Role of Independent Non-Executive Directors - Essay Example

?Running head: ROLE OF INDEPENDENT NON-EXECUTIVE DIRECTORS Role of Independent Non-Executive Directors of the of the Role of Independent Non-Executive Directors Introduction There are many definitions of "independent non-executive directors" of board members. Perhaps the most summarized in the Federal Law "On Joint Stock Companies", which refers primarily to the independence of Board members from the management. Incidentally, the definition of "independence" of directors is given in Sec. 9, "The interest in the commission of public transactions," so this definition can be regarded as purely utilitarian. A much more detailed vision of independent directors make the Code of Conduct and the Association of investor protection . Last added to the list of groups that should not affect the directors, yet the state, as well as major shareholders and partners of the company. Perhaps, except for employees (excluding top management), lists all of steykholde-ditch. However, if we take into account our current realities, placing the company's employees to the stakeholders (directly or through participation in trade unions) will be more a tribute to the generally accepted world practice, rather than a reflection of reality (Arbouw, 2004, pp. 8). Thus, in the most general case, it can be argued that an independent director is independent from all stakeholder groups. Of course, there is a statistic that confirms that the involvement of independent directors correlates with the high efficiency of enterprises and their degree of success. Moreover, already in 1992 Cadbury report was published, which stated that "the level and number of non-executive directors on the board of directors shall be such that their views have made a significant contribution to the decision of the Board of Directors". Later, in 1998, these provisions were reaffirmed in the group, Sir Ronald Hampel of the fundamental principles of corporate governance. However, I venture to suggest that the need for independent directors in the UK there was still earlier than the institution of independent directors. In his article, M. Samosudov concludes that, in speaking of "independence" of directors, "to talk about the independence of judgments of the Board of Directors (Barratt, 2002, pp.9). That is understood that members of the board of directors and board of directors as a whole should be in every situation to express opinions, make decisions, guided solely by considerations of their own professionalism and efficiency of the company as a whole, but not by considerations of any individual participants of corporate relations. “Then we come to the following conclusion: the independent director is a highly qualified specialist who can satisfy the needs to implement the functions and exercising the authority of the Board of Directors the most effective way, regardless of the views of various stakeholder groups. Main Body From this definition we can draw three conclusions. First, an independent director - not a position, and the profession, such as, for example, an electrical engineer or an accountant, with all ensuing consequences. Secondly, any shareholder, being of sound mind and memory of, must carry out the appointment of board members only from among the independent directors (the best, besides no one is appointed by, say, a professional accountant to the position electrician). And thirdly, to the service must be approached with the same criteria as any other service or any other product: the light of its value (how effective or that the applicant) and prices (the value of his services). As an option - to hold a competition for filling vacant board member. It is clear that, if we exclude from consideration all animate objects, the "Company" is a mere collection of assets and related liabilities to shareholders and third parties. Therefore, to talk about the "public interest" makes no sense. However, there are a lot of sense to talk about the interests of employees and its top managers. In this case we have to, first, to accept the fact that they are interested groups of individuals, or "stakeholders (Barrow, 2001, pp.14)." And secondly, to discuss their concerns in isolation from consideration of the interests of other groups (shareholders, customers, suppliers, government, competitors) would be meaningless. In the definition of independent director, given above, there is one essential component. Speaking about the ability of independent directors to meet the needs in the management of the most effective way, we did not mention whose it it needs satisfy. Even the groups themselves stakeholders have quite a lot. And each of them individually is rarely uniform. Among the shareholders there may be several owners of large packages, consumers can compete for the company's products, suppliers - for the opportunity to market their products, etc. In these circumstances, an independent director should take an independent, professional solution. But how likely is it that it is acceptable to everyone and to fully (and this is just one of the options assessments on decision making)? Probably very small. Independent director as a professional, who does not is the external pressure will be (as should) choose from a range of possible solutions to the most effective, considering all the alternatives. Meanwhile, the field of interests of each group of stakeholders is much less than the full range of solutions in general. Sometimes these areas will overlap, but the points of intersection, where the match would have the interests of all groups, there is very little. And this, in my opinion, is a kind of systemic problem: you can have an independent opinion; even being a "dependent" director, but the solution adopted always, intentionally or not, will bypass the interests of stakeholders (Bartholomeusz, 2002, pp.56). You can divide the solutions adopted "by Technology" and "subject to political expediency." In UK (and not only) practice, the board of directors often plays the role of a "politburo", one of the goals of which - the analysis