The dependent independent director
KUALA LUMPUR: Independent directors are expected to provide objective, impartial and independent judgement to the board.
Independent directors are expected to provide objective and impartial judgment to the board, challenging management and protecting shareholders' interests. However, formal independence does not always translate into practical independence. Long tenure and familiarity can lead to a psychological dependency on the company, its management, or controlling shareholders.
Directors may become reluctant to challenge those they have known for many years and may trust their relationships more than their professional scepticism. Dependence on board fees can also create a psychological dependency, especially when directors rely on board appointments as a significant source of income. When a controlling shareholder appoints independent directors, the directors may feel obligated to the shareholder, creating a subtle conflict between their legal duties and personal loyalty.
Social and personal relationships can also compromise independence, as directors who socialize with management may find it difficult to challenge their decisions objectively. Information asymmetry, where management controls much of the information presented to the board, can also lead to dependency, as directors may rely on management's interpretation of events.
A powerful chairman or dominant CEO can create a culture that discourages dissent, causing directors to avoid challenging management and fostering groupthink. The fundamental reason for dependency is that independence is a behavioral quality, not just a structural condition. Conflicts of interest, confirmation bias, familiarity bias, reciprocity, and the desire to maintain board cohesion can all contribute to dependency.
When independent directors become dependent, the board's ability to provide effective oversight declines, potentially allowing poor management decisions, related-party transactions, and financial reporting issues to go unchecked. To strengthen independence, companies should assess directors' independent judgment, monitor tenure, consider the lack of influence from relationships, and encourage directors to ask difficult questions without fear of repercussions.
Written by urgent.news from New Straits Times's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
