AICD Governance Leadership Centre commissions research on the value of independent directors

The AICD Governance Leadership Centre has commissioned research on the relationship between the proportion of independent directors on boards and organisational performance.

The AICD Governance Leadership Centre has commissioned research on the relationship between the proportion of independent directors on boards and organisational performance.

Recommendation 2.4 of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations states that “a majority of the board of a listed entity should be independent directors”. While the definition of independence varies, the requirement to have a majority of independent directors is an often mandated governance standard of virtually every major stock exchange in the world.

Independence is a topical issue. The Government’s recent proposed reforms would require that all APRA-regulated superannuation funds include a minimum of one third independent directors on their trustee board, including an independent chair. APRA has also proposed changes to its prudential standards in line with the Government’s proposed reforms.

There is an often expressed tension between practitioners and regulators when it comes to the efficacy of independent directors and their ability to add value to the firm. The rationale for having a majority of independent directors is to ensure that boards are largely free of business or other relationships which could hamper or interfere with their ability to monitor and review the performance of management in an objective and unbiased manner.

A number of practitioners have suggested that there is a lack of empirical evidence to support the current regulatory stance towards independent directors.

"Research over the last 20 years has produced inconclusive results, with evidence that increasing the proportion of independent directors can have a positive, negative or indeterminate effect on firm value.", says Rob Elliott, Executive Director of the Governance Leadership Centre.

"This further research will help to provide a more robust framework in which to examine the value offered by independent directors."

The Governance Leadership Centre invites input from interested parties that bears upon this important topic. Please direct your comments or enquiries by email here.