of solutions prepared by the executive authorities, consultants or by members of the board of directors for "political expediency" in terms of stakeholder whose interests are a "dependent" director (Baxt, 2005, pp.87). In my opinion, concern about the Board of Directors to decide on any issue was the most balanced and take into account the interests of all stakeholders, should underlie any member of the CD - it does not matter, "dependent" or not. It is necessary to understand that choice, ultimately the decision is unlikely to be the most efficient from the standpoint of the shareholder that elected the member of the board. This deviation is the price of some stakeholders in the interests of others. Proceeding from the above logic, we make one more conclusion. In a given coordinate system by an independent director is not and in principle can not be a "consumer" for his services because of market conditions "consumption" of a priori bear’s feedback, i.e. the influence (Baxt, 2006b, pp.45). Hence the first consequence: the effectiveness of independent directors depends on from whose point of view, we consider this activity. The second consequence is even more interesting: the appointment of a board member for the post through the election (voting) is meaningless. If all the independent directors profess a common policy of professionalism in their actions, then the stakeholders choose one candidate or another is due only to differences in the degree of preparation and cost. The higher the professionalism of the candidate, the higher its value. And this leads to the well-known situation in the economy, when the most rare and expensive resource-rich companies are buying the most, less than a rare resource - the less wealthy companies, etc. In this regard, a very rich company will prosper even faster, and less wealthy can do disappear from the market (Baxt, 2007a, pp.34). In the above model, where all stakeholders are treated as equal, the situation is close to a stalemate. In reality, the main stakeholder groups identified in many national systems of corporate governance, and this provision is enshrined in law. This group is the shareholders (investors). They have the right to choose board members. Will look like in this model that we have studied the object - an independent director? It becomes difficult to call an "independent" in the original sense of the term. Field, its decisions are restricted, which asked its shareholders opted for, and pay depends on the decisions of these shareholders. Maybe that's because more often instead of the definition of "independent" common term "non-executive» (non-executive). In this case, non-executive director can be considered a subclass of independent directors, and its "independence" is more narrowly delineated: he is independent of the executive bodies. That is, we're back to a narrow (legislative) interpretation of the term "independence (Barratt, 2002, pp.9)." Then the only difference between independent directors from the usual, "dependent", would be that he is able to find the most effective solutions, even on a limited political conventions of the field. But here the question arises about the effectiveness of independent directors. Indeed, as noted above, the most effective solution is not necessarily lie in the field, which is outlined by the shareholder, given that elected the director. By analogy with the "local maximum" in mathematics can only speak of "local effectiveness" director in the given field decisions. The effectiveness of using this expensive resource, as an independent director, with significantly reduced compared with the potential. Such a situation can be compared with the use of industrial spray paint to match. The orientation of the field solutions given by the shareholder, usually means excluding from consideration the interests of other stakeholders. Taking decisions in this vein, the company has positioned itself in the environment so that it appears the new threats. Is it possible then to speak about any effectiveness of independent directors? Realities of Independent Directors All we have discussed above behaviors of independent directors, no doubt, were close to the extreme cases which are rare. Actually, that's why such situations and can be called "models". Ordinary, 'normal' director - as a dependent and independent - in preparing its decisions take into account primarily the interests of one group of shareholders who elected him, and given the decision rules in the collective body forced him to take into account also the interests of other stakeholders (Barrow, 2001, pp.14). But prudence is a decision, the interests of all parties (primarily interest) And stands at the forefront of every member of the board of directors! The current rule of law says that all members of the board of directors elected by shareholders. In the presence of certain shares of shareholders have the right to nominate candidates? Only they can decide whom they choose to the Board of Directors: "independent" directors, which has considerable expertise in corporate governance, or "dependent" director capable of defending the interests of the shareholder. The system of the institute board of directors as such incorporated assumption that shareholders elect board members, working for the benefit of shareholders generally, will work with its shareholder, in particular. As noted by Professor Reinhard Schmidt, even in a situation where the company has several large shareholders, whose representatives through their participation on the board are trying to increase its share of "total pie" in a global sense, they will all have the same goal - to increase the size of the pie "in general. In this connection the question arises: what difference will one or another member of the board of directors or an independent, he will represent the interests of a particular group of shareholders (Bartholomeusz, 2002, pp.56)? Moving from an abstract model of behavior of an independent director to the side of practice, we come to the image, very reminiscent of the ordinary shareholders' representative. Perhaps, under