Corporate Governance and Review of Independent Directors

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CORPORATE GOVERNANCE
Corporate Governance and Review of Independent Directors
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Institution
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CORPORATE GOVERNANCE
1. Executive summary
Cases of misuse of corporate funds, a key reflector of poor governance within a company have
been increasing in the recent decades. One of the factors pointed out by commentators to cause
corporate governance issues is independence of directors. Some business analysts argue that
independence is an important factor for proper governance, while others argue that it would not
be effective for someone who does not own stocks in accompany or who does not engage in the
day to day operations of the business to ensure effective governance. This brings up the
question , what is the impact of independence on corporate governance?
2. Introduction
The success of any business organization relies on proper corporate governance. The current
companies are solely placed in the hands of the board of directors charged with overseeing
proper management of the business and its other related activities. However, in the recent years,
debates have arisen pointing out on the inefficiency of independent directors and financial crisis
reinforcing the doubts about the contribution of board independence towards corporate
governance. This paper is aimed at reviewing directors with respect to corporate governance
issues. The paper begins by defining independent directors, their fiduciary duties and
responsibilities, then it highlights the issue of independent directors and corporate governance
issues, discussing successful alignment of directors and company objectives as well as
misalignment, before making recommendations on how directors and shareholders could
improve on company governance. Finally a conclusion is drawn based on the issues discussed.
3. Independent directors

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CORPORATE GOVERNANCE
According to Dravis and American Bar Association, 2007, an independent director refers to a
director that has no employment, family or any other significant economic or personal
connections to the company in which he or she is serving as a director in. These directors are
appointed by the virtue of voting by the shareholders of the company.
a. Fiduciary duty and director liability
Directors have a duty of due care, that is, they should make considered decisions, and loyalty,
referring to the requirement that directors not base their decision making on self interest are the
major duties of directors stated by the state law, (Dravis and American Bar Association, 2007).
Additionally, directors have other duties that include; disclosure of decisions to shareholders and
the duty to act in good faith, as highlighted by Dravis and American Bar Association. There are
also rules established inside and outside the corporation that govern the behaviors of directors
such as committee charters and company policies. Thus, the directors have a standard of conduct
that they should consider before and when taking actions that affect the corporation.
b. Independence of directors and corporate governance
It is arguable how independence of directors affects corporate governance of the company. As
Swan and Liesen in their article, ‘Too many independent directors is heart of problem’, explain,
the independence of directors means that they cannot have any special knowledge or connection
with the corporation. This lack of knowledge mitigate against these independent directors’
ability to effectively monitor management or make a worthwhile strategic decision. Motivating
these directors through huge pay to perform diligently, their lack of knowledge base and day-to-
day involvement in the business activities and model of the corporation is a draw back to their
performance.