Sample The Independent Director and Effective Corporate Governance

The Independent Director and Effective Corporate Governance Assignment Sample

PART 1

CHAPTER ONE

INTRODUCTION

The phrase "corporate governance" has been in use for almost twenty years.

It has attracted a lot of interest recently, and like many popular notions, it is a little vague and, to some, has devolved into a cliché. It is an abstraction that has almost universal acceptance but is subject to varying interpretations. According to others and law dissertation help the phrase "came into mainstream use in the United States in the mid to late 1970s as a result of the Watergate crisis and the revelation that significant American firms had participated in covert political donations and corrupt payments overseas. A notion distinct from corporate management, business law, or corporate organisation eventually gained popularity in Europe.

The separation idea, as put forward by Adolf Berle and Gardener Means in their eminently renowned book "The Modern Corporation and Private Property," is, nevertheless, the source of the basic issue with corporate governance.

According to this idea, a "separation of ownership by passive shareholders from control by a tiny self-perpetuating management group" has developed in contemporary business. The tiny number of managers have a fair amount of discretion in how they run the publicly traded company (for their own interests, not that of the helpless and passive shareholders). According to Berle and Means, there is a considerable conflict of interest between who owns and controls the contemporary company. At the start of the 1930s, the writers looked at the kind of control that was being used over the 200 biggest American firms. They came to the conclusion that the management or a legal mechanism (such as voting trusts or non-voting shares) with a tiny fraction of ownership controlled 65% of the enterprises and 80% of their total value.

CORPORATE GOVERNANCE: AN OVERVIEW

Corporate governance experts, academics, and critics have all proposed several definitions of corporate governance. It is referred to as "the system of rules and institutions that establish the management and direction of the business and that define interactions among the organization's key actors" in a more restrictive definition. 9 To put it another way, corporate governance is the process by which businesses are managed and directed, with shareholders—those who provide the majority of a company's funding—being the main focus. According to this perspective, the corporate goal should be to preserve and maximise shareholder investment. This philosophy of corporate governance is also known as the "shareholder hypothesis."

In nations like the United States and the United Kingdom, where the idea is that the issue with corporate governance is making sure the company is run in the shareholders' best interests, this "shareholder-centric" approach to corporate governance is prevalent. The shareholders are the corporation's primary recipients of its earnings, which are intended to be made. Corporate governance in these nations, which are characterised by a widely distributed share ownership structure, focuses primarily on defining the relationship between the three main stakeholders in a corporation: shareholders, the board of directors, and business management. Once again, the Anglo-American model of corporate governance is occasionally used to describe this.

In a broader sense, corporate governance has been described as "the organisations and regulations that alter expectations about the exercise of control of resources in enterprises" and "the rules and the Institutions that determine how commercial corporations divide resources and returns." It covers the complete web of official and informal relationships affecting business and their effects on society at large. To put it another way, corporate governance focuses on maintaining a balance between social and economic objectives and managing the business as a community for the benefit of all stakeholders, such as shareholders, workers, creditors, suppliers, and the general public. The goal of corporate governance is to harmonise the interests of the corporation and the broader community. The "stakeholder theory" of corporate governance is another name for this.

This "stakeholder" approach of corporate governance is quite common in Japan and Continental Europe, particularly in nations with corporate systems characterised by a more concentrated share ownership structure. According to them, corporate governance entails society regulating firms for the benefit of society (corporate social responsibility). Companies are seen as social entities with obligations and responsibility, and in addition to the conventional category of shareholders, corporate aims also include serving the interests of other groups, such as workers and the larger society.

The current wave of high-profile scams and scandals that have rocked organisations has contributed to the increased focus on corporate governance.

Corporate governance had been a growing concern for those who control and direct companies, as well as society at large, ever since the failures of Polly Peck, Guinness, Maxwell, and BCCI in Europe, but the corporate failures and wrongdoing that have come to light since late 2001 have significantly increased the temperature of the international corporate governance debate. Investor confidence in the honesty of those responsible for the oversight and management of our larger companies has been severely impacted by the scandals at Enron, Arthur Anderson, Tyco, Global Crossing, Adelphia, and WorldCom in the United States, as well as at Ahold, Parmalat, One.Tel, HIH, Equitable, and currently Shell in Europe and other parts of the world.

Factors including executive avarice, dishonesty, accounting errors, insolvent trading, ineptitude, high executive remuneration, a lack of responsibility, and executive hubris are at the heart of numerous company disasters. These collapses are also caused by inactive boards of directors, subpar management and auditing procedures, directors who violated their fiduciary duties, ostentation, and waste. The main catalysts for the worldwide reactions to and efforts at corporate governance changes, especially from late 2001, were these events and the repercussions that followed.

The Public Company Accounting Reform and Investor Protection Act, also known as the Sarbanes-Oxley Act, was swiftly passed in the United States in the wake of the Enron scandal in 2002. This law "tightened regulations on a public company accounting oversight board, auditor independence, corporate responsibility, white collar crime penalties, and fraud and accountability"16. In other words, it was created to make it easier to tighten accounting standards and increase the independence of external auditors from management. It was the first brand-new piece of corporate regulatory legislation in in than 50 years and is regarded by many as the most significant revision to U.S. securities laws. New regulations were also enacted by the NASDAQ and NYSE, giving independent directors of listed businesses a bigger role.

In the UK, which has seen its fair share of company failures, a number of committees were asked to identify best practises for various areas of business activity. In response to the recommendations of these committees, corporate governance practises and structures inside UK corporations have undergone substantial modifications. The Cadbury Committee on the Financial Aspects of Corporate Governance, the first corporate governance committee, was established in 1991 as a result to concerns about lax corporate governance standards. "To assess those areas of corporate governance especially relevant to financial reporting and accountability," said the committee's mandate. 19 In 1992, it released a report that included a code of best practises (the Cadbury Code of Best Practice) for all publicly traded firms.

The Study Group on Directors' Remuneration (also known as the Greenbury Committee) was established in response to public complaints over excessive amounts of director compensation. Its goal is to find best practises for setting director compensation. In July 1995, it released a study and code of best practises on the factors affecting directors' compensation. 20In addition, the Committee on Corporate Governance (also known as the Hampel Committee) was founded in November 1995.

The Cadbury and Greenbury committees' suggestions were included in a set of principles and a code that this committee issued. The London Stock Exchange, which requires corporations to report on their compliance with the code under its listing requirements, has accepted the so-called "Combined Code."
The "King Report on Corporate Governance" was published in November 1994, institutionalising corporate governance in South Africa.

21 Under the aegis of the Institute of Directors of Southern Africa, the King Committee on Corporate Governance was established to examine corporate governance in the context of South Africa. 22 The report's goal was to advance the highest standards of corporate governance in South Africa, and it included a Code of Corporate Practices and Conduct that was meant to be followed by all significant public corporations in South Africa as well as firms listed on the JSE Securities Exchange. 23 In 2002, a revised version of the King report—referred to as King II—was published.

EMERGENCE OF THE INDEPENDENT DIRECTOR

The idea of the independent director has taken on a life of its own among corporate governance experts and pundits all over the globe. The commercial and corporate sphere has also widely embraced the idea. In fact, it has been suggested that independent directors make up the whole board of a corporation, with the exception of the chief executive officer. While some would go thus far, many think that the board should at the very least include a sizable number of independent directors. Frederick Lipman advises that completely independent directors should be included on the governing bodies of all organisations, whether they are referred to as boards of directors or not, and ideally should make up the majority of all directors, in his book on the best practises for corporate governance.

A review of laws and other corporate governance tools throughout the world indicates the broad support that this concept of an independent director has. The Combined Code of the UK and the Australian Corporate Governance Code, for example, both mandate that the board be made up of a sizable number of independent directors. The two regulations also foresee a significant role for such directors by mandating that the majority of independent directors serve on specific board committees, such as the audit, nominating, and compensation committees. In Australia, nine of the top 12 institutional investors agreed that it was crucial for listed companies to have some independent members on their board. They said that they want a majority of independent directors on the board.

The New York Stock Exchange's (NYSE) corporate governance guidelines in the US mandate that the majority of the directors on the boards of listed businesses must be independent. According to the guidelines, requiring a majority of independent directors would improve board supervision and reduce the likelihood of detrimental conflicts of interest. In accordance with the regulations, every listed company must have nominating, compensation, and audit committees that are wholly made up of independent directors. Similar to this, the South African corporate governance code (King 11) mandates that business boards be made up mostly of independent non-executive directors. The corporate governance code for Nigerian banks, which was published in April 2006, stipulates that there must be more non-executive directors on the board than executive directors, and that at least two of these non-executive directors must be independent.

The International Corporate Governance Network (ICGN) recommends that each board include a "strong presence of independent non-executive members with suitable capabilities" in its statement on global corporate governance standards. In a similar vein, the Organization for Economic Co-operation and Development (OECD) states in its corporate governance principles that the board must be able to exercise objective judgement on corporate affairs in order to carry out its responsibilities of monitoring managerial performance, preventing conflicts of interest, and balancing competing demands on the corporation. This implies that a sufficient number of board members must be free from managerial influence. It is important to have a sizable percentage of independent directors on the board, according to the French Principles of Corporate Governance, not only to meet market expectations but also to elevate the standard of proceedings. This is despite the fact that the effectiveness of the board of directors cannot be assessed solely in terms of the proportion of independent directors on the board.

Whatever the advantages, there is a tendency toward increased independence on corporate boards, which is praised by the majority of analysts. Major institutional investors do believe that independent directors add value, and have been vocal supporters of them. Examples include the California Public Employees' Retirement System (CalPERS), the largest public pension fund in the US, and institutional investor representative bodies Alternative Investment Management Association (AIMA) and Investment and Financial Services Association (IFSA), both in Australia. According to CalPERS's corporate governance principles and guidelines: The basis of accountability is independence... Independent boards are now universally acknowledged as being crucial to a strong governance system throughout the US. The number of independent directors on the board should be at least a majority. Boards should seek to have a significant majority of independent directors on their board.

