Independent Directors in business

The role of the Independent Director

It is very easy for any company, the more so when the directors are doing a lot of hands-on managing, to spend much of the time on today’s matters, such as getting the orders out and the cash in. This understandable concern, however, produces two undesirable side effects – it inhibits thought being given to the longer term needs of the business, and it tends to produce somewhat “narrow” thinking.

This is not a criticism per se; it is rather more a statement about what, with the best will in the world, takes place. Time is always in short supply, particularly when you are a manager first and a director second. Of course you concentrate on the here and now. But this is likely to mean that insufficient discussion, if there is any at all, takes place upon matters of major importance to the future well being of the company. Is the company working for you or are you working for the company? You and your decisions should be driving the company; if they don’t, the business will drive you and it may be in a direction in which you do not wish to go! The Independent Director is key to improving the strategic decision making of the directors, thus increasing the likelihood of the business going in the direction you would like.

The ID brings several other skills to the business, such as:

  • counselling: a shoulder to lean upon for informal advice. It can be very lonely at the top.
  • objectivity: someone who has no axe to grind other than the success of the enterprise.
  • independence: someone who can be relied upon to ask relevant questions; indeed searching questions; and to play devil’s advocate to help ensure comprehensive discussion.
  • experience: somebody who has run a company or divisions in a group and so understands the pressures and concerns you are likely to have.
  • new questions and ideas: the benefit of coming from a different business background and perspective.

The questions that need answering

  • Are you giving adequate time to considering the questions – where are we going? how are we going to get there? and is that where we want to go anyway?
  • Do you have a plan for unpleasant eventualities, such as, what would happen to the business if the key people were incapacitated or died suddenly?
  • Are you are getting good, impartial and objective advice?
  • Do you have a clear succession policy?
  • Is there someone on your board who really challenges assumptions and promotes rigorous discussion? who can play devil’s advocate?
  • Are there ways of dealing with conflict at board level?
  • Have you a strategy for developing the company and its people?
  • Have you professional management in key positions? If not, do you know how to judge that you should?
  • Is there someone who helps you to see the wider perspective, who asks new questions, and brings new ideas?

If you answer no, or are uncertain about any of these questions, then your business needs an Independent Director now.

What makes a good Independent Director?

“At a certain time in life a man’s fancy turns to thoughts of becoming an Independent Director”, to ruin a perfectly good quotation! It is true, however and we need to consider what makes a good ID because not everyone is suited for the position. It also depends upon the type and size of company and board. The requirements where only one person is being appointed are very different to those for a large organisation that seeks to appoint several IDs. The thrust of this article will be to consider the situation in regard to the smaller business.

The main qualities of a good ID include:

  • numeracy
  • ability to probe acceptably
  • ability to give advice acceptably
  • gets to the nub of the matter quickly
  • can hear what is not being said
  • can act as a counsellor
  • objectivity, impartiality
  • doesn’t need the money, and thus is independent and can walk away
  • genuine interest in helping the business
  • helicopter – ability to rise above and look down at the broader picture
  • good listener
  • broad business experience – has run own business or a division of a group
  • complete integrity.

Not everyone can make the transition from hands-on management to hands-off ID. It is quite difficult to avoid getting into discussion about matters that are rightly the province of the executive directors only. It is a position that can be held equally well by either sex. What matters are skill and experience, which tends to mean being ‘of mature years’. Ideally the ID will live not too far away; will be able to give around 18/20 days to the business; and will fit in with the company.

How do you find the right person for your company?

You need a clear idea of why you want to make an Independent Director appointment; you need outside expertise and help; and you should go through a formal process.

The route to success lies in the person specification. This is an important appointment, after all, so why treat it any less formally than you would a key managerial post? Agree with your adviser on the skills and experience required and draw up a brief. This should not be so detailed as to mean you are looking really for a consultant nor so vague as to ignore certain skills from which the business might benefit at this point.

Your adviser should have interviewed the prospective candidates and formed a view as to their suitability to act as an Independent Director. When interviewing the short list, you may wish to refer to the points above on what makes for a good ID. Two interviews are recommended; the first to decide which individuals you prefer and which can do what needs to be done, and the second, somewhat less formal, to see with whom you think you could work best. Empathy is so important in this appointment.

When you have made your final choice, you should agree a letter of appointment that will spell out clearly what you are expecting of your ID; why you are making the appointment and what should flow from it. The ID will want to know too what is expected of him and to feel that he can deliver. Included should be details of fees and expenses; when any review will take place; also the length of the appointment, which should be for a defined period, with an option to renew. This means that, as the business moves on, it is relatively easy to change your ID in line with changes in your needs, without anyone getting upset.

Finally don’t forget Director and Officer Liability Insurance.

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