The Importance of Board Independence (IVOR nr. 90) 2012/2.5.2:2.5.2 Person building block

The Importance of Board Independence (IVOR nr. 90) 2012/2.5.2

2.5.2 Person building block

Documentgegevens:

N.J.M. van Zijl, datum 05-10-2012

Datum: 05-10-2012
Auteur: N.J.M. van Zijl
JCDI: JCDI:ADS595970:1
Vakgebied(en): Ondernemingsrecht / Algemeen
Ondernemingsrecht / Corporate governance

Within a board structure with the right composition, an independent supervisor has to perform his duties. The independence of an individual supervisor is addressed by the person building block that first describes the difference between independence in fact, appearance and form. (Consideration 2.3) Independence in fact entails having an independent mindset when executing tasks, which results in unbiased work of the supervisor. Independence in appearance entails avoiding facts and circumstances that are so significant that a reasonable and informed third party would question the supervisor’s independence. Independence in form entails compliance with the relevant independence criteria. This means that none of the relationships or circumstances in the list of independence criteria apply to a supervisor. Independence in form and in appearance might coincide in a number of cases, because the independence criteria are based on relationships and circumstances that are considered by the public to have a negative influence on independence. A supervisor must be independent in fact to perform his duties – monitoring and advice – without bias.

Within the person building block it is important to determine the independence in form of a supervisor, because independence in form is measurable, in contrast to independence in fact. Broadly speaking, three different underlying concepts of independence can be identified within the spectrum of independence definitions. First, the disinterested outsider model focuses on supervisors without financial ties or business connections to management and the company. Supervisors should be more likely to monitor independently and suffer less from conflicts of interests without these ties and connections. Second, the objective monitor model focuses on ability, competence and quality requirements in a definition of independence. The supervisors in this model should be independent, sceptical and loyal to shareholders. This objective monitor model does not focus on ties that hamper independence, as the disinterested outsider model does. Third, the unaffiliated professional model focuses on supervisors who are only involved in supervisory positions and do not have other occupations, so that they can dedicate enough time to monitoring management in different companies. These professional supervisors should be experts in their fields, knowledgeable about the critical aspects of the company and skilful in serving as supervisor. This third model also emphasises the fact that a supervisor should have a supervisory position in more than one company. This makes a supervisor financially independent of any single company.

The above-described concepts of independence and the corporate governance codes do not include personal ties in lists of independence criteria. These personal ties are likely to generate conflicts of interests, but chapter 11 sheds light on the positive sides of personal ties between NEDs and executive directors or supervisory board and management board. Whether this is also perceived as a lacuna by people involved is described in chapter 12 of this study. That chapter describes a survey among SDs in the Netherlands on this matter. The next chapters use an economic approach to find the aim and consequences of independence. The definitions of independence used in the cited literature will likely not coincide with the definition given in this chapter.

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