The question of whether adding more independent members to boards will inevitably improve corporate performance is very different and will be addressed in a later section of this investigation. However, it is important to consider the justification for the addition of independent members to corporate boards.
RATIONALE FOR INDEPENDENT DIRECTORS

In the contemporary public corporation, there is a separation of ownership (a firm is seen to be owned by its shareholders) and control (a company is governed by managers who do not own it), which has resulted to agency costs that obstruct effective corporate decision-making. These agency costs include I the expenses shareholders expend in monitoring management to reduce the gap in their interests; (ii) the managers' bonding expenses; and (iii) the residual loss arising from the remaining divergence in shareholders' and managers' interests. Indeed, the contemporary corporation's organisational structure offers clear benefits to both managers and shareholders who act as capital providers. Owners of shares may benefit from business endeavours even if they lack management abilities. Managers, on the other hand, might pursue lucrative company prospects while having little personal wealth. The labour is divided in a way that benefits both parties.

However, shareholders want their agents—the firm's managers—to maximise wealth since they are residual claims on the revenue stream of the company. Managers don't have as much motivation to maximise wealth as they would if they were the principals since they can't keep all the profits if the business succeeds and won't take all the losses if it fails. Instead, managers have a motivation to spend more money on leisure and perks than they otherwise would, and to generally be less committed to the objective of wealth maximisation. One commenter asserts that as management seldom owns a large portion of shares in such organisations, they often only earn a little portion of the profits produced by their operations. As a result, they tend to behave selfishly. As a result, they operate in their own best interests rather than making an effort to maximise shareholder value. And to the degree that senior executives pursue their own goals rather than working to increase the company's profitability, they charge investors what are often referred to as "agency fees."

A variety of strategies were developed to balance the interests of non-owner management with those of shareholders in an attempt to lower these agency expenses. One such technique was the addition of the independent director. This agency-cost justification for the introduction of the independent director is based on the idea that outside directors must be independent of executive management and free from any business or other relationships with the company that could compromise their autonomy in order for the board to properly exercise its oversight and monitoring role over management decisions and activities. Independent directors are seen to be in a better position to efficiently supervise the senior management.

Many advocates for board independence have used this agency-cost justification for adding independent members to corporate boards. Despite their lack of significant personal wealth, the Cadbury Committee has access to commercial prospects. The labour is divided in a way that benefits both parties.

However, shareholders want their agents—the firm's managers—to maximise wealth since they are residual claims on the revenue stream of the company. Managers don't have as much motivation to maximise wealth as they would if they were the principals since they can't keep all the profits if the business succeeds and won't take all the losses if it fails. Instead, managers have a motivation to spend more money on leisure and perks than they otherwise would, and to generally be less committed to the objective of wealth maximisation.

One Analyst stated:

"Management develops the predisposition to operate in a self-serving way since they seldom hold a significant number of shares in such businesses and only earn a small proportion of the profits created by their operations. As a result, they operate in their own best interests rather than making an effort to maximise shareholder value. And to the degree that senior executives pursue their own goals rather than working to increase the company's profitability, they charge investors with what are known as "agency charges."

A variety of strategies were developed to balance the interests of non-owner management with those of shareholders in an attempt to lower these agency expenses. One such technique was the addition of the independent director.

This agency-cost justification for the introduction of the independent director is based on the idea that outside directors must be independent of executive management and free from any business or other relationships with the company that could compromise their autonomy in order for the board to properly exercise its oversight and monitoring role over management decisions and activities. Independent directors are seen to be in a better position to efficiently supervise the senior management.

Many advocates for board independence have used this agency-cost justification for adding independent members to corporate boards. Independent directors, according to the Cadbury Committee of the United Kingdom, are particularly helpful in reducing agency costs associated with takeovers, boardroom succession, and executive compensation. Non-executive directors also have two crucial contributions to make to the governance process as a result of their independence from executive responsibility…. The first step is to evaluate the executive's and board's performance…. The second is when someone takes the initiative, which might lead to conflicts of interest. Recognizing that there may sometimes be conflicts between the senior management's specialised objectives and the company's larger interests, such as when it comes to takeovers, boardroom succession, or director compensation, is a crucial component of successful corporate governance. Independent non-executive directors are in a good position to assist in resolving such issues since their interests are less immediately impacted.

The Organisation for Economic Co-operation and Development's (OECD's) corporate governance principles concur, stating that independent board members may considerably influence the board's decision-making. They may provide an unbiased perspective to the assessment of the board's and management's performance. Additionally, they may be crucial in areas where management, the firm, and shareholders' interests may not align, such as CEO compensation, succession planning, changes in corporate control, takeover defences, significant acquisitions, and the audit function.

In Australia, the Alternative Investment Management Association (AIMA) published corporate governance guidelines in 1997 that state "if the majority of the board are genuinely independent they have the power to implement board decisions even contrary to the wishes of management or a major shareholder, if the need arises."

When it asserts that non-executive directors contribute an external judgement on matters of strategy, performance, resources, standards of behaviour, and performance assessment, the South African Corporate Governance code likewise reflects the same topic.

Another justification for the independent director that originated from the OECD is that, as a vehicle of good corporate governance, their presence on the board is required for accessing global capital markets. The OECD claims that investors "rely increasingly on the corporate governance of the firms they invest in or lend to to offer accountability and responsibility to the investors and, a failure to adapt to efficient governance standards may possibly lead to limited access to capital markets." The OECD recommendations state:

The extent to which firms obey fundamental principles of good corporate governance is an increasingly essential element for investment choices, echoing the same subject and correctly highlighting the significance of excellent corporate governance practises. The connection between corporate governance procedures and the increasingly global nature of investment is particularly pertinent. Companies are able to get finance from a much bigger pool of investors because to international capital flows. Corporate governance structures must be trustworthy and widely understood in order for nations to fully benefit from the global capital market and to draw in long-term "patient" capital.

CHAPTER TWO

COMPARATIVE ANALYSIS OF THE CONCEPT OF INDEPENDENT DIRECTOR

As was already said, corporate governance has received a lot of attention recently on a worldwide scale. This is mostly attributable to the several recent company failures, which in turn prompted improvements in corporate governance. The rise of the independent director is a result of these changes. According to some, the creation of the independent director notion is what makes corporate governance tick. There is no question that achieving effective corporate governance depends on independence. High levels of independence and impartiality are necessary for the board of directors to properly carry out its responsibility of efficiently overseeing the actions and decisions of management. Therefore, it is impossible to overstate the importance of the independent director in corporate governance.

It is helpful to examine other definitions of the idea before doing a comparative study of the independent director definition found in a few corporate governance Acts and recommendations. Indeed, the term "independent director" defies easy explanation since it is rather vague. For many commentators, it has diverse meanings. The words outside director, non-executive director, non-interested director, non-management director, non-employee director, disinterested director, etc. have all been used interchangeably. Despite the fact that each of these titles has a unique definition and suggests a distinct job for the director it refers to, they are commonly used interchangeably.

The independent director is defined by the Council of Institutional Investors as a person "whose directorship is his or her sole tie to the business." The only nontrivial professional, family, or financial tie an impile has to the company, its chairman, CEO, or any other executive officer is his or her directorship, according to the definition given in the definition.

The Council members acknowledge that a director's impartiality and devotion to shareholders are dependent on all of the ties the director has, including relationships with other directors. According to the Organisation for Economic Co-operation and Development (OECD), an independent director is a person who does not work for the firm and is not in a close familial or personal relationship with it or its management. In addition to earning director compensation, he or she is a non-executive director who, "apart from having such skills for being regarded as an independent director, does not have any substantial connection or transaction, of such amount as may be required, with the business."

Independent directors are a subset of non-executive directors (not all non-executive directors are independent), who are free from management, powerful shareholders, and other competing interests including those of the company's employees and suppliers of products and services. The independent director is one who "has no link of any type whatsoever with the company, its group, or the management of either that is such as to colour his or her judgement," according to the French code of Corporate Governance for Listed Companies. He or she should also be considered to be "one devoid of any special ties of interest" (major shareholder, employee, etc) with them in addition to being a non-executive director. In his work titled "The Independent Director in Chinese Corporate Governance," Donald C. Clarke provides a fascinating description of the independent director. He claims that an independent director will be able to speak out both within and outside of the boardroom in the face of management wrongdoings in order to safeguard the interests of shareholders since they have no need or desire to maintain good relations with management.

KING II, AUSTRALIAN CODE, COMBINED CODE UK

The corporate governance standards examined in this research are from countries with various cultural traditions, ownership structures, historical financial practises, and legal foundations. The German and French codes, for example, indicate the two-tier board system, whereas other codes represent the unitary (or one-tier) board system. Despite having different historical roots, the rules are very similar, particularly in the way they see the important functions and obligations of the board and provide suggestions for improving its composition, structure, and procedures. For instance, although though the functions are more clearly defined in the unitary rules, both the supervisory and management roles of the board are recognised in all of the codes. The guidelines advise the selection of non-executive (or outside) directors who are independent from the board's administration in order to emphasise the distinction between the two roles. Additionally, they advocate for the separation of the CEO and board chairman responsibilities (or managing director). They advise that distinct people fill the two jobs.

The guidelines also advocate for the appointment of a senior (or lead) independent director to function as a point of contact or mediator amid major conflicts between executive and non-executive directors, as well as when the chairman and board are being evaluated for their performance. Some, like the Australian code, advocate having an independent director serve as the chairman. They suggest that each director's independence be regularly evaluated, and in this respect, each director is to tell the board of his personal interests. The names of the directors who the board believes to be independent must be revealed, together with the board's justifications, in the company's annual report. With this strategy, it is hoped that investors would be better informed and able to evaluate the level of the board's independence and its requirements for independence. The regulations also acknowledge that a committee structure allows the board to perform its supervisory function more successfully. This is especially true in areas like audit, nomination, and pay where there may be a conflict between the company's and management's interests. The guidelines suggest that independent directors serve a substantial role on the audit, nominating, and pay committees in addition to advising the formation of these committees. For instance, each listed firm must have audit, nomination/corporate governance, and pay committees, and these committees must be made up completely of independent directors, according to the NYSE corporate governance guidelines.

