Independence

Independence

 

In today’s blog, we discuss independence related to assembling a governing body (board). Conflicts of interest, as discussed in our previous blog, and independence go hand in hand when selecting board members. (You can find the previous blog here.) When assembling a board, it is important to ensure that the members (directors) are assessed and classified as independent. The best way to provide an effective assessment of independence is through a well-established corporate governance process.

 

Independence refers to the exercise of objective judgement. It is used as a measure to:

  • judge the appearance of independence; and
  • categorise non-executive directors of the board or its committees as independent.

 

This comprehensive definition of independence highlights the fact that directors should be independent in fact and perception as covered in King III™. The King IV Report on Corporate Governance™ (King IV™) requires that the board ensure that there is no interest, position, association, or relationship, which, when judged from the perspective of a reasonable and informed third party, is likely to influence unduly or cause bias in decision-making against the best interests of the organisation.

 

When assessing the independence of directors , I used references such as the Institute of Directors conflict of interest position Paper 5 of June 2012, King III™ and King IV™ to prepare documentation for such assessments and the process for approval by the board. I also considered the following nine factors as set out in King IV™ to assess independence.

 

The director of the board:

  1. is a significant provider of financial capital or ongoing funding to the organisation; or is an officer, employee, or a representative of such provider of financial capital or funding;
  2. participates in a share-based incentive scheme offered by the organisation, if the organisation is a company;
  3. owns securities in the organisation, the value of which is material to the personal wealth of the director, if the organisation is a company;
  4. been in the employ of the organisation as an executive manager during the preceding three financial years or is a related party to such executive manager;
  5. has been the designated external auditor responsible for performing the statutory audit for the organisation or a key member of the audit team of the external audit firm, during the preceding three financial years;
  6. is a significant or ongoing professional adviser to the organisation, other than in the capacity as director of the board;
  7. is a director of the board or the executive management of a significant customer of, or supplier to, the organisation;
  8. is a director of the board or the executive management of another organisation which is a related party to the organisation; or
  9. is entitled to remuneration contingent on the performance of the organisation.

 

In my career, I have encountered some of these factors, which rendered the director in question not independent, and I accordingly made the required disclosures and ensured ongoing monitoring of the status.

 

At Okina Company Secretarial Services, we emphasise the importance of a carefully composed board with members who can add value and are suited for their positions. As experts in corporate governance, we can advise on all aspects of good governance, including board technology, board composition and administration, drafting of board and company frameworks and policies, board evaluations, and directors training.

 

I hope that you are inspired to appoint more independent directors to your board. Please contact us to assist you with the assessments and policies to ensure the ongoing monitoring and assessment of directors.

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