normal conditions of independent directors will have two features? Firstly, it will be more inclined to adopt the "technically correct" solutions, rather than to protect the interests of shareholders choosing it. And secondly, it is assumed that the level of his knowledge, skills and experience is much broader than that of "dependent" director. Why the idea of “independence” of board members did is now so urgent? The first explanation, no doubt, will serve as the fashion for this course. As in any market, there are always consumers who want to try something new, and in the market for corporate control, there are always owners, actively deploying all the new developments with which we are familiar to Western consultants. Already talk of the town was the situation when the owner or top manager after another plays the lectures come to the realization that his company must radically reorganize. And such fundamental "restructuring" are carried out punctually, and the business itself for these forgotten and the staff are trying to quickly leave the company (Baxt, 2007a, pp.34). The second motive, in my opinion, is the substitution of goals, consciously or unconsciously. For example, I have heard that the introduction of management systems of ERP declared objective of improving the efficiency of production processes. In fact it became an informal goal (initially or during the project), "compliance" - to enter the listing in order to achieve a certain level of credit, etc. A similar situation may be with "independent" directors, whose presence in the formal Board of Directors makes the cooperation with Western partners. Conclusion To conclude, we can say that, any object has positive and negative sides. All depends on from what point of view we are considering. Depending on how we are positioning your company in the environment occurring in the events that would represent a threat to us or promise opportunities. For example, if we are going to travel, what to us would be the availability of rail traffic - risk or benefit? If we are going to travel by train, then surely benefit. And if you decide to travel by car, train traffic for us becomes a potential threat. Is no different and the situation with the institution of independent directors. In my opinion, an independent director must originally have a somewhat different framework, a set of values ??compared with the other members of the board of directors. At the forefront for him should be efficiency as absolute, not depending on the desires and preferences of one group or another steykholde-ditch. Need (and not just the ability) to seek and find absolutely effective solution should be his kind of "natural competitive advantage." However, we must acknowledge that real solutions are not always in demand (Arbouw, 2004, pp. 8). In this case, the decision "totally effective" solutions and the more they force the promotion can be a significant negative factor. Modern business is characterized by the fact that an increasingly significant role in it played by stakeholders such as staff and senior managers. Until relatively recently, the most common form of business organization was a "production model» (manufacturing model). One of the properties of this model is that the initiative and financial resources of the investor are the main driving forces behind business. The presence of these two factors is not only necessary but also sufficient condition for the existence and development business. However, in 1990 it became clear that while the importance of these two factors they are already becoming scarce. At first roles begin to emerge such "neoschuschaemye and Neocene Niva before factors such as intangible assets, patent rights, brand reputation, ability to innovate and to timely bring to market new products and services.”It has become commonplace to hear from the heads of large businesses:" Our wealth is our people. “Despite the fact that such a position may not be perceived as seriously as often expressed, there are important economic reasons why these words should be taken seriously (Baxt, 2006b, pp.45) ". In this regard, even more important is the role of the board of directors as a body, exploring the interests of all stakeholder groups and to make informed decisions in the public interest, not only in the interests of minority shareholders (no matter how important their role in the development of the stock market), because workers companies and executives have themselves become an important group of stakeholders. I least of all would like the readers of this article saw me as an enemy of independent directors, but in my opinion, the need for a critical approach to evaluating their role in corporate governance is already overripe. There is a tendency to position independent directors as a sort of panacea for all ills. However, we must understand that even such a great, at first glance; the tool is good only under certain conditions, as Board members, not belonging to the group of "independent", it is necessary to strive for equally high level of training and competence. References Arbouw, J. 2004. The Empty Boardroom, Is this becoming a reality? Company Director, October, pp. 8 – 14. Barratt, R. & Korac-Kakabadse, N. 2002. Developing reflexive corporate leadership: The role of the non-executive director. Corporate Governance. Bradford. Volume 2. Issue #3: pp98-120 Barrow, C. 2001. The Role of Non-Executive Directors in High Tech SMEs. International Journal of Business in Society. Cranfield. Volume 1. Issue #2: pp14-35 Bartholomeusz, S. 2002. After Enron: The New Reform Debate. University of New South Wales Law Journal. Sydney. Volume 25(2): pp56-89 Baxt, R. 2005a. Directors Cannot Escape Liability by Doing Nothing. Australian Business Law Review. Sydney. Volume 18. Issue #6: pp87-99 Baxt, R. 2006b. The Role and Behaviour of Company Directors – Phase 2. Australian Business Law Review. Sydney. Volume 18. Issue #1: pp45-56 Baxt, R. 2007a. Company Law: Sleeping Directors Get a Second Chance. Australian Business Law Review. Sydney. Volume 20. Issue #1: pp34-45 Read More