Comment

Independence of mind

Oct 01, 2018
Independence in the world of corporate governance isn’t simply a matter of circumstance, it is a state of mind.

The concept of the independent non-executive director is a very familiar one. In fact, the new UK Corporate Governance Code for certain listed companies (in a similar manner to the 2016 code that went before it) goes so far as to list the relationships and circumstances that are relevant to the determination of a director’s independence.
In addition, guidance is provided as to the measures that can be taken to manage and preserve independence. This guidance includes a careful consideration of a non-executive director’s contribution to the board and their effectiveness on the board when proposing a director for re-election.

It seems, therefore, that the determination of the independence of a director must go beyond relationships and circumstance; it should also look to the state of mind and behaviour of the director in question.

This brings into the frame the concepts of being independent and independence of mind. The application of these concepts to an independent non-executive director is obvious. However, when assessing the ability of any director – independent, executive or non-executive – should we expect the presence of independence of mind as a minimum requirement?

Being independent

It is abundantly clear that for a director to be independent, they cannot have any present or recent relationships or links with the company or its management that could influence their objective and balanced judgement.

Past employment, material business relationships, close family ties with other board members or senior management, cross-directorships, excessive board terms and representation of a significant shareholder or stakeholder would all suggest a lack of independence.

Being independent is a matter of fact. It is either the case that there are circumstances that are likely to impair or that could impair a non-executive director’s ability to take decisions independently or there are not.

Independence of mind

The less obvious concept of independence in the context of board members is that of independence of mind. Acting with independence of mind is a pattern of behaviour shown during discussions and decision-making that demonstrates the ability of a director to make their own sound, objective and independent decisions and judgments.

These behavioural skills include having the courage, conviction and strength to effectively assess and challenge decisions of other members of the board, the ability to ask questions of those closer to the executive function of the company or closer to certain aspects of that executive function and, very importantly, the ability to resist ‘group-think’.

Independence of mind is not a fact, but a skill. On closer examination, it is a skill that is integral to the ability of every director to effectively undertake their role and fulfil their duties.

The law

The Companies Act 2014 codifies the principal fiduciary duties of directors. This codification acts as a signpost as to the standards of conduct that the law requires of them.

The duties that are now “up in lights” speak to directors acting in good faith in the interests of the company, acting honestly and responsibly in relation to the conduct of the affairs of the company, agreeing not to restrict their power to exercise an independent judgment, avoiding conflicts of interest and exercising the care, skill and diligence that might reasonably be expected of them.

To successfully navigate and deliver on these duties, a director must be able to act in the best interests of a company without being affected by influences that compromise professional judgement, thereby allowing them to behave with integrity while also exercising objectivity and professional scepticism.

Successfully navigating and delivering on these duties requires a director to have independence of mind.

Claire Lord is a Corporate Partner and Head of Governance and Compliance
at Mason Hayes & Curran.