No need to be the awkward squad

The independence of directors is often confused with board-level fist-fights, but this need not be the case, argues Robert Bruce

Corporate governance specialists often say that independence is a state of mind. A better definition would be very useful. Increasingly, independent directors on a corporate board assume that adopting an awkward stance means their job is done and their independence preserved. But there is more to it than that.

Recently, Independent Audit, a corporate governance consultancy firm, issued a survey of FTSE-100 annual reports for the first year in which they had to comply with the combined code on corporate governance, which meant reporting on the independence of directors.

The survey found that 90 per cent of non-executives were described as independent. Most companies made an effort to describe how they were independent, but 14 per cent simply asserted they were and left it at that. Jonathan Hayward, chief executive of Independent Audit, described it as a new version of the Higgs code recommendation of “comply or explain”. Another four per cent simply ignored the topic completely.

The independence argument is in danger of vanishing. One expert blames all those post-Enron pundits who overemphasised the idea that independence simply means asking the tough questions. Given the lack of in-depth knowledge of the companies concerned, how would they know what the answers to the tough questions really signified?

“A popular diversionary tactic is to refer to the director’s knowledge and experience, which are excellent things for non-executives to have but do not constitute evidence of independence of mind,” Hayward said.

This is a period of settling in and getting used to the combined code. The independence of directors will be debated and the issue refined. Alastair Ross Goobey, chairman of the International Corporate Governance Network, pointed out the difficulties. “Is Michael Jackson, the chairman of PartyGaming, any less independent because he got £1.5m to bring it to market?” he said.

Unfortunately, independence will come down to perception. Pundits will value independence where they see a fist-fight erupt at board-level, seeing it as tangible evidence that the independent directors are getting stuck in. But as good corporate governance it should be deemed a failure. Much better that independence of mind holds sway behind closed doors so that the company can subtly alter strategies and increase shareholder value.

There are strong parallels with the audit world here. Over the years auditors have been presumed weak if not seen to be belligerently resigning. Anecdotally we all know of issues that were sorted out in a tough manner but quietly, which serves companies, their investors, and external auditors better. But that doesn’t play well with pundits.

This is where the surge of corporate governance measures may falter. The old argument that they would get in the way of old-style buccaneering and bullying behaviour was easily seen off. A mention of Robert Maxwell and all would go quiet. But it is going to be harder during a period where corporate scandals have been scarcer.

The answer lies in strengthening audit committees still further and then telling investors more about the process. As the Independent Audit survey puts it: “Audit committee reports give away more than their authors might intend, and far too many of them portray attitudes which don’t inspire confidence.” That is where the stability that allows entrepreneurs to flourish must be created.