In this interview, Sir Andrew Likierman, Professor at the London Business School, shares some guiding principles on how boards can exercise independent judgment, the consequences of not doing this, and what board members can learn from Sherlock Holmes…
It has two parts. Judgment is being able to form opinions and make decisions based on combining personal qualities with relevant knowledge and experience. Independent is defined by the law and the UK corporate governance code. It includes not being dependent on outside interests and avoiding excessive dependence on the knowledge of others as well as providing fresh perspectives and holding management to account. I was prompted to look at it because Section 173 of the Companies Act says all directors should exercise independent judgment. But I didn't find a definition of judgment (the one above is mine) and there is no literature explaining what independent judgment is, or how to achieve it. I also found directors were, understandably, pretty vague on the subject. So I decided to see if I could help by creating guidance for its use in practice.
“The Companies Act says all directors should exercise independent judgment . . . but there is no literature explaining what independent judgment is.”
A lack of independent judgment sits at the heart of most corporate failures, not just in the UK but around the world — you only have to look at Enron and, more recently, Theranos to understand the implications of directors not exercising independent judgment. You had board members not looking closely enough in both situations, not asking what was really going on.
Directors can find it difficult to question a charismatic leader without feeling they are fettering him or her. It is especially difficult for executive directors and those new to the board to challenge or voice dissenting views. I have a lot of sympathy for these difficulties. They highlight the need for guidance.
“A lack of independent judgment sits at the heart of most corporate failures.”
Chairs must recognise that independent judgement through challenge is important for the entire board. They should create a safe space for discussion and dissent.
I’ve worked with wonderful chairs who bring the best out of members even if they say something irrelevant — which we all do from time to time. I’ve also worked with awful ones who are on a power trip and love the sound of their own voice!
The late Lord Ron Dearing got chairing right. He could move a meeting along and if someone went on a tangent, politely but firmly bring the discussion back to the issue. He created an atmosphere where everyone felt free to speak. He’d also remember who knew what and would ask that person for their opinion if they didn’t volunteer it. He really did his homework. I learnt a lot from him.
A huge role. And it’s the responsibility of everyone, not just the Company Secretary or CFO, to shape the quality of the information in a board pack. Being overwhelmed or baffled is almost as bad as not being told at all. Good quality information is central to good judgment.
It’s not just what’s there, it’s what’s missing — the risk factors that aren’t disclosed, the people who haven’t been consulted, the options not provided. These omissions can derail independent judgment. Just look at the world of crime and espionage where the Sherlock Holmes story “The Adventure of Silver Blaze” is a great example — the dog didn’t bark when the house was broken into because the dog recognised the perpetrator, allowing Sherlock to solve the mystery!
“It’s not just what’s there, it’s what’s missing . . . these omissions can derail independent judgment.”
This is difficult when first joining a board, but the more time a director has served, the more he or she has the opportunity to check reality with the statements and claims made, as well as how far fellow members are reliable. So directors need to remember what was said and claimed. I suggest making notes after each meeting rather than relying on the formal minutes. On the information flow, board members need to be active in shaping it, and my experience is that, if they are, those providing information are responsive.
You can help avoid overreliance by identifying the gaps in knowledge and skills on the board and how members approach plugging these gaps. A comprehensive skills matrix is useful for just this reason.
I suggest that all boards need to reflect on how well they’re exercising independent judgment. The guidance, produced in consultation with the Chartered Governance Institute and after discussions with a large number of current and former directors, identifies 12 elements. Look through them to see what needs attention. If an individual or a board collectively finds this difficult, I suggest asking someone trusted for feedback.
It’s also a matter of weaving independent judgment into existing mechanisms, such as inductions for new board members and board reviews. Indeed that’s the object of the booklet — to help boards incorporate independent judgment into their current ways of working.
You can download “The 12 elements of independent judgement for a UK board: A guide for directors” here.