112 (a) Independence and NEDs.
Define independence
Independence is a quality possessed by individuals and refers to the avoidance of being unduly influenced by a vested
interest. This freedom enables a more objective position to be taken on issues compared to those who consider vested
interests or other loyalties.
Independence can be threatened by over-familiarity with the executive board, which is why many corporate governance codes
have measures in place to prevent this. These include restrictions on share option schemes for NEDs, time-limited
appointments and bans on cross-directorships. Other restrictions, depending on jurisdiction and code, include salaries being
set at an appropriate level for NEDs, a compulsory number of years after retirement from a company before being eligible for
a NED role (if ever), and no close personal relationships between executives and non-executives.
Benefits of greater independence
In the case of the independence of non-executive directors, Mr Louse is arguing that those with no previous contact with the
other members of the board and who come from outside the industry that Zogs is in, will be more independent than those
who may have some form of vested interest. In this he is only partly accurate: whilst succession to a NED role from an
executive position in the same company is likely to threaten independence, appointments to NED positions from other
companies within the same sector are quite common and still provide industry knowledge to a board.
The first benefit of greater independence is that independent people brought in as NEDs are less likely to have prior vested
interests in terms of material business relationships that might influence judgments or opinions. Such vested interests may
involve friendships with other board members or past professional relationships. Past or current equity holdings in companies
within the industry may encourage unhelpful loyalties (many CG codes restrict NEDs from holding shares or share options in
companies they are on the boards of).
Second, they are likely to have fewer prejudices for or against certain policies or individuals as working relationships will not
have been built up over a number of years. Accordingly, they are likely to start from the ‘ground up’ in seeking clarifications
and explanations for each area of discussion. Previous rivalries, alliances or embedded ideas would not frustrate discussions
and this may allow for more objective discussions.
Third, independent non-executive directors are more likely to challenge the established beliefs of less independent people
(such as executive directors). This is a more effective way of scrutinising the work of board committees and of increasing their
effectiveness. This has the advantage of challenging orthodoxy and bringing fresh perspectives to committee discussions.
Disadvantages of greater independence
Some NEDs are appointed because of their connections with the existing board, either through prior industry involvement,
prior executive membership or prior service on another board with one or more other directors. These are considered by
Mr Louse to be less independent.
There are, however, a number of advantages when NEDs have some familiarity with a company and board they are joining.
A key non-executive role, including in board committees, is providing strategic advice. This can often arise from a thorough
knowledge of the strategic issues in a company or industry. Retired executive directors, like Mr Louse, sometimes serve as
NEDs in the same company and are thus able to bring their experience of that industry and company to bear on committee
discussions (although in some countries, there are time restrictions on executives becoming NEDs in the same company).
Some level of prior connection is advantageous when some level of technical knowledge is required. Therefore, Mr Louse’s
comments about independence depending upon NEDs’ needing to be from a different industry background or sector is not
quite appropriate. When serving on an appointments committee, for example, knowledge of the industry and the technical
aspects of a company’s operations will increase effectiveness. This might apply in electronics, chemicals, accounting services
and financial services, for example. When serving on a risk committee in, for example, a bank, a technical knowledge of key
risks specific to that particular industry can be very important.
The contacts and personal networks that a NED with industry experience can bring may be of advantage, especially for
informal discussions when serving on a nominations committee, for example.
