Independent Directors: Strategic Pillars in an Environment of Change and Disruption

SFF Magazine December 2024

Topics: Governance, Independent Director

Is the Role of Independent Directors Key in the Current Environment?

Being an Independent Director is a complex task that requires courage, commitment, thoroughness, curiosity, sociability and independence. These qualities are essential to meeting the challenges of a constantly changing and highly disruptive environment.

The Board of Directors: A Strategic Team

Delving into the world of corporate governance reveals layers of complexity and relevance. This is not only a matter of discharging the legal responsibilities of companies and their Boards of Directors as non-executive bodies. It is also a fundamental instrument to avoid the destruction of a company’s value, to make it more attractive as an investmentand to safeguard its continuity.

The Board of Directors is not merely a supervisory body; it must act as a cohesive team with a broader vision than the day-to-day operations. This ability to observe from the “balcony”, while the executive team operates on the “ground floor”, allows advisors to identify patterns and inertia. This approach makes it possible to anticipate risks and build good governance.

The Importance of Independent Directors in a Disruptive Environment

The highly disruptive environment we live in currently and which companies and, therefore, their boards of directors are facing is increasingly complex. Digitalisation and the increasingly rapid incursion of AI, geopolitical risks, the global economic situation and climate change in particular bring to the fore the need to balance short-term and long-term results with sustainability and growth objectives. This is no easy challenge in an environment where good ideas often get sidelined by short-sighted economic objectives. Corporate governance, along with its becoming increasingly professional as well as the inclusion of independent directors, is becoming ever more important and plays an essential role.

In this context, independent directors are becoming increasingly important, not only because they bring diversity of thought and knowledge, providing a broader vision to the company, especially in the “grey areas”, but also because of their independence as the most important value, i.e. their ability to offer an impartial perspective, is key to ensuring that the board is not only reactive, but also proactive. They bring experience, diversity, transparency and qualifications to the board. They are especially valuable because they may be the only ones who can influence decisions from a neutral position, asking uncomfortable but necessary questions, filling information gaps and exploring new opportunities for the company.

“In this context, independent directors are becoming increasingly important, not only because they bring diversity of thought and knowledge, providing a broader vision to the company, especially in the “grey areas”, but also because of their independence as the most important value, i.e. their ability to offer an impartial perspective, is key to ensuring that the board is not only reactive, but also proactive.”

Overcoming Board Inertia: Diversity, Courage and Empathy

It takes courage to be an independent director. It involves resisting the temptation to be complacent and challenging group decisions that can arise from collective inertia. This phenomenon is known as the “Abilene paradox”, which is an example of how the desire to avoid conflict can lead to poor collective decisions. Complacency on a Board may appear to contribute to consensus, but in reality it limits debate and hampers strategic decisions. This skill becomes much more difficult and necessary when there is only one independent director on an established board. In these situations, breaking the group dynamic becomes very difficult.

A common challenge for independent directors is working as part of a team they do not know well, with meetings held only a few times a year. An independent director must be empathetic; building effective relationships with other board members is essential. Pre-board dinners or lunches or one-on-one meetings often help to create a more relaxed atmosphere, strengthening trust between members without compromising the professionalism and transparency of the meetings. The leadership of the chairperson of the board is essential in this context; they must ensure that the meeting’s atmosphere fosters participation, allowing each member to contribute their ideas and opinions. Likewise, they must encourage constructive discussions that go beyond approving pre-existing decisions.

Continuous Preparation: Training, Self-awareness and Curiosity

In an environment of constant change, an independent director must be committed to continuous training. It is essential for them to be aware of the latest technological, economic, regulatory, geopolitical, governance, climate or industry trends in order to provide relevant and up-to-date advice. Independent Directors must be curious and keen to learn.

It is essential for them to develop self-awareness, identify their biases and recognise any factors that may compromise the independence of their views. They must consider questions such as why they were chosen and for what purpose, in order to maintain a clear focus on the responsibility they have taken on. They must also prepare themselves to discuss and address various issues, anticipating how to deal with uncomfortable or unfamiliar situations. Practising these interactions in advance can strengthen confidence and enhance the independent adviser’s ability to respond confidently and effectively when these challenges arise.

“In an environment of constant change, an independent director must be committed to continuous training. It is essential for them to be aware of the latest technological, economic, regulatory, geopolitical, governance, climate or industry trends in order to provide relevant and up-to-date advice. Independent Directors must be curious and keen to learn.”

Building Relationships of Trust: Internal Dynamics and the Relationship with the CEO

The relationship with the CEO is one of the most important relationships within the board. Yet boards often spend little time understanding the CEO’s needs and expectations. Maintaining a healthy relationship with the CEO involves balancing emotional proximity with the professional distance necessary to ensure objectivity.

In this respect, independent directors should be aware that their role is not only to support the CEO, but also to challenge the CEO’s decisions when necessary in order to maintain a constructive dynamic.

Lessons in Times of Crisis: Reflection and Improvement

Crises are inevitable in corporate life, but they are also opportunities to learn and evolve. Boards of directors should use these periods to reflect on their performance, analyse mistakes and adapt their processes. Independent directors are key players in this transformation.

So is the independent director role more relevant than ever?

In a world characterised by complexity and disruption, their ability to bring diversity, impartiality, knowledge and transparency is crucial to ensuring that businesses not only survive, but thrive. Beyond fulfilling a legal or supervisory role, independent directors act as change agents ensuring that decisions not only respond to the pressures and inertia of the present, but rather prepare the organisation for a sustainable and competitive future.