This product has already been purchased.
- Independent directors need to be the challenging voice at the board table.
- Standard independence tests don’t always detect power-based relationships and social ties.
- Setting time limits might not be the solution. It should be more about reassessing each individual director’s contribution and value.
While ASX guidelines define independent directors as free of conflicting interests, boards still self-assess their own peers. Three governance experts share their views on how social ties undermine board oversight and why individual evaluation outperforms arbitrary tenure limits.
How robust is director independence really? The ASX Corporate Governance Council’s guidelines set the bar high – an independent director should be free of any interest, position or relationship that might materially influence their objective judgement. Yet across corporate Australia, the test of director independence remains largely self-assessed and declared. Boards decide whether their own peers meet the test. The same directors who benefit from being classified as independent assess each other, with no penalty for errors.
“There’s nothing wrong with having a director who’s not independent, as long as everyone else on the board knows that, the shareholders know that and it’s offset by other members of the board who are independent,” says Dr Natalie Elms, a senior lecturer at QUT Business School whose research focuses on corporate governance, board composition and director motivation and effectiveness.
Elms points to the Crown Resorts scandal as an example of how current independence definitions fall short. “The majority of those directors were independent on paper, but every single one of them was hand-selected by the major shareholder, James Packer,” says Elms. “When every director is handpicked by someone who’s incredibly powerful inside the company and outside of the company, how can you be independent? Yet they pass the ‘test’, so if you look at it like that, I’d say the test doesn’t work.”
Others believe it’s usually properly applied. “Some boards do it more effectively than others, but in a general sense, I do think it is well done,” says Russell Quinn, head of the Perth office for national communications and investor relations firm Media + Capital Partners. “You want the composition of your board to be strong and sound, and operating with integrity at every turn and independence is a key component of that.”
Quinn says that while there are “bad apples”, most independent directors work hard to live up to high expectations. “Independent directors need to be the challenging voice at the board table,” he says. “Those terse conversations are often led by independent directors and it’s mostly welcomed by the other members of the board.”
Elms agrees there are boards where independent directors live up to their title. “Most companies want a board that is effective, so they might take the independence of their directors more properly,” she says. “But I think it’s very easy to get around it.”
The subtlety of social capture
While financial ties are relatively straightforward to evaluate, social capture presents trickier challenges. It’s natural – even necessary – for relationships to form between directors, but it’s another potential pebble in the shoe of independence.
“If people are a bit too close or seem to have a long history together, then we’d definitely question the independence,” says CEO of the Australian Shareholders’ Association Rachel Waterhouse. “There’s definitely a perception of a club. Boards need to demonstrate that’s not the case. We want to know board members are overseeing governance in the right way, that it’s not too cosy and they are objective.”
Elms says the guidelines adding social relationships was a good move, but sees it as difficult to monitor. “How do you measure a social relationship? Is it ‘we play golf regularly’ or ‘our kids are at the same school’? There are situations where people know each other outside of the boardroom, but can act independently inside it.”
She posits radical transparency as a possible solution. “Understanding more about why independent directors are selected – and how – can help boards, shareholders and investors. Right now, it’s very opaque. Some boards go through very rigorous processes, others just appoint people they know or want. It would be useful for boards – and make them think about it before they simply roll over someone’s nomination – if they knew they had to provide a bit more transparency for the outside world.”
None of the experts interviewed argued for hard-and-fast rules. “It should be a director-by-director assessment of the tenure, relationships, performance and behaviour,” says Waterhouse. “The key question is whether the director can still provide genuine, independent thinking, particularly when they’ve served for a long period alongside the same CEO or chair.”
Pillars of independence
- Focus on individual performance: Evaluate director independence based on behaviour, skills and strategic needs rather than relying solely on time served.
- Examine overlapping tenure: A chair and CEO serving together long-term poses a greater risk of psychological capture than a sole veteran director.
- Elevate accountability: Boards should publicly disclose nomination and re-election processes to promote greater transparency.
- Recognise social capture: Standard independence tests don’t detect power-based relationships and social ties.
Rigid tenure limits aren’t the answer
Tenure limits are a hot topic. APRA initially proposed a 10-year tenure limit, but following industry feedback, changed the default to 12 years, allowing a board-approved extension of up to 12 months only in exceptional circumstances. Former CBA chair Catherine Livingstone AC FAICDLife has floated six-year norms. For now, ASX tenure is uncapped, and these experts caution changing that could create unintended consequences.
“An overlap in tenure is more problematic than tenure on its own and can cause more harm than, say, one person who’s been there for 10 years,” says Elms. “When the CEO and the chair have been together for so long that they can finish each other’s sentences there’s probably a reluctance to challenge.”
She also sees the potential of tenure limits creating a comfortable and relaxed mindset. “One of the risks of saying directors can only stay for nine, 10 or 12 years is that it can be interpreted as directors should stay for nine, 10 or 12 years,” says Elms. “I’ve seen directors who’ve been there for 15 years and are still contributing high value, and others who’ve been there for two years and have never contributed. There’s a danger in putting a number on it – it should be about reassessing each individual director’s contribution and value.”
The Australian Shareholders’ Association (ASA) is reviewing its voting and engagement guidelines, which currently state that the ASA doesn’t generally consider a director independent after 12 years. “We’re engaging with our members and retail investors, and those guidelines are probably going to change,” says Waterhouse. “The global trend is looking towards board renewal based on skills, diversity, performance and succession planning, rather than an automatic removal after a fixed period.”
Ultimately, maintaining a balance of independent directors requires agility, regular scrutiny and common sense, rather than box-ticking.
Latest news
Already a member?
Login to view this content