This section of the paper makes an effort to compare how different corporate governance instruments define a "independent director." We begin by contrasting the definitions of the term found in the South African code (King II), the Australian code, and the combined code from the UK, which are all examples of the "unitary board" structure that is common in the Anglo-American corporate system. The definition given in the French code, which is a representation of the "two-tier board" structure that is prevalent in Continental European corporate systems, is then compared to these. The concept of an independent director as stated in the NYSE corporate governance guidelines is the last term we will examine.

Most of these regulations take a two-pronged approach to bolstering board independence. They support increasing the number of independent directors serving on the board and its committees, on the one hand. They instead use a broader but more constrained concept of independence. This appears to demonstrate a strong conviction in the independent director's ability to address the issue of corporate governance that permeates the business sector. Expectations of independent directors are rising as a consequence, while it is yet unclear if more board independence leads to improved company performance. A key finding from a review of these definitions is that they are negative in nature and include criteria that rule out a director from being regarded as independent. They describe the factors that make it impossible for a filmmaker to be autonomous. They often provide a list of situations or connections that suggest non-independence rather than a clear description of what independence entails.

The exceptions to this rule are the definitions of the Combined Code and the French code. What they do is provide a list of many factors that may be important in deciding whether a director meets the requirements for independence. They describe some situations whose presence could be important in figuring out a director's independence. As a result, they provide corporate boards some discretion to assess director independence by taking into account each director's unique circumstances and affiliations. This implies that a director would not instantly become independent or cease to be regarded as independent simply because any of the situations stated above existed. Each director's unique situation and affiliations would need to be taken into account separately by the board when reaching a decision.

The definitions' structural approach to the idea of independence, where "independence appears to imply being consistently in a position free of any conceivable conflict of interest," is another thing to note. They seem to adopt a more formal strategy. Character, attitude, and judgement are other independent-related elements that have not been taken into account. Instead, the emphasis is on the conditions and events that might lead to conflicts between the independent director's personal interests and those of management. When it states that "the board should determine whether the director is independent in character and judgement and whether there are relationships or circumstances which are likely to affect, or could appear to affect, the director's judgement," the combined code appears to acknowledge the significance of these other "soft" components of independence. Some of the other codes also recognise that independence cannot be determined only by adherence to their formal specifications. In fact, certain recent corporate scandals have shown that only having nominally independent directors present without these "soft" components, such as an independent mindset and a solid character, would not shield companies from future governance violations. No code of corporate behaviour and ethics, in accordance with NYSE regulations, can substitute for the considerate actions of an ethical director, officer, or employee. However, a code of conduct like this may direct the board and management to areas of ethical risk, provide advice to staff to assist them recognise and handle ethical difficulties, give channels to report unethical behaviour, and help to develop a culture of honesty and responsibility.

The definitions of independent directors in South Africa, the United Kingdom, and Australia may be closely compared and found to have a very similar structure. Each one of them has seven distinct situations or components that, if present, would make a director autonomous. The three definitions agree that an independent director is a non-executive director as a starting point. To put it another way, an independent director isn't a full-time paid worker of the business or group and isn't responsible for day-to-day management. Since the idea of independence implies separation (independent) from executive management, this is, of course, the foundation upon which independence may be evaluated in the first place. Additionally, it should be remembered that not all non-executive directors may be regarded as independent.

While the King II and Australian definitions concur that an independent director must not have worked for the company or group in an executive capacity in the three years prior to being appointed as a director, the combined code states that whether he has worked for the company or group within the last five years is a factor that is relevant to whether the board should consider the director to be independent. It is evident that the obligation under the combined code has a greater reach. The definition offers the board some discretion in assessing a director's independence. In other words, even though this director may have worked as a corporation executive, they might still be regarded as independent.

Ironically, it makes sense to infer that a director who had held a senior executive position within the recent three to five years would not be independent. Indeed, given the nature of the position, there would very certainly be conflicts of interest, and it is difficult to see how such a director, who has previously served as an executive "insider," could continue to function objectively. Although it could be assumed that a director would be independent if the prior employment was in a non-executive capacity, the board is expected to consider the specific circumstances of that prior employment in order to make that determination. The key factor is the director's prior executive employment.

It should be noted that the combined code provides for a five-year period, which is consistent with the five-year look-back period of the Council of Institutional Investors 2006 director independence standards. King II and the Australian definitions only allow for a three-year (financial) look-back period. An independent director cannot have served as a director after leaving any such employment with the firm, according to the Australian definition. This might imply that a director who served as a non-executive director of the same firm for the previous three years would not be regarded as independent.

An independent director is one who has no substantial contractual tie with the firm or group and who is not a significant supplier to or client of the company or group, according to King II and the Australian code. The Australian definition goes further by stating that the director in question cannot be an official of, connected to, or a client of a material supplier of the firm or group. This might imply that, under King II, a non-major supplier or customer independent director could yet serve as an executive of or be connected to a significant supplier or customer of the business. In this aspect, the Australian definition is more useful since it aims to minimise any circumstances that can compromise a director's independence of judgement. The director's personal interests and those of the firm might potentially collide via such indirect relationships with customers or suppliers.

An independent director must be free from any business interests or relationships that could reasonably be seen or perceived as interfering with his ability to act independently or in the best interests of the company, according to both King II and the Australian definitions, which could be referred to as a "omnibus criteria." This clause's crucial component is not necessarily the existence of such a connection or interest; rather, what matters is how significant such a relationship or interest is. Is it such that it could obstruct the director's ability to make autonomous decisions? This clause seems to include all such indirect relationships that are not covered by the other parts. An illustration of this would be if a director was involved with or had a connection with a political or philanthropic organisation that the firm supported. In this situation, it would be necessary to assess how much the director's connections would impair his capacity to act impartially and in the best interests of the firm. There doesn't seem to be any such clause in the definition of the combined code.

A large shareholder's representative may not be an independent director, according to the unified code. In accordance with King II, a non-representative director is one who is not a controlling shareholder's agent; in accordance with Australian law, a non-representative director is one who is not a substantial shareholder of the company, an officer of the company, or otherwise directly connected to a substantial shareholder of the company. This may be taken to suggest that independent directors could be substantial shareholders themselves or officers of significant shareholders under the criteria of the unified code and King II. The purpose of this portion of the definition is to guarantee that the independent director does not act to safeguard the interests of merely a constituency of shareholders, namely controlling shareholders. If this were the objective of the drafters of these regulations, the goal would be thwarted. In order to safeguard the interests of all shareholders and not just a subset of them, he is supposed to be independent of management. Where the director is a large shareholder or an officer of a significant shareholder, it would be challenging to do this. In such case, there would undoubtedly be a conflict of interest. By no means does this imply that the independent director should have a stronger motivation to operate in the best interests of the shareholders. Independent directors should not vary from other directors based on their personal characteristics. All directors should ideally act in the best interests of all shareholders.

The King II definition further stipulates that an independent director cannot serve as a group or company's professional adviser. The Australian code is more specific in stating that he must have served as a principal or employee of a significant professional advisor or consultant to the firm or group during the three years before. The term "material" implies that there are experts who are deemed to be non-material consultants and counsellors. To put it another way, keeping connections with them may not be bad for the business or the director's feeling of independence.

Since he is a principal or employee of a non-material professional advisor or consultant to the firm, such a director may still be regarded as independent. Again, it would appear that the goal of this component is to avoid the potential conflict of interest issue and resulting lack of impartiality that would undoubtedly develop if a director also serves as a corporate advisor or consultant. On this subject, the Combined Code is quiet.

The Combined Code, however, stipulates that an independent director cannot have, or have had during the previous three years, a substantial commercial involvement with the firm, either directly or as a partner, shareholder, director, or senior employee of a body that does. The issue with this is that it is difficult, if not impossible, to define what may be considered a "material business connection" since it could encompass a relationship that is professional, commercial, consultative, or even family. To ascertain if a particular director's commercial contacts are significant enough to interfere with his feeling of independence or result in a conflict of interest, all pertinent facts of those relationships must be taken into account. The Australian definition stipulates that an independent director must not have served on the board for a time period that might, or could reasonably be considered to, significantly impair the director's capacity to act in the best interests of the firm. This requirement is absent from King II. What is an acceptable time frame that might negatively impact a director's feeling of independence is the question that emerges. In certain situations, what is acceptable may not be reasonable in others. The Combined Code is more clear when it states that a director's independence will be considered after they have served for more than nine years from the date of their initial election. This is compatible with the NAPF68's definition of an independent director, which specifies that they cannot have served as a non-executive director for more than three periods of three years (nine years).

According to King II, an independent director cannot be a member of the immediate family of someone who is or has been an executive employee of the firm or group for any of the previous three financial years. The combined code similarly states that a director's independence would be affected by having close familial relationships to any advisors, directors, or senior employees of the firm. There is no equivalent clause in the Australian definition. Family connections and cross-directorships, however, may be seen as interests and relationships that threaten independence, according to other statements.

It is difficult to define precisely what "family relationships" are. It is a somewhat vague and general phrase. Does this refer to simply members of the immediate family or does it also include members of the extended family? King II is clearer when it says that the person "...is not a member of direct family." Another issue is the definition of "immediate family." According to some definitions, it includes anybody who lives in the same house as the individual, including their spouse, parents, siblings, children, parents-in-law, sons, daughters-in-law, brothers, and sisters-in-law.

However, it may be reasonable to conclude that, for this purpose, what is to be examined are such family relationships that are capable of interfering with a director's independent judgement, whether they be extended or intimate family ties. In this case, the board would have to take into account the unique circumstances of each director.

In accordance with the provisions of the unified code, an independent director is also prohibited from receiving compensation other than director's fees and from taking part in the company's share option or performance-based pay programme. Additionally, he cannot be enrolled in the company's pension plan. Receiving compensation in addition to the director's fees or other compensating advantages may have an impact on the director's judgement. However, it is difficult to understand how exercising his share option would compromise his independence. If anything, share options should serve as a motivator for directors to align their interests with shareholders' interests, resulting in greater independence from management. The agency issue in corporate governance caused by the separation of control from management may also be addressed by this.

