Independent Directors are so important to the health of a company that whenever one among them passes away, the company’s share prices have been known to dip by almost 1 per cent for a week following the tragic event.
That’s what a finding from the Journal of Financial Economics has revealed. Another study from Rice’s Graduate School of Business found that there is less vigor from a company’s CEO to seek business acquisitions, especially large ones, following the death of an Independent Director.
So what exactly does this role entail, and how is it that Independent Directors can affect the stock market so significantly?
The clue lies in the word “independent”. These important figures of corporate governance are completely autonomous of an organization’s day-to-day management team, which includes the company’s Chief Executive and Senior Managers, as well as its Executive Directors.
While Independent Directors usually make up only one-third of a company’s Board of Directors, they have an important role to play in shaping a company’s performance. It’s no wonder that the Singapore Institute of Directors (SID) defines them as “vigilant guardians.”
Add on their vast portfolio of skills, and you have key figures who are venerable custodians of company affairs such as:
- Aligning corporate activities with core business interests
- Advising corporate strategy to guide the firm through complex industry landscapes
- Ensuring accounts are clean and aren’t flouting any laws
- Cross-checking proposed growth strategies, especially if they involve lots of risks
- Assessing and reviewing the performance of senior management, and deciding on the remuneration they should receive
- Monitoring the firm’s activities and performance, as well as the economic environment in which the business is operating
Besides taking charge of the overall supervision of a company, Independent Directors also act as internal check-and-balance vanguards in order to prevent corporate abuses of power. This could happen when too many members of a family are on the Board of Directors, or when Executive Directors stay on the Board for decades and beyond the standard time frame of three years.
In such cases, Independent Directors can intervene and ensure that the interests of shareholders, employees and creditors are balanced and met.
Looking ahead in the future
Despite their importance, the role of an Independent Director is a relatively recent appointment in Singapore. Initially an American phenomenon, Singapore saw the benefits of such a role and decided to adopt it in 2001, after the 1997 Asian Financial Crisis. However, only in 2012 did the amendment of the Corporate Governance Code by the Monetary Authority of Singapore (MAS) highlight the importance of Independent Directors. This saw many listed companies scrambling in search of suitable candidates.
Today, the role of the Independent Director is gaining new ground in the wake of volatile global stock markets, slowing growth and a widening gap between the rich and poor.
If your company needs advice on this front, feel free to reach out to our Financial Communications team at firstname.lastname@example.org.