Corporate Governance and the Impact of Independent Directors Review

This report provides an executive summary of corporate governance issues, particularly focusing on the role and impact of independent directors. It begins by defining independent directors and outlining their fiduciary duties and responsibilities, as well as their accountability to shareholders. The report explores the complexities of corporate governance, including the alignment and misalignment of independent directors with company objectives. It discusses the importance of shareholder interests, successful integration of directors within organizations, and the causes of potential misalignments. Finally, the report offers recommendations to improve corporate governance, such as aligning directors' interests with shareholders through stock ownership and enhanced communication. The report concludes by emphasizing the need for further research to ensure that independent directors are competent and committed to the company's sustainable growth. The report uses several references to support the discussion.

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Corporate Governance and Review of Independent Directors
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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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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.

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c. Independent directors and share holders interest
Taking the case of mutual funds organizations, as explained by Carter & Lorsch, (2009), there
has been growing concern that mutual fund independent directors are not independent enough as
overseers of shareholder interests. Directors’ competence and will are very important to mutual
funds shareholders. In addition, it is also important for the directors’ interests to be aligned with
the interests of the shareholders. Directors interests in some instances have been aligned with
management rather than with shareholders. Thus, inflation of earnings by management in pursuit
of higher stock prices has in some cases led to the financially aligned directors buying this idea
since they also stand to gain, (Carter & Lorsch, 2009).
d. Review of independent directors
The independent directors are accountable to the shareholders and should ensure accurate and
timely disclosure of any decisions they make that affects the corporation, as well as all material
facts relating to company activities to the shareholders. They should provide the true picture of
the organization and should not lie to satisfy their own selfish interests. The principles used to
review directors in this case include; accountability, fairness, transparency and responsibility,
(Tran et al, 2014). Equal chances should be accorded to all the shareholders in obtaining
effective redress of shareholders rights violations. Finally, the directors’ responsibility to act in
the interest of the shareholders is also a principle for directors’ review.
4. Successful alignment of independent directors within organizations
The basic corporate governance framework brings together such aspects as company’s mission,
strategy, culture, objectives and leadership. Thus proper alignment of all these aspects within the
company is necessary to ensure sustainable performance. Alignment of independent directors

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within the organization requires the shareholders to ensure that these directors are first
familiarized with the business mission, vision, goals and strategies, both short term and long
term, (Sanders & Wood, 2015). Voting of competent directors who are familiar with the specific
type and form of business that the corporation engages in is also a key requirement to ensure
alignment of directors within the company.
After admission into the board of directors, they are informed of the company policies, rules and
other related laws regarding to directors’ behavior within the organization. A supervisory board
is also important in ensuring that the independent directors act in the interest of the shareholders
and the company at large and also comply to the legal and state requirements. Further effective
communication system within the organization also ensures alignment within the organization.
5. Causes of misalignment with organizations objectives
The independent directors have interests that are aligned to the organizational objectives.
However, in some cases, there occurs misalignment of these directors’ interests with the
organizational objectives, (Hien et al, 2014). Some of the causes of such misalignments are: the
directors putting their personal remuneration as the primary goal instead of shareholders wealth
maximization; lack of genuine desire to meet corporate governance responsibilities; taking
advantage of the fact that they do not own shares in these organizations; constant pressure from
the shareholders to maximize shareholder value; lack of the required skills and competency;
failure of the supervisory board to effectively ensure that the directors act in accordance with the
organizational objectives ; weaker regulatory processes that sometimes do not see through that
those directors who engage in financial crises are brought under law and punished accordingly;

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and biased voting processes that sometimes see into office the inefficient directors, (Kellermann
& De, n.d.).
6. Recommendations
According to Carter and Lorsch, 2009, shareholder alignment into the corporate governance is
an important factor as directors would perform better if they think and act like shareholders.
Therefore, they should own stock and the more the better. Therefore, non-executive directors
should be paid in stock or options and be required to own a given amount of equity. The more
stock directors hold, means the more their compensation is at risk and thus the more aligned they
would be with shareholders’ interests.
Taking an example of mutual funds organizations, Carter and Lorsch, 2009, highlight that
several arguments are offered towards ensuring that the independent directors interests are
aligned with the shareholders interests. These include: the directors should invest a significant
proportion f their financial assets in the mutual funds they serve along with adequate disclosure;
this would help in the alignment of directors interest on the basis of self interest. Secondly,
mutual fund directors would be more aligned with shareholders if they were not chosen by the
fund investment advisors. Also, ensuring effective communication between the independent
directors and the shareholders would also help reduce misalignment, (Carter & Lorsch, 2009).
Moreover, avoiding the conflict of interest between the directors and the shareholders to ensure
good corporate governance could also be attained through ensuring competency and will in
electing directors and thorough scrutiny of each individual director’s profile, credit history and
other relevant information before joining the company board.

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Finally, constant audit of company assets and books of accounts along with directors’ corporate
governance effectiveness is necessary to ensure that any slightest action that does not conform to
the company policies or any biased decision would be detected early enough to avoid future
diverse effects, (Clarke & Branson, 2008).
7. Conclusion
The issue of conflict of interest between the independent directors and the shareholders and the
fact that independent directors do not hold shares in the companies which they control, often lead
to corporate governance issues evidenced by financial crises or misappropriation of company
funds, (Hien et al, 2014). Therefore, measures should be taken to ensure that independent
directors are competent enough and have the will to effectively ensure sustainable performance
and growth of the company. Further research is necessary to unveil more relevant actions that
could be put in place to ensure good corporate governance in companies by independent
directors.
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8. References
Carter C.B. & Lorsch J. W. (2009). Back to the Drawing Board Designing Corporate Boards
for a Complex World. Harvard Business Press.
Clarke, T. & Branson, D. (2008). The SAGE handbook of corporate governance. London:
SAGE.
Dravis, B.F., & American Bar Association. (2007). The role of independent directors after
Sarbanes- Oxley. Chicago, III: ABA Section of Business Law.
Hien D.T.N, Hoy D.T.N & Hung N.V. (2014). Modern International Corporate Governance
Principles and Models After Global Economic Crisis, Part 2. Singapore, Partridge Publishing.
Kellermann A.J. De H.J. & De V. F. (n.d). Financial Supervision in the 21st Century. [recurso
electronic].
Sanders N.R., & Wood J.D. (2015). Foundations of sustainable business: Theory, function and
strategy. John Wiley & Sons.
Swan, P & Liesen, D. 2018, ‘Too many independent directors is heart of problem’, The
Australian Financial Review, Thursday, 3 May, p. 55.

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