The independent director cannot have substantial connections to other directors via membership in other organisations or firms, which is another requirement of the Combined Code definition of an independent director. The Australian concept also includes the cross-directorship component. It seems plausible to claim that having many directorships might jeopardise a director's feeling of independence. For instance, it is without a doubt a symptom of possible conflict of interest when a director concurrently serves on the board of a rival firm. It is difficult, if not impossible, to see how such a director could uphold his fiduciary obligation of acting "at all times" in the company's best interests without encountering friction and eventually losing his independence. This is where having many directorships might be risky. However, it might be difficult to foresee or plan for all scenarios or connections that would constitute "substantial ties" with other directors. In today's corporate world, it is common knowledge that directors are involved in several firms and have a variety of commercial contacts. This is especially true in nations where there are just a few people who may serve as company directors. In such nations, it is typical to see one person holding up to four or five directorship posts concurrently. The same group of people often hold board positions, which leads to the development of professional and social ties among them. Some of these connections are considerable, and they do in fact have a detrimental effect on the directors' ability to exercise objective judgement in situations when vested interests need to be preserved. Indeed, a director's independence should be based on all of their interactions, including those with other directors, since these ties might affect their impartiality and commitment to the firm.

FRENCH CODE VS NYSE RULES

The purpose of this section of the research is to compare and contrast the definitions of independent director found in the NYSE Corporate Governance Rules and the French Code of Corporate Governance for Listed Corporations. The NYSE regulations are of a mandatory nature, thus businesses listed on the exchange are expected to abide by its terms. This is a crucial fact to keep in mind.

Unlike the French code, which has a voluntary nature, this is different. The requirements of the French code and the majority of other codes are suggestions that are, at best, of a persuasive nature, but the NYSE may penalise corporations that do not comply with its corporate governance regulations. Companies may decide whether or not to follow their advice. However, this pattern is quickly shifting since corporations are now required by stock market laws in many countries to report their degree of compliance with the criteria outlined in these codes. Companies who do not adhere to these regulations risk punishment in these countries for failing to implement generally recognised corporate governance standards. This is in addition to the fact that capital owners like investing in businesses with sound corporate governance policies.

Another finding is that the NYSE definition often equates a director's independence with the amount of money the firm pays him. The amount of income a director or a member of his family gets from the firm, or his affiliation with another business that pays his company or receives payments from it, are key factors in assessing a director's independence. The recent increase in CEO compensation in the US and other countries may not be unrelated to the attitude of the NYSE definition. Indeed, some of the root reasons of recent company failures have been linked to elements like exorbitant executive compensation, CEO avarice, and executive ostentation. These laws, which define an independent director (for audit committee purposes only) as someone who accepts no compensation from the company other than director's fees and is not a "affiliated person" of the company or any of its subsidiaries, reflect the same attitude. The Sarbanes Oxley Act76 and the Securities Exchange Act77. The French and other definitions, which tend to concentrate more on the director's ties with other stakeholders or bodies connected to the firm in some manner and which may or may not necessarily entail monetary remuneration, are significantly different from the NYSE's position in this regard.

The fact that each of the criteria in the NYSE independent director definition has a three-year "look-back" term is another point that should be made. In other words, the board must take into account the director's affiliations or interests in the three years before to the finding when deciding whether a director is independent with respect to a specific criteria of the definition. On the other hand, the French definition includes a five-year "look-back" period. Whether the connection or interest in question has a duration of five or three years, what matters is its materiality and whether it may prevent the director from acting independently.

In this respect, the board must look at each director's unique circumstances. This is required since a director's independence won't be assured by just meeting the "look-back" criteria. Even if a director meets the statutory requirements, they may not be able to act independently or with objectivity while making company decisions. As was previously noted, independence entails more than only meeting a set of statutory requirements.

The fact that the NYSE definition includes the director's immediate family members is an additional intriguing aspect of the term. In other words, the board must take the circumstances and ties of a director's immediate family into account when establishing that director's independence. This feature passes practically all of the definition's requirements. The definition of "immediate family member" in the commentary to the first criterion states that it includes a person's spouse, parents, children, siblings, mother and father-in-law, son and daughter-in-law, brothers and sisters-in-law, and anyone who lives in the same household as that person, excluding domestic workers. This definition of an immediate family member is actually quite comprehensive, and other rules should use it to define "family relations." Other definitions don't emphasise ties between members of the close family as much.

The sole requirement that unites the French and NYSE definitions is that an independent director cannot also be a corporate employee. The French definition adds that he cannot now be and cannot have been a corporate official, employee, or director of the firm, its parent company, or a company that it consolidates. On the other hand, the NYSE definition adds that a director's immediate family member cannot now serve as an executive officer of the business or have served in such capacity within the preceding three years. The NYSE definition indicates that references to the firm also include its parent or a subsidiary of the same group in the comments on this criterion. Furthermore, it emphasises that serving as a temporary chairman or CEO does not preclude a director from later being regarded as independent.

First of all, it is confusing to comprehend the apparent difference between an employee and an official of a corporation. In fact, it is reasonable to wonder if becoming an executive or corporate officer is conceivable without first holding a job. Although it is true that not all firm workers hold corporate or executive officer positions, is it conceivable for a non-employee to do so? Being in such a position would imply that one works for the firm, since even executive directors are often thought of as workers. Therefore, it is redundant and perhaps confusing to employ both words in the French definition. All other codes under examination appear to recognise this viewpoint since they refrain from using the phrases in such a monotonous manner. In addition, it is unclear why a director who has served as a temporary chairman or CEO would still be regarded as independent. This is especially true in the US, where it is typical to see the same person holding both posts. It goes without saying that the CEO serves as the firm's "chief executive director" and that executive directors are engaged according to a contract with the company serving as their employer, thus their designation as "inside directors." Many board chairs participate in the executive and daily operations of the firm, thus they would not meet the barest requirements for independence in this area. Some may argue that the reason such directors are seen as autonomous stems from the position's transience (as interim chairman or CEO). However, the fact still stands that such a director would have been so deeply connected with the company's senior management that it would have been almost impossible for him to act independently in the future. The least that might be done in such a circumstance, disregarding all other factors, would be to apply the three-year look-back rule to establish the absence of any possible conflict of interests.

The French definition adds another requirement that an independent director cannot be "a corporate officer of a company in which the corporation holds a directorship, directly or indirectly, or in which an employee appointed as such or a corporate officer of the corporation (currently in office or having held such office going back five years) is a director." The justification for this clause seems to be that a director having such ties to the firm would be unable to utilise his independent judgement when making choices that might have an impact on the other company. He would undoubtedly be an insider and have access to inside knowledge about the firm as a corporate official of that other company. His interests as a director on the one hand, and those of a corporate officer of the other firm on the other, would undoubtedly collide in such a circumstance. This criterion's second leg seems to be discussing cross-directorships. Cross-directorships may impair an independent director's ability to make unbiased decisions. It may result in connections or conflicts of interest that would jeopardise the director's independence. Because of this, it is seen as being crucial to assessing a director's independence.

An independent director cannot be (or be tied to) a substantial client, supplier, investment banker, or commercial banker for the company or its group, or for whose business the corporation or its group accounts in a significant way, according to the French definition. Similar clauses are included in both the Australian definition and King II. The inclusion of the investment or commercial banker component makes a difference in this situation. It is assumed that these components were included as an extra measure of safety to secure and encourage independence. However, caution must be used to prevent making the standards so onerous or onerous that it becomes almost impossible for directors to comply with them. The significance of the connection or interest under consideration—specifically, whether it might be harmful to or compromise the director's independence—should be taken into account.

A director cannot be deemed independent under the first criteria of the NYSE definition unless he has no significant connection, either directly or indirectly, to the firm. Such a connection can be as a shareholder, partner, or official of a group that works with the firm. The question of whether the connection to the corporation is substantial comes up once again. In fact, the commentary to this criteria notes that it is impossible to foresee or expressly account for every situation that could indicate potential conflicts of interest or that might affect how substantial a director's connection to a listed business is. Therefore, it is recommended that boards carefully analyse all pertinent information before making "independence" conclusions. The board should, in particular, take into account the viewpoints of the people or organisations that the director has an association with when determining whether a director's relationship with the firm is material. Commercial, industrial, financial, consulting, legal, accounting, charity, and family ties are just a few examples of material interactions.

Additionally, materiality should be taken into account in regard to the director's independence. To put it another way, the inquiry should not just focus on whether a connection is substantial but also on whether it could indicate future conflicts of interest. Because not all material links may jeopardise the independence of the director. Therefore, the strategy should focus on two questions: Is the director's connection important to the business? Second, is it one that would be harmful to the director's ability to exercise independent judgement? It is impossible to foresee every situation that can lead to a conflict of interest, as the commenter noted. This is likely the reason why certain codes, such as the French and Combined codes, provide the board the discretion to decide whether a director is independent or not, regardless of any affiliations or other circumstances that would seem to be significant.

In this respect, a board is expected to establish its own independence criteria and is required to provide justification when a specific director is considered independent despite not having complied with the company's requirements.

A director is not considered independent, according to the NYSE definition, if he or a member of his immediate family gets more than $100,000 in direct income from the firm each year, in addition to director's fees and pension benefits. As was already said, the amount of direct pay the director or a member of his family gets from the firm seems to be the main point of interest in this case. According to this standard, a director may be regarded as independent if he earns more than $100,000 annually, provided that it is in the form of indirect pay. Similarly, he can be regarded as independent even if his annual direct remuneration totals $99,999. As a result, a director may be regarded as independent of the corporation as long as their salary does not exceed $100,000 per year and is not direct. This is clearly ludicrous.

