Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Indian Stock Market News, Equity Market and Sensex Today in India | Equitymaster
Investing in India? Get Equitymaster Research  
How to gauge board's independence? 
(Tue, 30 Oct Pre-Open) 
An independent opinion in the board room is critical for an unbiased view on important subject matters. And that comes from having independent directors on board who are not related to the company. Because they are not related to the company they can freely express their opinions without any biases. This is in the long term interests of the shareholders. Also, greater the composition of independent directors better the corporate governance standards.

But more often than not we focus too much on independence of the board in gauging corporate governance. The role of the chairman of the board is ignored. His role is particularly important given the powers that are vested with him. Generally, it is believed that it is the managing director (MD) or the chief executive officer (CEO) who runs the company and chairman runs the board. However, whenever it comes to actual roles that are played by them, there is a wide divergence.

More often than not the chairman of the board is also the MD or the CEO of the company. Sometimes the role of chairman is played by some executive or family person of the promoter group. Very few companies have non-executive independent chairman. As the chairman can overturn/oppose any board decision there should be an independent person at the helm. But this is rarely the case. Both the roles of chairman and CEO are played by a single person in most cases.

Just imagine, if that is the case, then, while the MD reports to the board he is also the boss of the board! Thus, he can influence the board decision at his will.

In a nutshell, chairman and CEO cannot be one unit. There has to be some level of independence which generally lacks. And this poses governance risk. Further, if the chairman is a significant shareholder, the risk increases even more. That's because he will be more inclined and emotionally attached to the company. This can impact his rationality in decision making at the cost of long term returns to the other shareholders. We are not saying that having a non-independent chairman as a CEO is a recipe for disaster. The point we want to highlight is that when both these roles are played by a single individual his actions are more often than not governed by emotions rather than prudence. While some can overpower the emotional factor and act with prudence, some cannot.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

View all commentaries | Archives  RSS
Read the latest Market Commentary


Equitymaster requests your view! Post a comment on "How to gauge board's independence?". Click here!


Become A Smarter Investor In
Just 5 Minutes

Multibagger Stocks Guide 2017
Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Jul 26, 2017 03:36 PM