Do independent boards deliver long term value?

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By Amanda Peters – Amanda.Peters@EthicalBoardroom.com

 

With so many governance scandals reported on an almost daily basis, having an independent board member or members is not only considered ‘best practice’ but may also lead to huge benefits and considerable long term value for the company in the process. A successful board, as you know, should facilitate effective, entrepreneurial and prudent management skills. Its actions should be subject to various rules and regulations, and it should always act for the ‘greater good’ of the business at all times, putting aside any personal issues or ‘vendettas’.

After some extensive analysis from our pioneering corporate governance researchers, we can determine that there are five major benefitting factors to having an independent member on board for either a private or public limited company, and they are as follows: 

1.) Credibility:

In these current and rather crude economic times, it’s more important than ever that companies assure their institutional and private equity investors, as well as their lenders, that they are in compliance with proper accounting and fiduciary standards. A business looking to seek outside investment; for example, would fair as being more honest and trustworthy if one of their directors was known for their autonomous position.

2.) Independence:

It seems quite obvious to state that an independent board creates independence, but it’s true: no matter how hard they try, stakeholders and directors rarely act without bias. Unknowingly, they become easily swayed in their decisions, whereas an independent board member can take a truly neutral position instead. Such a stance enables those to look at the business, its objectives and its current state of affairs with an open mind; never misplacing the bigger picture and the long term invested interests.

3.) Diversity:

Whilst choosing your independent board members, you can use the opportunity to your advantage by electing candidates who are specialists in key business areas; such as, marketing, finance, law, sales, human resources, and so fourth. If the board can work cohesively and utilise a mixture of skillsets then this will undoubtedly help toward taking the company to the next level. The old saying ‘two heads are better than one’ couldn’t be closer to the truth in this instance.  

4.) Resolve:

Often when people work together for a lengthy period of time and are either family members or extremely good friends (this is a more common setup than you might think), they lose sight of the long term goals of their business. They become consumed by the day-to-day ‘goings-on’, they begin to take the slightest criticism personally, and their sense of professionalism somewhat diminishes: we are only human after all. However, if one or some of the board members are completely neutral then they can act as a means of resolve; a negotiator to quickly ‘put to bed’ any unnecessary and unproductive arguments or issues.

5.) Negotiation:

With the Say on Pay movement gaining strength particulary during and after the proxy season ends, you may not be surprised to hear that an independent board can do wonders for your finances too, especially in terms of executive pay packages, benefits and other financial prerequisites. Having nonbelligerent minds at the forefront of your business will ensure that directors and staff are not paid too little, or indeed too much, for their efforts – as often you will find that this is the case when businesses are failing.

A neutral board is far cleaner and better placed to make those all important judgements. It’s integral that there are fresh, unbiased minds in the mix as differences in opinion can prompt creative and innovative business solutions: such creativity is incredibly powerful and has the potential to lead to better products, better services, better company finances, regulations and even staffing structures. It’s very easy to get carried away and to only regard the judgement of yourself or those closest to you, but this isn’t a healthy approach and can cause damage and chaos further down the line. You need to invest in the long term and always ensure that the company’s best interests are at the forefront of the board’s decisions.

As we draw this article to an end, it’s important to note that many successful and global brands appoint new and neutral directors all of the time: Northern Gold, Sotherbys and Santander have all announced ‘fresh blood’ in recent months – so it seems Independence Day is very much every day – and for good reason too.