Another requirement of the definition is that a director is not independent if he or a member of his immediate family works for or is connected to the company's current or previous internal or external auditors. The same clause appears in the French definition. According to this rule, an independent director cannot have served as the corporation's auditor during the past five years. The addition of the phrases "associated with" and consideration of the director's immediate family member in the NYSE definition is what distinguishes the two definitions. In fact, generally speaking, the inclusion of such a criteria seems to be fairly rational, since it would be difficult, if not impossible, for a director who, for example, sits on the audit committee to function independently if he had previously served as the company's auditor. The same rule applies if he or a member of his immediate family is connected to or employed by a current or previous auditor of the business.

The challenge in this situation is figuring out what type of connection would qualify as an affiliation. Additionally, since there are several levels of connection, it can be difficult to foresee every relationship or set of events that might lead to such. The board must carefully evaluate the circumstances of the director to determine whether he could be described as "affiliated" because it has been said that where affiliation exists, independence vanishes. The goal is to eliminate, or minimise as much as possible, all potential causes of a conflict of interest between the director and the company. A director who "is employed, or whose immediate family member is employed, as an executive officer of another company where any of the listed company's present executives serve on that company's compensation committee is not independent," according to another criterion in the NYSE definition, "is not independent." Due to the mention of the "compensation committee," this definitional term is particularly intriguing. Why specifically mention the "compensation committee" as opposed to the "nomination committee" or the "audit committee," one would wonder. It is debatable if these three are the most important board committees, in which case the independent director's position is crucial. The three committees are crucial to the smooth operation of the board and have evolved into crucial mechanisms for ensuring compliance with independence and other corporate governance standards, even though the audit committee is occasionally viewed as more significant and is therefore given more prominence by many commentators (likely due to the numerous accounting and auditing scandals).

A director's perception of independence could be damaged by membership in one of these three important committees. A director should not be considered an independent director under the conditions outlined in the definition if they serve on the nominating, pay, or audit committees. Even if the CEO and other executives of the firm are subject to recommendations from the compensation committee on pay and benefits, the definition's particular mention of this committee (and exclusion of the other committees) raises some questions. The NYSE's approach toward independence is greatly compensating, as was already noted. It links a director's remuneration or other significant financial incentives to the independence norm. A director is less likely to be independent the more remuneration he earns. The explicit reference to the compensation committee may have been used for this purpose. However, this should not be taken to imply that it is the most important body on the board.

According to the final clause of the NYSE definition, "a director who is an executive officer or an employee, or whose immediate family member is an executive officer, of a company that makes payments to, or receives payments from, the listed company for property or services in an amount which, in any single fiscal year, exceeds the greater of $1 million, or 2% of such other company's consolidated gross revenues, is not independent.... The NYSE definition, which measures independence by the amount of financial rewards provided to or received by a director or firm, is once again reflected in this. Why nonprofit organisations are not regarded as "businesses" for the purposes of this criteria is a mystery. Ties with charity organisations have to be taken into account when considering conditions that might result in conflicts of interest, as the first leg of the definition acknowledges, because such relationships may be substantial. A listed firm must, however, disclose in its annual proxy statement "any philanthropic donations made by the listed business to any charity organisation in which a director serves as an executive officer" according to the commentary on this criteria.

PART 2

CHAPTER THREE

INDEPENDENT DIRECTOR AND FIRM PERFORMANCE

It's possible that independence advocates' cries for more autonomy on corporate boards have mostly been heard. As was already said, the majority of analysts welcome the movement toward more board independence. 88 Today, corporate governance campaigners call for boards on which independent directors constitute a "substantial majority," while observers refer to the "norm" of a supermajority independent board. The need for a "independent watchdog" is proclaimed by academics, who contend that "an active and independent board of directors working for shareholders clearly would seem to benefit the corporation by reducing the losses from misdirected "agency" inherent in the separation of ownership from control that is fundamental to the modern corporation." These days, a "supermajority" of big American public corporations have independent boards with only one or two inside directors. For instance, a 1997 study of 484 S&P 500 companies revealed that 56% of those companies had only one or two internal directors. "Only nine firms (2%) had an internal director majority, while the typical business had almost 80% outside directors," according to the study. In 2001, independent directors made up a majority of the boards of almost 75% of NYSE-listed businesses and 65% of S&P 1500 corporations. By the time the Sarbanes-Oxley Act was passed in 2002, the majority of public businesses had independent boards with supermajorities, and just one or two inside directors. Some independent director supporters admit that inside directors perform a significant, if not essential role on a company's board of directors despite the current trend toward higher independent director participation. 94 It is said that inside directors are better positioned to make choices at the board level that will affect the company's short- and long-term orientation because of their close participation with day-to-day business activity. In fact, there is some evidence that increased profitability is associated with having a reasonable number of inside directors (let's say three to five on a normal eleven-member board). On the other hand, studies of overall business performance have not uncovered any strong evidence that companies with majority-independent boards outperform those without. One can argue that having independent outside members on a board of directors really makes them less effective. "Because of their limited exposure to corporate activities, outside independent directors might prove to be a hindrance to management in their efforts to supervise and monitor the operations of the business," the report states.

Independent directors "frequently turn out to be lapdogs rather than watchdogs," according to some analysts. It is said that despite having mostly independent boards, firms like Enron, Hewlett-Packard, GM, IBM, Kodak, Chrysler, Sears, and Westinghouse fared horribly for years. Others have been tarnished by controversy, including WorldCom, Apple, Converse, and United Health, to mention a few. Additionally, despite the recent trend toward supermajority-independent boards and independent pay committees, "chief executive salary increased throughout the same time that independent directors became dominant on big firm boards." The function of the independent director in connection to managing the company, evaluating managerial performance independently, and finally in relation to the success of the company has therefore been called into question by these and similar occurrences. As a result, the subject of whether more board independence leads to better corporate performance has been raised repeatedly. This chapter covers data obtained from several empirical research carried out by chosen academics and others. These will demonstrate that there is mixed and sometimes contradictory data about the effect of independent directors on corporate performance. While some studies provide evidence that independent directors do not improve business performance, others provide some evidence that independent directors add value in certain areas, such as the accomplishment of particular board responsibilities. (This data tends to show that majority independent boards perform some tasks better but others worse.) In order to determine whether independent directors (or majority-independent boards) have any impact on the performance of particular board tasks, such as making or opposing a takeover bid, CEO replacement, executive compensation, and financial reporting, the first part of this chapter reviews evidence from studies. It also briefly reviews research-based information about the potential advantages on company performance of certain mechanisms, such as the separation of the CEO and board chair roles and the usage of nominating, pay, and audit committees made up completely of independent directors. The second section of this chapter looks at concrete evidence that independent directors (board composition) and overall business performance are correlated.

DO INDEPENDENT DIRECTORS ADD VALUE?

TAKEOVERS

The board of directors of a firm plays a crucial role in big investment decisions like the purchase or takeover of another business. Independent directors' impact should be seen in the takeover process if they really represent the interests of shareholders and work to maximise shareholder value. Indeed, some empirical data does imply that independent directors do play an essential role as a shareholder advocate (the stock price response to the news of a takeover proposal gives a gauge of whether shareholders believe the acquirer has gotten a bargain or has overpaid). According to a study by Byrd and Hickman, when independent directors make up the majority of the board in tender offers for bidders, shareholders are better rewarded. They discovered that, for a sample of 128 takeover bids from 1980 to 1987, bidders with a majority of independent directors earned an announcement-date abnormal return of 0% on their acquisitions while bidders with a majority of executive and affiliated non-executive directors lost, on average, a statistically significant amount. This seems to be due to the lower takeover premia offered by bidders with majority independent boards. It also seems to demonstrate that independent directors were not as willing to overpay as non-independent directors, while allowing their firms to overpay when purchasing another company. According to certain research, target firms for tender offers with majority-independent boards see stronger stock price returns than target companies with majority-nonindependent boards. This tends to demonstrate that targets with majority-independent boards are more effective at obtaining larger acquisition premia from an acquirer, hence enhancing shareholder returns.

Bhagat and Black contend that if the target business has a majority-independent board of directors, there cannot be larger efficiency improvements. They contend that if the target firm has a majority-independent board, a higher takeover price is merely a transfer of wealth from the bidder's shareholders to the target's owners, and there is no evidence of improved returns to both the bidder and target companies. Since there is some evidence that this might result in fewer takeover offers for businesses with majority-independent boards, they come to the conclusion that better returns to shareholders of actual target companies may not help owners of prospective target companies.

In light of the implementation of takeover defences, it may not be true that independent directors are more effective at maximising shareholder value. According to several research, when the company had a majority-independent board, the stock market's response to the implementation of poison pill defences was considerably favourable, and when it didn't, it was significantly negative. On the other hand, some studies suggest that when there is a larger share of independent directors, there is a negative stock market response to the adoption of poison pills and other takeover defences. Others have seen no connection between the percentage of independent directors and the propensity of the firm to use a poison pill defence. Regarding the use of greenmail as a takeover defence, businesses with a high percentage of outside directors are more likely to use greenmail to bribe a prospective bidder into withdrawing their offer. Overall, there isn't much proof that independent boards adopt and use takeover defences in a much more (or less) shareholder-friendly manner than other boards do.

CEO REPLACEMENT

It is widely acknowledged that the board's primary duty is to remove or discipline a CEO who is not operating up to par. There is minimal data suggesting that independent and inside directors have different attitudes on the hiring of a new CEO. Weisbach showed that a board with at least 60% independent directors was more likely to terminate an underperforming company's CEO than a board with fewer than 60% independent members in a thorough research on how board composition corresponds with CEO replacement. 118 According to other research, CEOs are replaced at a greater rate in companies with a large percentage of outside directors than in other companies. There is some evidence that, generally speaking, a CEO change results in a minor improvement in a company's performance. Other observers counter that the increased firings by 60% independent boards have no economic impact. They contend that the data shows that independent directors, who are probably less familiar with a company than inside directors, may be faster to remove a CEO when things are going badly, but may take too long to do so when things are going well for the company's stock price.

