Independent Directors - the Good and the Bad
I am often asked what makes a good Independent Director. After many years of sitting on Boards and advising Boards I have found there are a number of key skills that sets you apart from the rest....unfortunately, there are also some traits that are best not seen in the Boardroom.
Broad Experience - this is sometimes overlooked in the pursuit of specific industry experience. However, I think the need for an Independent Director to be able to draw upon varied experience gained in a variety of industries can enable them to think outside the square, and not necessarily accept what is supposed to be the "norm" in a specific industry. However, NEDs who are not from the same industry are expected to gain a strong understanding of the industry and the Company. If a Board can absorb the cost of two Independent Directors I would certainly try and make sure the second one did have sound industry experience.
Independence - yes I know it sounds obvious, but it is amazing how many times I see so called Independent Directors that conflict their position. Independent Directors must bring the integrity that comes with independence into their decision making.
Strong Communication Skills - there is nothing worse than a NED that does not get to the point. Strong verbal communication skills are a must if one is to bring the thought process along a decision path and to influence without being dictatorial. You must be able to explain your point of view in clear and concise terms.
Financial Skills - there have been a number of recent cases where Non Executive Directors have been heavily criticised, and in some cases charged, for financial negligence. Whilst an accounting degree is not required, the ability to read and understand financial reports and the willingness to seek clarification on any item, is required. Furthermore, an awareness of financial markets is also becoming a desired skill.
Time Availability - the days of rolling up to Board Meetings unprepared are a thing of the past, even though in reality they should never have been deemed acceptable. The expectation from other Board Members, Shareholder and the authorities dictate that sufficient time is allocated to understanding and analysing Board Papers. Furthermore, the expectation is that Independent Directors will lead or sit on Committees such as Remuneration, Audit and Risk. The combination of these demands means that anyone accepting a NED role must be able to commit the necessary time.
Understand and Manage Risk - this has become a major focus area for Independent Directors. Risk comes in many forms: financial; operations; compliance; and reputation. You need to be able to identify and understand the risk and then ensure the board deals with the mitigation on a timely manner. Ensuring Boards have the right approach to these matters provides the foundation for a risk management culture to permeate through the company.
As to the traits I prefer to see left behind, here are my key "no goes":
Big Egos & Secret Agendas - are at the top of my list. There is no place for this in the Board room, the focus should be on the Company and other Directors should not have to manoeuvre around political agendas and profile seeking NEDs.
Overpowering Personalities - often runs in conjunction with the above trait, and typically comes with a dogmatic approach seeking others to agree to all their points of view. This totally undermines any collegiate relationship between Board members.
NEDs that think they are Executive Directors - whilst in many cases this occurs without intent, it should be kept in step, as not only will the independence be lost but it can also undermine the relationship with other Executive Directors and CEOs.
Lack of Understanding the Business - as stated in the desired characteristics this is one of the worst failures. If you want to accept a NED role you must make an effort to understand the business.
These are some of the key areas we look for In assessing potential Independent Directors for clients. For more information contact us at email@example.com. - a nem group company.
Author: Ian Knight, Partner of nem Australasia, and Managing Director of Non Executive Board.