Balancing act of independent directors
What is the extent of responsibility or involvement of an independent director of a company in its regular operation?
This issue cropped up in the course of the investigation by the Senate blue ribbon committee of anomalous flood control projects.
It turned out that the wife of Sen. Rodante Marcoleta, a member of the committee, is an independent director of insurance companies that provided insurance coverage to some of the projects of the Discaya couple, who are at the center of the controversy.
Marcoleta admitted his wife’s engagement with those companies, but said that since she is an independent director and has nothing to do with their operation, he did not see any conflict of interest in his participation in the proceedings.
Note that the position of independent director (ID) was created by law to promote accountability and objectivity, and to provide a mechanism for checks and balances in companies imbued with public interest.
These companies include, among others, those listed on the stock market, issuers of securities, trust and insurance companies and other financial intermediaries.
The ID should be “independent of management and free from any business or other relationship which could, or could reasonably be perceived to materially interfere with the exercise of independent judgment in carrying out the responsibilities of a director.”
Sterling those qualifications may be, there is an unwritten, but critical, element involved in the selection and election of an ID: He or she should be acceptable to management or the majority of the stockholders.
Bear in mind that an ID’s entry to the board is “by invitation” only. No applications from the outside are entertained.
It helps if the prospective ID is a prominent business person or a former high-ranking member of an executive, legislative or judicial office and enjoys a reputation for professionalism and integrity.
Of course, the past professional linkage would be helpful in case the company finds itself in some corporate or business trouble in the future.
In consideration for the ID’s positive contributions to the company, he or she will receive hefty director’s fees and be entitled to all the perks and privileges that accrue to membership on the board.
That’s a sweetheart deal for a once-a-month attendance at board or committee meetings. In the process, it is inevitable for the ID to become cozy with management.
To continue to enjoy those benefits within the term limits allowed by the rules (which the Securities and Exchange Commission now wants to rationalize), the ID has to remain in the good graces of management without losing sight of the objective for which the position was created.
It’s a balancing act that requires tact, political correctness in the business sense and the ability to see where the wind blows, so to speak, when the board tackles contentious issues or matters that do not draw unanimity among the directors, or more importantly, the stockholders or beneficial owners they represent.
The rule of thumb is that the ID should speak his or her mind when the occasion calls for it, regardless of contrary sentiments of management or the majority of the stockholders. And be prepared for the consequences in the event his or her posture does not sit well with the people who made it possible for him or her to hold that position.
Going back to the case of Marcoleta’s wife, it stretches the imagination to think that she was oblivious to the adverse effects of the Senate investigation on her companies’ insurance coverage of the Discayas’ companies.
The possible loss of millions of pesos in insurance premiums would be a matter of serious concern for the boards that would necessitate their members to take all measures necessary and available, both internal and external, to prevent that from happening or mitigate its impact on their bottom line.
For comments, please send your email to raul.palabrica@inquirer.net.