EXECUTIVE COMPENSATION

It is commonly acknowledged that the board of directors' responsibility to decide on and assess the compensation of the company's CEO and other senior executive officers is crucial. It is often advised that the pay (or remuneration) committee of the board be constituted mostly, if not fully, of independent directors to strengthen the board in carrying out this role. The pay committee may put in place compensation plans that will aid in attaining the business' long-term performance goals and make sure that shareholders' interests are not put on the back burner in favour of management's immediate concerns. However, according to some research, CEO pay is often greater in companies with majority independent boards. Other research finds no proof of a connection between CEO salary and the percentage of independent directors on the compensation committee. In contrast, several other studies have shown that the bigger the percentage of independent members on the board, the higher the average CEO compensation. In other words, the CEO gets compensated more the bigger the percentage of independent members on the board.

CEO salary was found to be higher in businesses with linked non-executive directors (insider-influenced compensation committees) than in those with compensation committees made up of of independent directors in a study of 161 of the 250 biggest U.S. listed corporations (independent compensation committees). According to the research, "with everything else being equal, the CEO of a business with an insider-influenced pay committee got around 20% higher compensation than the CEO of a company with an independent remuneration committee." 127 The likelihood of a company implementing a stock-option plan for outside directors is greater when the board is predominated by independent outside members and when institutional equity ownership is substantial, according to a research by Fich and Shivdasani. A separate research involving 167 American companies found that the CEO's pay and bonuses increased in proportion to how much influence he or she had on the board of directors. Additionally, a research of the banking sector found a negative correlation between the percentage of outside directors and pay expenditures, indicating that outside directors may have assisted in reducing exorbitant salaries.

Lawrence and Stapledon stated that the pay practises of Australian firms do not seem to differ in line with the makeup of the remuneration committee in their research of the value of the independent director in Australia. They also found no evidence that merging the CEO and chairperson duties or having fewer independent members on the board increases CEO remuneration. Overall, these research show that there is conflicting data about the link between CEO pay and independent directors (or board composition). There is no question that an independent compensation committee can strengthen corporate boards by successfully managing and evaluating the level of executive compensation, even though the evidence has failed to conclusively dispel questions about independent directors' ability to rein in excessive executive compensation. Occasionally, the pay committees of businesses like Enron, Global Crossing Ltd., etc. are mentioned. These committees were made up solely of independent directors, yet they were unable to oversee and regulate excessive executive salaries.

FINANCIAL FRAUD AND FINANCIAL REPORTING

Since the Sarbanes Oxley Act was passed in the US, all publicly traded firms are obliged to set up audit committees that are wholly made up of independent outside directors. The trustworthiness of the company's financial statements is crucially maintained by the audit committee. In fact, it is generally accepted that an independent audit committee may strengthen the board of directors by policing how management discloses financial information. Conflicting empirical data exists about the connection between the independence of the audit committee and the accuracy of the financial accounts.

While some studies show that organisations with independent audit committees are more likely to have trustworthy financial information, others show that having an independent audit committee does not improve the dependability of financial data. According to one research, businesses without an audit committee and with a majority of inside (executive) directors are more likely to perpetrate financial fraud. 135 According to a related research, fraud-committing companies had fewer independent directors than their matched control companies. However, a second research found no proof that the makeup of the board of directors had an impact on the overall quality of financial reporting by American businesses.

INDEPENDENT DIRECTOR AND FIRM PERFORMANCE

Now, we review the empirical data that currently exists (much of it based in the US) on the association between independent directors (or board composition) and business success. Again, the findings are conflicting and inconclusive. ‘ The question of whether board composition affects the firm's performance in any way is at the centre of the debate. While some research claim that increasing the number of independent directors on a board enhances company performance, other studies have not shown a connection between independent directors and corporate success. One research by Baysinger and Butler is among several that suggests a connection between independent directors and company success, finding a positive correlation between the percentage of independent directors in 1970 and return on equity in 1980. Early in the decade, companies with a larger proportion of independent directors had, on average, better performance records by the conclusion of the decade. Financial performance was shown to be better in organisations with a relatively high number of independent directors than in those with a relatively small number of independent directors, according to a study of 100 small listed U.S. corporations. A number of other studies, including Gautchi and Jones (1987), Cochrane et al. (1985), Zahra and Stanton (1988), Rosenstein and Whyatt (1990), and Donaldson and Davis (1991), discovered a strong correlation between board composition and the firm's performance and managers' accountability to shareholders.

The research by April Klein, which examined the makeup of the boards' committee structures of companies listed on the S & P 500, is one of those studies that discovered a negative link between having a lot of independent members on a board and future business performance. She discovered that the percentage of independent directors had no discernible impact on the success of the company. Additionally, she discovered that "inside directors are more likely to be found on the boards of corporations that require the inside director's knowledge, suggesting that these directors might be helpful if utilised." In a different research by Agrawal and Knoeber, it was shown that having more independent directors negatively affects the success of the company. In other words, more board independence has a bad impact on business success. Bhagat and Black conducted one of the most thorough and extensive research ever conducted in this field, and they found no indication that companies with a majority-independent board outperform those with more inside than independent directors. Instead, it was shown that slower growth was associated with a large percentage of independent directors. They also discovered that having a sizable number of internal directors may be advantageous for businesses.

They looked at 957 major U.S. public firms' financial and stock price performance between 1985 and 1995. Additionally, they looked at the ownership of shares by the management, the board of directors, and the top 5% of shareholders in these businesses. They discovered that although some independent directors may contribute value, others do not. Donald Clarke states that there isn't much empirical basis for the idea that independent directors in China improve business performance in a study of the independent director in Chinese corporate governance. Another research of the top 100 ASX-listed businesses revealed no compelling proof that the percentage of independent directors affects corporate success, whether accounting performance or share price returns are used as the primary metrics. The research were unable to provide conclusive proof for the claim that independent directors increase or decrease value. 151 The number of inside directors and the market-based measure of company success were shown to be positively correlated in a comparable analysis of the link between board demography and corporate performance in 348 of Australia's top publicly listed corporations. In contrast, no such association was seen with regard to the performance metric based on accounting. In a separate research, Millstein and McAvoy took an alternative tack by putting more of an emphasis on board behaviour than board composition. They discovered a strong and statistically significant link between having a functioning board of directors and better organisational success (measured by operating profit excess of costs of capital over the industry average). In their own words: "Our experience is that boardroom behaviour is what is critical, and that the professional board is an active monitoring (but not meddling) organisation that participates with management in formulating corporate strategy in the interests of the shareholders, creates the right incentives for management and other employees to harness their interests to achieve the mutually agreed-upon strategic plan, and then judges management performance against the strategic plan." In light of this, it is impossible to assess a board's effectiveness using general structural factors like the number of outside directors, the frequency of board meetings, and the like. Being present in the boardroom is the only certain method to determine how well a board is functioning, and we are unable to do that. However, certain board procedure components show that there is a setting where active monitoring is present. Additionally, we think specific process representations may be employed to show performance monitoring in order to identify well-governed boards. Millstein and McAvoy referred to the independent board leadership, whether through a non-executive chairperson or a lead independent director, periodic meetings of the board's independent directors without management present, and formal guidelines to regulate the board's relationship with management as process representatives. According to Millstein and McAvoy, these members demonstrated board conduct that might be used to determine if a board is independent, has likely embraced a professional culture, and is therefore well controlled. It is clear from the several studies we have studied here that there is no apparent agreement among academics and researchers about the connection between board makeup and business success. There is little evidence to support the claim that the appointment of independent directors affects company performance. Additionally, there is conflicting data to support the idea that performance levels rise when there are more independent members on a board. Similar to that, there is conflicting information about whether or not having a majority of inside directors on the board improves the success of the company. Overall, there's no denying that a larger proportion of corporate governance proponents seem to favour giving the outside independent director a bigger role in the organization's administration and control. This is in line with the agency cost theory, according to which independent directors serve to lessen the expense caused by the conflict between the interests of corporate managers and those of shareholders by monitoring and supervising the administration of the company's operations.

CHAPTER FOUR

TOWARDS MORE EFFECTIVE CORPORATE GOVERNANCE

The increased global focus on corporate governance in recent years is proof that there are problems with our corporations' leadership. No company can be too big (financially or otherwise) to fail, as Enron, Parmalat, WorldCom, and other businesses demonstrated. Their poor corporate governance culture, including poor management, fraud, insider abuse by the board of directors and management, poor asset and liability management, poor regulation and supervision, was a recurring theme in these massive corporate failures. These incidents, along with other examples of poor corporate governance, have been named as the main reasons for the investing public's loss of faith in the stock markets and the general lack of trust that has afflicted the business world. Indeed, the success of our commercial institutions is entrusted to corporate directors by shareholders, employees, creditors, and the general public. Sadly, it took the current wave of corporate fraud and abuse to draw our attention to the board of directors and corporate governance in general. These corporate wrongdoings have had a negative impact on investor and public confidence in the honesty of corporate institutions and leadership.

The majority of surveys on the state of trust around the world reveal low levels of public confidence in business institutions and leadership. Corporate governors have consistently fallen short of our expectations, and ineffective boards have persisted in raising questions about the effectiveness of the entire system of corporate governance. The majority of studies have found little to no correlation between the presence of independent directors (or board composition) and firm performance, despite the proliferation of numerous codes, guidelines, and other instruments of corporate governance best practises and the ongoing call for increased director independence. In other research, the connection between the two components has even been shown to be negative. The difficult question that needs to be addressed is, how do we ensure that independent (outside) directors are empowered to effectively perform their role as independent and active monitors of management, for the benefit of the shareholders, in light of the growing scepticism regarding the relevance and impact of the independent director? To put it another way, "how can we make sure that directors are responsible and operate in the best interest of the business and its shareholders, particularly given that shareholders' legal and actual control over the organisation is limited?" It is so obvious that the question is how to increase the effectiveness and responsiveness of independent directors to their obligations. The contradictory results of the research mentioned above and the corporate wrongdoings at Enron and other businesses throughout the globe remind us that independence is insufficient. It's noteworthy to note that the majority of the outside independent directors on Enron Corporation's board of directors were independent outsiders. Only two of the 14 directors were insiders. They represented a broad spectrum of expertise in business, finance, accounting, and government. ‘ An executive committee, finance committee, audit and compliance committee, nominating and corporate governance committee—all the committees one could like to see—were all present on the board. The Enron audit committee had a model charter and was led by a former accounting professor who had previously served as the dean of the Stanford Graduate School of Business. This may have been most significant to the board's oversight function. Finally, the board convened five times annually on a regular basis, with additional sessions called as required. It is obvious that the presence of such a "wonderful" board did nothing to stop the accounting and auditing scams that caused the company to fall. It seems that the board was only "checking the boxes and going through the motions." The usefulness of the independent director is one key point that has been brought up as a consequence of these developments.

