Boards must balance independence with competence

(November 12, 2003) The “independence” of corporate board directors may sound like a good idea in the quest to tighten corporate governance, but there is little evidence that it will make the board any more effective, according to a leading business school professor.

“Twenty years of empirical data suggests there is no relationship between board structure and corporate financial performance, or between board structure and board effectiveness,” says Richard Leblanc, PhD with the Corporate Governance Program at the Schulich School of Business.

“There is a relationship, in my view, between board effectiveness and corporate financial performance, but we’re not measuring board effectiveness as academics,” he told the audience at Dialogue with the [Ontario Securities Commission (OSC)] today.

Leblanc says regulators place far too much emphasis on board structure — calling for the separation of CEO and chair, as well as a majority of independent directors on the board — while board process and membership tend to fall by the wayside.

“The assumption that if you’ve got a ‘correct board structure,’ you’re necessarily going to be an effective board is flawed,” he says. “You need to be competent and you need to behave a certain way as a director.”

Too often, Leblanc explains, the search for an “independent” director leads to a candidate without adequate understanding of a firm’s business, particularly in highly specialized fields.

“If you’re going out to recruit directors based on what the regulator wants, which is independence, you’re naturally going to go out and recruit more independent directors who know less and less about the business,” Leblanc says. “There might even be an inverse relationship between director independence and director competence.”

He also says there is little evidence supporting the theory of splitting the titles of CEO and chair of the board to increase board effectiveness.

“If we were right, the Brits and Canadians would outperform the Americans, where most of their chair and CEO is combined, and we don’t,” said Leblanc.

Does independence increase the risk of hiring an incompetent director? Should the CEO and chair positions be fused or split? Does it matter? Share your thoughts about this topic in the Talvest Town Hall on Advisor.ca.

Filed by Steven Lamb, Advisor.ca, slamb@advisor.ca