Good Practice: Lead Independent Directors

Has the time come for a lead independent director?

Corporate governance guidelines uniformly recommend that the roles of chair and CEO should not be exercised by the same individual and that the chair be an ‘independent’ director. However, this recommendation is not always possible or appropriate to follow. For example, in start-up companies, the founder will often serve as both CEO and chair.

In circumstances where the CEO also serves as the chair, or where the chair would not meet an objective assessment of ‘independence’, the ASX Corporate Governance Council suggests the appointment of a lead independent director.[1] The role of the lead independent director is then to provide leadership to the independent directors, liaise with CEO on behalf of the independent directors and advise the board on matters where there may be an actual or perceived conflict of interest such as chair/CEO performance evaluation.

For obvious reasons, the chair/CEO should not choose the lead independent director; rather the position should be elected by the independent directors. As with the other leadership positions, succession planning is advised for this role.

In the US, the position of lead independent director has become institutionalised in public companies in the wake of the Sarbanes-Oxley Act 2002 and subsequent US Securities and Exchange Commission (SEC) and New York Stock Exchange (NYSE) regulations.[2]

Further, there is some evidence that appointing a lead independent director where there is an executive chair, in combination with other board of director variables such as the number of meetings, is associated with improved company performance.[3] However, the benefits of a lead independent director will be contingent upon factors such as the director’s competence and company’s governance maturity.

Due to the nature of the role, a number of Australian companies have incorporated the role of the lead independent director with that of the deputy chair. For example, in their 2011 annual reports, Blackmores Ltd, Fortescue Metals Group Ltd, Seven Group Holdings Ltd and Southern Cross Media Group Ltd are among those companies who have taken this path.

The chair/CEO and the lead independent director need to collaborate to ensure the best possible operation of the board. As such, clear delineation of the division of responsibilities with the chair/CEO and communication of this division to the board and to management is vital. Your board does not need to hear the complaint, ‘Who’s in charge?’ when it comes to this position. Therefore, defining the scope of the lead independent director’s duties and responsibilities should be a priority included in the board’s charter.

 


[1] ASX Corporate Governance Council 2010, Corporate Governance Principles and Recommendations, 2nd edn, Australian Securities Exchange Ltd, Sydney, p. 17, Box 2.1.

[2] Penbera, J 2009, ‘What lead directors do’, MIT Sloan Management Review, vol. 50, no. 4, pp. 15-17.

[3] Larcker, DF, Richardson, SA & Tuna, I 2007, ‘Corporate governance, accounting outcomes, and organizational performance’, The Accounting Review, vol. 83, no. 4, pp. 963-1008.

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