Independent directors are often accused of lacking the time, knowledge, and drive necessary to run the firm efficiently. They often have no idea what is going on within the business. Independent directors are, by definition, outsiders to the company who often have time-consuming day jobs and other obligations that prevent them from investing a lot of time in board activities. For instance, directors may serve on many boards or have executive positions with different businesses. Some of them could occupy governmental office, teach at universities, or work in the commercial sector as professionals. For information and direction in carrying out their jobs, they depend on insiders and other staff members who are more educated about the business's operations. Additionally, these directors who must oversee management are often chosen by the managers they are supposed to be overseeing.

The director will undoubtedly lose their impartiality as a result of this circumstance. Additionally, if directors are appointed due to executive generosity, there is no motivation to aggressively supervise management, which encourages apathy and compliance to its ambitions. At its worst, such a board of directors reduces to little more than a rubber stamp for the boss.

The fact that the majority of independent directors do not get sufficient incentives has also been brought up as an issue about their efficacy. When there are no real rewards for doing so, directors are unable to aggressively supervise management. The claim is that in order to align the interests of directors with those of shareholders, incentives like equity-based pay are necessary. Through substantial director stock participation, the aim is that ownership and control of the firm would be linked, leading to improved managerial oversight. Some have asserted that directors' stock ownership does lead to more active supervision. There is some indication that more shareholders may perform better as independent directors. Bhagat and Black found some evidence of a relationship between outside director ownership and company performance in their analysis of board composition and firm performance. They draw the conclusion that their data suggests higher stock-based incentives may improve the performance of independent directors. The claim that option-based remuneration helps align directors' interests with those of shareholders does seem to have some merit. Directors have alternatively been referred to as the shareholders' representatives. By receiving higher compensation based on stock options, independent directors in particular can play a significant role in assisting in the reduction of managerial agency costs. Stock options may seem like a good idea because they not only directly align directors' interests with shareholders' interests, but they also indirectly align directors' share returns with the company's performance. In addition to being totally impartial toward management, independent directors must also be sufficiently driven and compensated to uphold the interests of the shareholders and oversee management with objectivity. ‘While independence fosters objectivity, the board also must have an incentive to exercise that objectivity effectively. Granting independent directors stock ownership in the business may assist accomplish this goal’. There is simply no personal financial motive for directors to actively oversee management when they have no investment in the company other than their board membership. The question of whether an independent director is "really" independent has also been brought up in relation to their efficacy. Some contend that the independent director model developed by proponents of corporate governance is insufficiently independent. There are worries about persistent "soft" conflicts of interest and "institutional prejudices" that might jeopardise the independence of directors. Some directors who are considered independent are, in the words of one critic, "beholden to the firm or its incumbent CEO in too nuanced a fashion to be captured in conventional notions of independence." In this sense, the Enron example is quite instructive. Due to political and charity contributions, there were indirect connections between its management and board. The independence and impartiality of the directors were undoubtedly undermined by these interactions. For instance, two of Enron's directors served as president of an organisation, to which Enron and its CEO and Chairman donated about $600,000. Additionally, Enron donated more than $50,000 to a charity that hired an Enron director. The National Tank Company, whose board an Enron director served, reported over $2.5 million in income from sales of equipment and services to Enron businesses in 2000, and Enron paid one of its outside directors over $490,000 for consultancy work. Could it be stated that the Enron outside directors were "really" independent?

The personal responsibilities of directors are a different issue that has just come up. Directors, particularly independent directors, are held to very high standards nowadays for the efficiency of their monitoring duties. A larger need for director duty, accountability, and liabilities has arisen as a consequence of the push for more independence from outside directors. The legal and regulatory environment in which directors must operate has been tightened as a result of broad pressure. Any losses brought on by a director's violation of their fiduciary obligations to the business may subject them to personal liability. For instance, the American corporate structure "allows shareholders to sue directors and officers for injuries they have sustained either directly by corporate action or derivatively, on behalf of the corporation, for injuries done to the corporation because of wrongful actions by its officers or directors." Directors are being expected to be more responsible. Because of the increasingly dangerous legal environment in which they operate, there may be a shortage of non-executive directors in the market.

Many competent people are becoming more hesitant to accept vacant directorships because of the demanding workload demands on their time and the associated danger to their reputations. Therefore, as it becomes more difficult to locate people who would be ready to undertake the personal responsibility risks associated with board participation, the market for outside independent directors shrinks. Directors and officers believe they are "under a microscope" and that "severe repercussions would follow if they make a mistake," according to one author. Other effects on business performance and strategy result from the complexity and risk of board duties growing. Companies could, for instance, set more specific rather than more general requirements for the qualifications needed to be appointed as an outside director. On the other side, for fear of violating the responsibility standards, directors could become less meticulous in their monitoring and assessing of management choices and actions. Additionally, management can develop a fear of taking calculated business risks, which would be detrimental to the expansion of the firm as no organisation has ever prospered without taking some chances. If they behaved in good faith, directors and managers shouldn't have to worry about facing legal repercussions every time they make a mistake.

IS INDEPENDENCE OVERRATED?

What constitutes "genuine" independence has been debated by commentators from a variety of angles. While some define independence by the formal qualities and standards that may entitle a filmmaker to be called independent (structural approach), others approach independence from the perspective of how and how well a certain director performs his or her function as director (behavioral approach). Whatever strategy one chooses, most proponents of independence agree that "simple" independence is insufficient. In addition to focusing on the formal qualities that directors must possess, emphasis should also be made on additional informal aspects that can be important in this context in order to improve director independence and maximise board performance. Moving beyond the existing "box-ticking" approach to director independence is necessary to increase confidence in the abilities of independent directors and the board as a whole. As was previously mentioned in this research, a more comprehensive yet "soft" strategy is required rather than the formal or "hard" one used by many recent reform projects. If the lessons from Enron and other business catastrophes are any indication, then the idea of director independence has to be seen from a different angle, particularly if the objective is to increase board effectiveness. The idea of "freedom of thought" was put out by Van Den Berghe and Baelden.

They claim that rather than being a structurally formal term, the concept communicates the sense that independence is about the character and spirit of the individual being considered. The definitions of the corporate governance regulations and guidelines do not ensure the capacity or desire to reach an impartial decision. They claim that a director should possess "something more" than the qualities outlined in the corporate governance regulations and guidelines in addition to being in the proper position legally. They differentiate between official freedom and mental independence. According to him, having legal independence and mental independence are not goals in and of themselves, but rather a means to the aim of attaining board efficiency. They state that attentive oversight and impartial decision-making are essential to effective board performance and that the board should concentrate on these. The board would need both components of formal independence and mental independence in order to ensure attentive oversight and impartial decision-making. According to Richard Leblanc, independence is difficult to control since it is a mental condition. He contends that a large portion of what constitutes independence is only discernible in the boardroom, in the context of particular decision-making circumstances and the persons involved. In the boardroom, a director "may be conflicted and yet independent" or "may not be conflicted and not independent," according to him. In an effort to appease regulators in their overzealous pursuit of "independence," he continues, there is a tendency to appoint directors who are distant and ignorant of the company's operations and incapable of offering management concrete and meaningful strategic input or holding management accountable for achieving corporate goals. He comes to the conclusion that in order to create an effective board, the company or nominating committee must pay close attention to I the competencies required for the board and which ones, if any, are lacking, and (ii) the mix of behavioural types of the potential candidates. They must determine whether the candidate they are recommending to the board for membership is a behavioural type that will contribute to making the board process more effective. These are the criteria that ought to guide the choice of potential directors.

Effective corporate governance, according to another author, depends on the board of directors acting independently as a whole rather than on the independence of any one specific group of directors. According to him, board independence serves three main purposes: enhanced shareholder voice in corporate decision-making, explicit responsibility to shareholders, and informational openness. He claims that "not only do these tasks produce practical guidance for improving the procedures by which a board does its work, but also more effectively encapsulate the monitoring and oversight standards envisioned by present independence regimes." He depends on Professor Donald Langevoort's tripartite board structure, which calls for a board to be made up of managers, traditional independent monitors, and quasi-independent or "grey" mediators. 200 While board structure, makeup, and independence "condition board performance," Roberts, McNulty, and Stiles contend in their own study that "board effectiveness is really determined by the behaviour of the non-executive relative to the executive." They contend that "independence" should be viewed as a valuable resource for executives rather than simply requiring that non-executives remain distant and wary of the executives because, when enacted in the form of suspicion, "independence" emphasises the distinction between executive and non-executive directors. When used as a tool for the company's success, "independence" just enhances the unitary board's capacity to manage the risks and problems that are inextricably linked to decision-making. As long as there is a need for better board performance and corporate governance, the discussion on director independence will undoubtedly continue. Commentators will keep putting forward various ideas of what they believe to be "genuine" independence. It is widely acknowledged that a strong board is still a necessary component for achieving excellent corporate governance. The diverse ideas of independence must thus be included in governance changes, whether from the perspective of officially defined standards or from the perspective of individual director qualities. However, while doing so, the emphasis should be on enhancing the efficacy of each individual independent director. Such changes would need a departure from the legal and structural framework that most corporate governance principles now use to define director independence.

