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Independence should not be the “crown jewel” of directorship

Corporate and M&A
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In a comment article published in The Australian newspaper, partner Jeremy Lanzer observes "an interesting dichotomy" between recommendations from an ASIC taskforce on director and officer oversight of non-financial risk and the observations of its consultant psychologist, Elizabeth Arzadon, leading Jeremy to conclude that “the current regulatory framework that holds up independence as the ‘crown jewel’ of directorship should be reconsidered.”

What is most telling in Ms Arzadon’s report, which was commissioned by ASIC, is the observation that “some non-executive directors appear unwilling, or unable, to effectively challenge management and to understand and interrogate non-financial risks, often adopting excessive politeness and language intended to subtly placate and avoid follow-up on uncomfortable issues,” Jeremy explained.

“These observations, more so than ASIC’s recommendations about reducing the number of trees felled in the name of board packs or the intricacies of risk appetite statements, suggest that we need a fundamental rethink about the most appropriate people for our boards.”

“These observations, more so than ASIC’s recommendations about reducing the number of trees felled in the name of board packs or the intricacies of risk appetite statements, suggest that we need a fundamental rethink about the most appropriate people for our boards.”

“Suggestions that directors have close connections to the companies they oversee are considered by many to be dangerous and likely to create greater risk for good corporate governance. It appears, in line with this mandate, we now have boardrooms with many (not all) NEDs who are politely disengaged, happy to tick the ‘independent’ box on the skills matrix, and ready to subtly placate management.”

Jeremy quotes the psychologist’s comment that “the combination of independence and diversity does present a risk that the board may have a restricted understanding of the business”, as well as recent university research which suggested that “social capital, such as reputation and industry connections, are strong contributing factors when a board finds itself in need of a new member.” Jeremy therefore suggests that “the pleasant (and independent) director is assured of a recommendation to their next board through their social capital, reputation for polite placation and willingness not to second-guess management.”

“Why would these NEDs wish to engage in robust debate or to challenge management, if it could lead to a reputation for being difficult, lest they miss out on the recommendation to the next well-paid NED role?” Jeremy asks.

 

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