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How IDs can get involved without interfering

Independent directors straddle the fine balance between involvement and interference with a company's affairs but does it have to be so?

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While all is well when a strategic decision is endorsed by the board and management, when that decision turns problematic years later, shareholders will invariably question if the IDs have been diligent.

MUCH of the corporate headlines today on fraud, business impropriety, undisclosed interested party transactions and lapses in accounting judgment can be traced to the issue of governance. For an independent director (ID), the greatest fear is to see their company in the news for the wrong reasons.

What can an ID do to avert unwanted publicity? While the roles and responsibilities of IDs are clearly spelt out in the Companies Act and the SGX rules, the lived experiences of IDs may be a different and less straightforward one.

For the purpose of this article, we must assume that IDs are working with good and honest companies that are facing vagaries of today's competition and complexities, rather than those that are improper or dishonest.

REALITIES OF THE ROLE

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IDs have a unique role to protect the sanctity of governance in the corporate system. They are appointed to be a check and balance to the company's management and executive directors, safeguard the company's assets and protect the interests of public shareholders.

To discharge their duties, IDs need a sufficient understanding of the business. Some IDs commence duties with an intense onboarding programme, then plough through volumes of information and data in the following months. Others may be given only brief notes and high-level information that are deemed necessary without creating information overload. Whichever is the case, the responsibility - and exposure - of IDs remain the same.

While all is well when a strategic decision is endorsed by the board and management, when that decision turns problematic years later, shareholders will invariably question if the IDs have been diligent.

Take cyber risk management as an example. Discussions around the appropriate level of security is a concerted decision and often a judgment call. IDs are critical in ensuring that the management has been rigorous in assessing risks, evaluating the options and costs of investments, and examining the basis for concluding the optimal level of security required. Yet, even with the best intent in risk management, given how the cyber landscape is rapidly evolving, a cyber attack can still occur.

Should the IDs have probed deeper in the decisions back then, and to what extent?

Without a doubt, it is the responsibility of the ID to ask questions and request for more information when required. When this information raises even more questions, some IDs may feel compelled to rationalise or settle on the management's explanation to avoid being seen a hindrance or worse, an adversary, even if their years of experience in business could tell them that something is amiss.

Is this then a dilemma of involvement versus interference?

IDs must be confident to act without fear or favour. Involvement as an ID means asking the right questions to drive governance around responsibility, accountability and rewards. Healthy tension between IDs and the management for the right reasons is often a reasonable measure of effective governance. An ID's role is not to "rubber-stamp" decisions, but to understand and challenge the management on key strategic decisions with mid- to long-term impact on the business, such as major investments, acquisitions and divestment.

That said, over-zealous scrutiny of every single management decision, particularly in day-to-day operations, may not be welcomed. That may be seen as interfering with the management's ability to perform its duties, questioning its competence and micro-managing. While some IDs would err on the side of conservatism, what one chooses to challenge management with must commensurate with the risk profile on the matter in question.

An area where the involvement of IDs is especially valuable is in accounting, for instance, in the application of fair value estimates, impairment assessment and revenue recognition policies, which in recent times have been the subject of scrutiny by regulators.

A company's performance is not driven by accounting but the business model, and so the accounting becomes clearer when the business model is sorted out. To that end, IDs, in robustly challenging the business model, can bring benefits in driving the integrity and sustainability of the business. IDs must take a firm stand not to allow accounting discussions to distract from the real business issues. At the same time, they have the authority to assert and guide management in arriving at an acceptable accounting position that complies with rules.

BALANCING THE ACT

With multiple dynamics at play - the personalities of management, board governance and culture - there is no one size that fits all in how IDs get involved without interfering.

IDs are encouraged to align with the management on the cadence and protocol on access to information and decision-making. As the company evolves, it is necessary to revisit the relevance of the arrangement. With change, the involvement of IDs will naturally increase. The management also needs to proactively engage directors early to avoid surprises that will hamper board confidence. Transparency will build trust and benefit all parties.

High-performing boards help the management to perform at the top of their game. They each have their own role but bring synergy - while the management runs the business, directors bring a wealth of knowledge, ideas and experience from the outside.

For IDs, it is not a question of involvement or interference, but how to navigate involvement sensibly, even if the occasional deep dive could be perceived as interference. This is a continuous journey of learning and at some point, IDs and the management must strive to meet at the equilibrium of "welcomed interference".

  • The writer is Singapore head of assurance at Ernst & Young LLP.
    The views here are the writer's and do not necessarily reflect the views of the global EY organisation or its member firms.