, the duty to challenge, ask searching questions, being fully informed, focus on what is best for the company, etc. Therefore, we should resist its use as a measure of independence.
How then might we determine if an independent director is ‘compromised or dependent’?
I suggest two distinct, but interlinked possibilities on which to base the assessment of an independent director’s ‘independence.’ First, it starts with their behaviour, do they present any outward signs of capture or of being compromised, e.g. subservient to individual shareholders/stakeholders, wishes or demands, that are not in the best interests of the firm, etc. Second, bi-annually, or more often if thought appropriate, the Chair in consultation with the CEO reviews the performance of all directors, identifying if directors are adding value, any perceived or real issues and in relation to independent directors if behaviours/actions show a loss of independence or a compromised position.
These conversations rely on high levels of synergy, trust, and confidence within the board and between the individual directors, Chair and CEO. If the required levels of synergy, trust and confidence are absent or low, meaning they cannot conduct these types of reviews, then you have far more serious issues than director independence.
Author: Dr D Mowbray FCG FGNZ
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