The need for clarification on the board requirements for a majority of independent directors as it relates to corporate governance is of great importance and would be discussed in this write up.
According to Shleifer and Vishny (1997), corporate governance is the system, by which corporations are directed and controlled. On the other hand, an independent director is a person that has at no time, worked for the company nor owned shares in the company. This director also would not be related to any of the key employees nor would have worked for any major supplier, customer or service providers, such as consultants, accountants, lawyers, etc.
In principle, as retrieved from Wikipedia, “an Independent director, is a director of a board of directors, who would not have a material or pecuniary relationship with the company or related persons, except sitting fees”. It is the duty of the independent director to ensure that the board is active, effective and performing well. It is also his duty to ensure that the CEO is executing his duty in line with the aims, mission and vision of the company, in accordance with the directives of the board.
The importance of independent directors’ roles cannot be over emphasized and the major role being improving the performance of the board and the company as a whole. These roles, however are constrained by various factors, the two most prominent, being the information that is available to the independent directors, and the position / size of the company affected by transitions / life cycle of the company and any significant changes the company may be experiencing. Having mentioned the need for an independent director, specific board positions should be held by independent directors (e.g. Chairman) because of the conflict of interest that arises when the CEO is also the chairman or chairperson of the board.
Theoretically, independent directors are not as pressurized as non-independent directors, thus, more likely to act on behalf of the shareholders. In the past, the chairman or the CEO were known to be friends and colleagues from within the company’s board, and gained their position from whom they knew, and not as a result of skill and expertise nor from what they were capable of contributing to the board and the company as a whole. The appointment of independent directors became very necessary, as shareholders looked for a way by which management became more responsible and accountable, and as such; the need for independent directors, who would not only checkmate the excesses of the board of directors, but also have the interest of the company and the shareholders at heart.
Joshua Kennon (2007), stated that “The board of directors is the highest governing authority within the management structure at any publicly traded company and is usually made up of the directors who are elected for a specific number of years by the shareholders”. According to Wikipedia,” A board of directors is a body of elected or...