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Subject 3. Board Independence
#cfa #cfa-level-1 #corporate-finance #the-corporate-governance-of-listed-companies-a-manual-for-investors
Board Members must make decisions based on what ultimately is best for the long-term interests of Shareowners. The major factors that enable a board to act in the best interests of shareowners can be summarized as:

  • Independence, which means that the board has the autonomy to act independently and does not only vote along with the management.
  • Experience and expertise, which means the board has the competence to evaluate the best interests of the shareowners. Depending upon the business, specialized expertise might be required.
  • Resources, which means there are internal mechanisms that allow the board to exercise its independent work, including using outside consultants.

Independence promotes integrity, accountability and effective oversight. We will address experience and resources in later discussions.

The term "Board Member" refers to all individuals who sit on the Board, including:

  • Executive Board Members: the members of the executive management. They are not considered to be Independent;
  • Independent Board Members;
  • Non-Executive Board Members: they may represent interests that may conflict with those of other Shareowners.

An Independent Board Member is defined as one who has no direct or indirect material relationship with the Company, its subsidiaries, or any of its members other than as a Board Member or Shareowner of the Company. Stated simply, an Independent Board Member must be free of any relationship with the Company or its senior management that may impair the Board Member's ability to make independent judgments or compromise the Board Member's objectivity and loyalty to shareowners.

There are many different types of relationships between Board Members and the Company that may be material and preclude a finding of independence, including employment, advisory, business, financial, charitable, family, and personal relationships.

In making determinations regarding Independence, the Board shall consider all relevant facts and circumstances and shall apply the following guidelines:

  • Independent Board Members should not be current or former employees of the Company;
  • Independent Board Members should not serve as or be affiliated with advisors (including external auditors) to the Company or its senior management;
  • Independent Board Members should not do business with the Company.

The Board should be comprised of a substantial majority of Independent Board Members. A Board with this makeup and one which is diverse in its composition is more likely to limit undue influence of management and others over the affairs of the Board. The decisions of such a Board will be more likely to aid the Company's long-term success.

Things to consider for investors:

  • Do Independent Board Members regularly meet without the presence of management and report on their activities at least annually to Shareowners?
  • Is the Board Chair also the CEO of the Company? If yes, Executive Board Members may have too much influence and impair the ability and willingness of Independent Board Members to exercise their independent judgment.
  • Is the Board chair a former chief executive of the Company? If yes, the chair may hamper efforts to undo the mistakes he or she previously made.
  • If the Board Chair is not Independent, do Independent Board Members have a lead Member?
  • If some Board Members are aligned with a Company-related entity (supplier, customer, auditor, etc.), do they recuse themselves on issues that may create a conflict?
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