If you’re considering adding an independent director to your board, (and if you’re not considering it, you probably should be) firstly, you need to ensure your candidate is in fact independent. The factors determining a director’s independence are outlined in the UK Corporate Governance Code. To be considered independent, an individual
- Should not be or have been an employee of the company within the previous 5 years;
- Should not have, or have had within the previous 3 years, a material business relationship with the company;
- Should not receive additional remuneration from the company, outside of a directors fee;
- Should not have close ties with any of the company’s advisors or senior employees;
- Should not represent a significant shareholder; and
- Should not have served on that board for more than 9 years from the first date of appointment.
By virtue of the fact that they do not represent investors or the founders, independent directors bring balance to a board. By being independent they are impartial and objective and, while still beholden to shareholders they will be more objective as far as directing the company on the most beneficial path. The responsibility of their role is to act in the best interests of a) the company as a whole and b) the shareholders, which in many cases will be the same thing.
Having an independent director on a board provides corporate credibility to the company, providing comfort to shareholders that it is being run in a professional, considered and ethical manner. Independent directors also provide a critical risk management function. In terms of drawing investors, professional, independent directors can validate a company in terms of providing a structured oversight on operations, governance and company strategy. It is widely accepted that a company run in line with good corporate governance standards is more likely to be successful than one that is not, and therefore, the makeup of the board will be an important consideration for investors.
The presence of an independent board member adds a formality and structure to board meetings which can otherwise be lacking. An independent director will require any proposals being put to the board to be well presented and articulated to allow for the independent board member’s lack of day-to-day exposure to the specific subject matter. Independent directors will insist on meetings to consider any matters being properly structured and operated in line with best practice corporate governance standards, including the provision of formal meeting agendas and relevant board materials provided in advance of any meetings to allow all directors to adequately prepare, both of which help to keep meeting participants focused on the matters at hand and with the running of an efficient meeting. The independent director will often act as the Chairman of board or committee meetings and will be experienced running board meetings in the most effective manner.
By being on the outside, as it were, independent directors are better able to hold management to account, especially in, for example, a family situation where emotions and internal family politics may be at play.
Both internal directors and external independent directors contribute high value in different ways. Directors who may already be closely tied with the company in a professional capacity will have the advantage of inside operational and industry knowledge, company culture and of issues and risks arising. The external independent director will challenge, advise and provide structure and balance to the company in line with their responsibility to maintain and growth shareholder value in the company. Independent directors may be able to ‘see the wood for the trees’ in a way that those so closely involved in the day to day operations may not.
Together with the professionalism and experience to fulfil their fiduciary duties to companies, professional independent directors play a primary role in assisting company management to get things done to move the company forward with its strategic goals.
Directors attached to a professional services firm will bring other benefits, like the availability of professional administrative assistance, minute taking, board pack collation, company entity management and compliance services, to name but a few. These types of firms may also use a virtual boardroom platform used for the secure collation and distribution of confidential meeting materials.
If you’re considering adding an independent director to your board, contact Dominion to discuss your requirements.
Written by Carol Ann Rotsey, Executive Director, London