10.2 Person building block

Chapter 2 has concluded that independence is a situation in which supervisors are independent in fact and in appearance, which means they have an independent mindset that leads to unbiased work and there are no facts and circumstances that are so significant that a reasonable and informed third party would question the supervisor’s independence. Therefore, the assessment of the independence of a supervisor should try to discover whether he is independent in fact and in appearance in order to have a strong person building block of independence. All circumstances or relationships that might impair the independent judgement of a supervisor must be considered in that case. The corporate governance codes in the United Kingdom, the Netherlands and Sweden offer lists of circumstances or relationships that are likely to affect the independent judgement. These lists contain independence criteria.

The independence criteria of the three corporate governance codes can roughly be divided into relationships with the company and other relations or circumstances that might have a negative influence on independence. The relationships with the company can be divided into employment, financial, business and shareholder relationships. The category ‘other relations and circumstances’ refers to family relationships, interlocking directorships and maximum tenure. These seven categories comprise all the relationships or circumstances provided in the three corporate governance codes, which does not mean that all the codes have all seven relationships on their lists. Table 10-2 lists these circumstances and relationships in the appendix. An assessment of the quality of the independence criteria is not made in this study, because they should be used as guidance and should be applied by using sound judgement.

The way the independence criteria are used to determine the independence of a supervisor differs. The DCGC has a strict rule and requires checking off the independence criteria. If none of the relationships or circumstances apply to a supervisor, he is considered to be independent. If there might be other reasons that influence his independence, the DCGC offers no room to take that into account and focuses solely on independence in form. The UKCGC approaches the determination of a supervisor’s independence differently. According to the UKCGC, the board should determine whether a supervisor 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 final decision is at the discretion of the whole board. However, the board has to state its reasons if it determines that a supervisor is independent, whilst at least one of the seven independence criteria applies to him.

The British approach shows similarities with the Swedish and are both in accordance with the Recommendation of the European Commission. The SCCG requires taking all factors that might influence the independence into account. And all these factors must at least include the independence criteria provided. However, a weak point is the distinction between independence from the company and its executive management and independence from major shareholders. If a relationship or circumstance impairs independent judgement it should in any case result in the label non-independent.

(Consideration 10.1) In order to have a strong person building block, the board must consider more relationships or circumstances that impair independence than provided in the list of independence criteria. The United Kingdom and Sweden do so and with their approach address concerns about a lack of independence in fact and independence in appearance. This is better than the DCGC which instead focuses solely on independence in form. The DCGC should adopt the same methodology as the UKCGC or the SCCG in order to improve its person building block. Furthermore, the SCCG should reconsider its distinction between independence from the company and its executive management and independence from major shareholders.