Myth about so-called independent directors in PLCs

The role and responsibility of an independent director in a public company are more serious and demanding than ever before. Several factors have heightened expectations and accountability for independent directors

With the Securities and Exchange Commission (SEC) introducing new and updated guidelines that expand the responsibilities of independent directors on listed boards, the role of these directors has taken on new significance. This move creates a broader canvas for independent directors to operate, but it also raises important questions about their true effectiveness. 

Unlike in banks, where over 90% of the capital employed comes from borrowed funds or public deposits, non-financial companies typically rely on entrepreneurs’ investments or bank borrowings. A board’s effectiveness is only as strong as its understanding of the company, and that understanding is best developed on the shop floor or on the ground, not just in the boardroom. Good decision-making comes from analysing data from multiple perspectives and translating insights into action. Traditionally, boards have categorised risk into strategic, operational, financial, and compliance-related areas. However, this framework must be expanded to include intangibles such as corporate reputation, employee well-being, and public perception. Board discussions should not merely be a review of presented information but a critical examination of historical context, the underlying risks behind the data, and future opportunities. 

The goal is to develop a shared perspective on decisions that will create long-term value for all stakeholders. While boards cannot predict every challenge, merely following a predefined roadmap based on past events or engaging in box-ticking exercises is no longer sufficient.

Independent? But how independent?

A key governance metric regulators have emphasised is the presence of independent directors on boards, redefining it by age and tenure. While this is commendable in theory, true independence is far more nuanced than what governance codes define. In a small corporate environment, where deep-rooted relationships exist, a chairman’s schoolmate who meets the formal definition of independence may, in practice, be far less independent than someone outside those relationships. Furthermore, there is an ongoing debate about whether so-called independent directors—who receive fixed nominal fees and have no real stake in the business—are truly motivated to enhance enterprise value. 

Independence and effectiveness cannot be measured by governance codes alone; they are best assessed by a director’s actions in the boardroom and their willingness to step down if good governance principles are compromised. To strengthen independence, boards must seek broader sources of information and avoid over-reliance on a few individuals. There is no substitute for direct engagement—spending time with management across departments, having them present directly to the board, and visiting company operations. This is not about interference, but about developing a genuine understanding of the business.

Beyond compliance: The mindset shift

Ultimately, while governance rules establish base standards, it is the mindset and commitment to implementing them in a way that enhances corporate value that truly matters. Boards that rely solely on checklist governance will find themselves ill-equipped to handle complexity. Responsible self-regulation is critical to counter the growing pressure for more intrusive regulatory oversight. This approach will not only strengthen corporate governance at the firm level but also mitigate systemic risks across industries by fostering shared best practices. 

Good corporate governance is not just about compliance with the governance codes and SEC rules – it is about instilling the right values in people and ensuring that companies move beyond short-term gains toward sustainable, long-term success. 

Conclusion

A critical examination of the effectiveness and true independence of so-called “independent directors” on publicly listed company (PLC) boards is long overdue. At the core of a director’s responsibility is ensuring that management balances the short-term and long-term interests of both shareholders and stakeholders in equal measure. A board’s role is to enhance company value for all stakeholders and ensure strong long-term financial performance. This means focusing on big-picture issues such as CEO succession, corporate strategy, talent development, and industry dynamics rather than getting caught up in day-to-day operations. Board members are not there to run the business—they are there for their expertise, wisdom, sound counsel, and judgment.

 Finally, institutions that use public money and sell products to the public have a greater responsibility to be accountable, transparent, and accessible than ever before. In the end, the true measure of an independent director is not just meeting governance criteria but their ability to challenge assumptions, drive ethical decision-making, and ensure that companies create real value beyond compliance. Therefore, mere regulatory compliance is not enough; independent directors must be truly independent in mindset and action.

Reference: 

https://www.dailymirror.lk/print/hr-marketing/Board-governance-connecting-the-dots/275-111154