IMPROVING INDEPENDENT DIRECTOR EFFECTIVENESS

In this last section of the research, suggestions are offered in an effort to increase the efficacy of independent directors. As previously mentioned, the majority of research on the effect of the independent director on business performance provide conflicting results. Even the many formal and informal attempts implemented so far to improve board performance have not lessened the rising uncertainty over what function independent directors must serve in the organisation and how they should be best prepared to carry out this function. Without a question, independence is essential to good corporate governance, particularly in terms of preventing conflicts of interest and promoting impartial oversight and decision-making. Enron and many other scandals that followed it made clear that more needs to be done to improve board performance. Nominally independent directors on the board do not guarantee that the board will function effectively. In other words, a board that is independent is not the same as a board that is active. An active or productive board is a result of appropriate incentive and rewards. It has been claimed that altering incentives is one method to enhance the effectiveness of independent outside directors. The claim is that independent directors will be more motivated to carry out their duties of unbiased monitoring and supervision of management for the benefit of the shareholders if given the right incentives. The independent or outside director is a person who is said to have no material connection to the firm other than his directorship, and as a result, may not have any personal motive or interest to adequately oversee management. This justification seems pretty rational. Boards of directors have often come under fire for failing to exercise the type of active management supervision that enhances business success. As a result, recommendations have been made for the creation of improved incentive systems for directors, such as pay, replacement opportunities, and the chance to hold other board directorships. However, equity-based pay for directors, or forcing directors to actively participate in the ownership of the firm, has recently received increased attention.

The present demand for outside directors to receive pay based on stock options or equity is justified on the grounds that doing so would allow directors' interests and shareholders' interests to align. In other words, "through significant director stock ownership and therefore greater management supervision, the objective is to reconnect ownership and control." The claim is that the outside directors' significant stock participation generates a personally-based motive to actively supervise. Evidence from Enron and similar situations suggests that independent outside directors should be more active in their monitoring responsibilities. This, it has been said, is because there aren't enough compelling reasons for them to become engaged and dedicate themselves to fulfilling their position. Accordingly, it has been claimed that "the board of directors is responsible for ensuring that the firm has a strong strategy in order to safeguard the interests of shareholders. Many non-executive directors, however, hold relatively little stock in the firms they supervise, thus the profitability of such businesses has a little influence on their own wealth. According to the agency hypothesis, these non-executive directors are 'agents' of the 'principals' (the shareholders), not the 'principals' themselves, much like the executives they supervise. There should be a significant need to create incentives for another group of agents, the nonexecutives, if there is a strong need to do so for one group of agents, the executives. The idea behind this is that providing independent directors with higher equity-based pay would both ensure their independence from management and enable them participate in good governance. Indeed, there is some empirical support for the idea that providing independent directors with equity-based pay improves both business performance and the ability of directors to align their interests with those of shareholders. The market to book ratio and the existence of a stock option plan for outside directors were shown to be positively and significantly correlated in one research by Fich and Shivdasani. According to their findings, equity-based pay for outside directors increases business value. Bhagat, Carey, and Elson discovered in another research a substantial relationship between stock ownership by individual outside directors and company success (based on a variety of performance measures). They provide stock ownership as the reason for this finding, arguing that it enhanced the board's ability to supervise management, leading to better outcomes. This supports their claim that greater director share ownership and improved monitoring are related in some way. It may be challenging to definitively concur with these findings, which show that independent directors' equity-based pay does have some favourable effects on business performance. Like other evidence presented before, this is also inconclusive. However, it is impossible to deny that the idea that such pay aids in bringing the independent director's interests into line with those of the shareholders has some value. Outside independent directors must be driven to maintain their independence from management in order to be effective monitors and promote these shareholder interests. Equity ownership will make directors more sensitive to the company's performance as well as align them with shareholder interests. The outside directors now have a personal interest in the company's success or failure by becoming stock owners. Directors have an incentive to keep a closer eye on management's performance when they actively participate in the stock market since ineffective monitoring might directly harm their own financial interests. Without stock ownership, independent directors have little to no motivation to actively oversee management. Therefore, it is argued that long-term stock ownership for independent directors is a crucial tool for attaining successful corporate governance, in addition to objective oversight. ‘ Although independence may foster the objectivity required for effective oversight, equity ownership combined with independence creates the incentive for objective directors to act ultimately in shareholders' interest – to produce the kind of corporate productivity that justifies past and future public investments.

One of the methods for developing successful corporate governance has also been recognised as proper and ongoing performance review and assessment of the board of directors. A framework for routinely assessing the board of directors' actions has been suggested by several corporate governance regulations and recommendations to guarantee the efficient discharge of their duties. They advise businesses to implement procedures and controls that will allow for the efficient and thorough assessment of directors. The fact that the periodic review procedure discloses the calibre of the board and the directors on it is a significant benefit. It also helps in determining how successful the board has been in attempting to carry out its duties. Both the board as a whole and each director individually should be evaluated. The board must have a system in place for evaluating the performance of each director specifically. The board has the chance to delve further into specific concerns during individual assessment, which may be done either by self- or peer-evaluation. Peer review will allow directors to recognise each other's unique skills and limitations. Self-evaluation will inspire directors to consider their own contributions to board activities. It is feasible to have a more objective understanding of each director's strengths and limitations and how they contribute to the success of the board by having board members assess one another.

Directors may gain a clear grasp of their job and duties by regularly evaluating the board. Non-executive directors will already have the necessary qualifications upon appointment, according to the statement. However, a non-executive director's reputation and success in the boardroom will rely not only on their current skill set but also on their capacity to grow and update it. The King II corporate governance code of South Africa suggests that the chairperson conduct the board's informal evaluation and that the board, through the nomination committee or a similar board committee, regularly review the required combination of skills and experience as well as other factors like its demographics and diversity to gauge its effectiveness. The need for ongoing training and education for directors, particularly independent outside directors, is comparable to a regular review and appraisal of directors. Independent directors, as was previously said, are often external individuals who are not engaged in the day-to-day operation of the organisation. Because of this, it's possible that they lack the type of in-depth understanding of the company and entrepreneurial abilities that may be required for them to carry out their monitoring function successfully. They are not as intimate with the inside workings of the company as the executive directors (insiders), which might undoubtedly limit their capacity to make the type of impartial choices that are required of them. There is little question that the duties of the independent director will continue to grow given the current attention paid to them in the search for more efficient corporate governance procedures. Companies must put in place enough training and other educational procedures to equip independent directors in fulfilling their position if they are to use the sort of independent and objective decision-making necessary for effective supervision and monitoring of management. The need of objectivity, honesty, and other high ethical standards from independent directors is insufficient; in fact, without these personal qualities, an independent director cannot be considered to be "really" independent and will not be able to exercise objectivity when necessary. However, in order for boards to function as effectively as they should today, directors must be able to advance their understanding of business, entrepreneurship, and other corporate strategies. The shareholders themselves may also be a powerful weapon for enhancing the performance of directors. Because of the widely distributed ownership structure in many huge enterprises, stockholders had little influence over how these businesses were operated. Even as institutional investing has become more popular, particularly in the US, there has been a persistent desire for shareholders to participate more directly in corporate governance. At many instances of corporate misconduct, shareholders suffer because their long-term interests are always in jeopardy. An example is Enron, where executives such as directors and other senior management made significant financial advantages after the company filed for bankruptcy, while investors and employee stockholders suffered significant losses. Therefore, enhancing shareholder engagement, especially in the appointment of independent directors, is one approach to safeguard the lawful rights and interests of shareholders.

Between the shareholders and the management, independent directors serve as a liaison. They are expected to report to shareholders on management behaviour and hold managers responsible. Therefore, processes should be put in place so that a specific director who fails in his tasks may be discovered and, with the approval of the shareholders, removed from his position. They should also include them directly in the nomination and election of directors. The board's routine review and assessment process need to have this as its goal. Instilling a feeling of responsiveness in each director and preventing board inertia will go a long way toward creating a strong accountability framework where each individual director is accountable to the shareholders for his behaviour and activity on the board. Shareholder participation serves as a check on management and board operations.

After Enron, many people began to seriously question the skills of the directors of other top firms. At the same time, directors started to face more obligations, risks, and demands. Public expectations for directors started to grow at the same time that public confidence in directors' competence began to decline. Just as shareholders began to expect responsibility from their elected representatives, the public started to demand more active and effective performance from directors. The board of directors was held largely responsible for the many company failures. Numerous boards have been criticised for being inactive and ineffectual. Lack of independence on the boards was one of the main causes of these catastrophes. It has been extensively advocated to separate the roles of CEO and board chairperson, designate a lead independent director, and other structural best practises to promote board and director independence. Boards should implement a system that would allow independent directors to meet frequently without management present, nevertheless. Additionally, a process should be in place so that the board may obtain independent expert counsel as needed. Additionally, independent directors' reappointment should not be a given; rather, it should rely on their performance being rated favourably and the vote of the shareholders. These are only a few concrete actions that, if taken, may lead to more independence and effectiveness on the board.

CONCLUSION

The first section of this paper compares several definitions of an independent director found in corporate governance instruments and rules from various nations. The organisation and substance of these definitions vary. Most definitions emphasise on a systematic set of standards by which independence may be evaluated, adopting a more formalised approach to independence. Others have put more of an emphasis on the individual director and those inborn qualities and traits, like honesty, professionalism, etc., that serve to provide the individual director impartiality and professional judgement needed for diligent corporate monitoring and leadership. According to one school of thought, an independent director must not only be legally in the appropriate position but also have a "additional individual characteristic" that goes beyond the standards outlined in corporate governance regulations and guidelines. The importance and usefulness of this class of directors to company success were closely examined in the second phase of this research. As this research has shown, there is conflicting data about how independent directors affect business performance. While some studies claim that the independent director has a favourable influence on corporate performance, particularly with respect to certain board duties, others claim that there is no solid proof of this. Despite the contradictory findings, this research has attempted to show that the independent director's importance to contemporary corporate leadership cannot be overstated. In fact, it is generally accepted knowledge that this type of directors exists. Since they serve as a conduit between the company's owners (shareholders) and management, they are, or ought to be, the guardians or gatekeepers of the corporation. Therefore, the independent director's responsibility may be summed up as providing impartial and unbiased oversight of management and making sure corporate leaders and managers are accountable to shareholders for the ongoing operations of the organisation. Therefore, future research and studies in this field should concentrate on the best ways to increase the independent director's effectiveness, particularly in the more dynamic global business context.

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