Independent directors must be beyond scrutiny

As regulators and investors place ever more scrutiny on corporate governance, the appointment of experienced and qualified independent directors has become ever-more critical and firms should check the suitability of directors on a number of fronts before confirming appointments.

That is the view of Geoff Ruddick of International Management Services, a firm which specialises in providing such individuals. He has suggested some qualities companies should seek in their independent directors.

Top of that list is ensuring they are indeed independent. “Independence is the ‘Holy Grail’ of effective corporate governance. If a director is not independent, conflicts of interest will inevitably arise and interfere with the director’s ability to act in the best interests of the fund,” Ruddick said.

Next on the list is experience. Ruddick recommends thoroughly checking their biography and confirming they have experience serving on boards with similar strategies. In addition to this, he suggests checking their qualifications. “A legal, accounting, compliance, investment or other relevant qualification, combined with experience, will provide a good indication of where their specific expertise lies and how they will add value,” he said.

 Their capacity to commit time to the job should be a key consideration. “Simply put, ‘capacity = time’,” Ruddick said. “Capacity does not, however, simplistically equate to an arbitrary number of appointments held, as every relationship will be different and have its own nuances and complexities.

“Numbers of directorships held will provide some insight, but it is only one of the many important things to consider when assessing a director’s capacity. One must keep in mind that numbers, like all statistics, in isolation can be misleading. The focal point should be on a director’s ‘time’ and the ability to apply his or her mind to issues at hand.”

Some consideration should also be given to what happens when the individual may not be available and what back-up plans might be put in place. “People take vacations, encounter emergencies, come and go from an organisation or jurisdiction, and start-up businesses often fail,” Ruddick said.

“Confirm that the individual has a sufficient support infrastructure to cover these contingencies, and whether they have colleagues who can be appointed in their place should the need arise.”

He concludes by saying that the search for an independent director does not have to be an arduous, time-consuming process. “But the decision should not be taken lightly. Effective corporate governance is imperative, and some of the issues, scenarios and outright collapses in recent news should highlight this point.”