The Thing About Independent Directors

In theory, an independent director is a guardian of minority shareholder rights. The independent director is supposed to scrutinise questionable decisions or plans made by the CEO or the executive promoter. Such decisions might go against the best interests of minority shareholders and could directly affect the value of their investment.

In practice, though, independent directors rarely stand up to a CEO or promoter with skewed interests and an informational advantage. Some of the more conscientious independent directors may speak up against a blatant illegality, but any unfair decisions that are pushed through by management using verbose consultant reports or subtle complexities will generally not be stymied by “cocker spaniel” directors. Warren Buffett wrote this about boards of directors in his 2019 letter to Berkshire Hathaway shareholders: “When seeking directors, CEOs don’t look for pit bulls. It’s the cocker spaniel that gets taken home,” referring to the gentle and likeable nature of the cocker spaniel breed of dog. In the real world, the boardroom is a highly social forum where questioning the CEO or taking a stand against an audit or compensation committee’s recommendation can be detrimental to the social position of the person taking such a stand. Many board meetings are “pre-packaged” events.

So what should we do as investors about this well-intentioned but practically ineffective concept of the independent director? The short answer is, don’t invest in companies where you need independent directors to check the promoter or controlling owner.  Find a few companies (you only need a few for your portfolio), out of the thousands available, where you are protected by the character and competence of the CEO and majority shareholders themselves. Easier said than done, of course. However, once you are confident about this point, the independent director as defined by regulations and recommended by corporate governance advocates becomes pretty much redundant.

Independent directors are generally nice people who are highly qualified and accomplished at many different things. The problem is that, on average, they aren’t very good at protecting your money and business interests when it really matters.