Independence, competency, and behavior are the three foundational elements that make an effective director. The foregoing inputs are equally important. If one is weak—for example, a director whose independence is compromised, a director with a crucial competency that is undeveloped, or a director whose behavior is inappropriate—the effectiveness of the board will be impaired. If a director is underperforming, the dynamic and effectiveness of the board is compromised.1
The Regulatory Focus on Director Independence May Occur at the Expense of Industry Expertise
Much governance regulation focuses on board, committee, and director independence, as defined by relevant governance regulation or codes.2 The presumption of such regulations is that a director who is independent of management and the company3 can more objectively oversee performance and compliance than by company insiders. There is also regulatory deference given to the view of directors (OSC 2008) in the determination of director independence.
The regulatory importance devoted to director independence has well intentioned but undesired consequences, and limitations (Sharpe 2012). In many recent prominent instances of risk and performance failure, boards were populated with independent directors who ...