The Role of the Independent Director: Evidence from a Survey of Independent Directors in Australia

Abstract

The purpose of this paper is to report the results of a survey of independent directors on a range of issues relating to the execution of their role including the independent directors' perceptions relating to board effectiveness, board interactions, information sources, and performance and evaluation. A survey was forwarded to independent directors of the top 200 Australian Securities Exchange (ASX) listed companies. The paper aims to provide the perceptions of independent directors themselves and so contribute to the literature through a better understanding of the nature of the work performed by Australian company independent directors and the environment in which it occurs. Findings suggest that the fundamental role of the independent director has not changed as a result of the corporate governance reforms.

Corporate Governance and Company Performance in Australia

“…The variables are self‐explanatory with the exception of board independence. Non‐executive directors can have affiliations with the company, such as being a substantial shareholder, former employee, advisor or consultant, or have a material business relationship that may impair their independence (Brooks, Oliver and Veljanovski 2009) and therefore not be strictly independent as articulated by the ASX Corporate Governance Guidelines (ASX 2003). We relied on the annual reports to identify independent directors.…”

Do corporate governance recommendations improve the performance and accountability of small listed companies?

“…Non‐executive directors can have affiliations with the company (Brooks et al ., ) and therefore not be strictly independent as articulated by the ASX Corporate Governance Guidelines (ASX Corporate Governance Council, ).…”

Large Shareholders and Independent Director Equity Compensation

“…While equity compensation can align the interests of independent directors and shareholders, this does not come without a cost. Previous research suggests that independent directors are risk‐averse, that is, they appreciate fixed cash payment more than uncertain equity compensation (Brook et al ). Share prices can be affected by uncontrollable factors, making equity compensation risky.…”

“…Without sufficient power to influence and interfere, neither ‘carrot’ nor ‘stick’ can be implemented. In this case, we anticipate that independent directors are more likely paid in terms of fixed cash compensation, the independent director's preferred form of remuneration (Brook et al ). In other words, we anticipate that equity compensation is less likely to be awarded to independent directors when the aggregate block ownership percentage is in the low range.…”

“…It may be the second cause, that is, the independent director's own preference, which is more influential in determining independent director compensation in practice. A recent survey shows that Australian independent directors prefer fixed cash compensation to equity compensation (Brook et al ).…”