Board independence fails academic tests

A number of academics have spoken out against the trend towards independent board directors, with one saying the ASX’s move to mandate independence on boards in 2003 was “the most costly and disastrous regulatory change ever implemented in Australia by a private regulator”. 

Professor Peter Swan from the Australian School of Business at the University of NSW will present his research at the Chulalongkorn Accounting and Finance Symposium in Thailand in November. 

He argues that the decision by the ASX in 2003 that required listed companies to adopt a majority of independent directors had resulted in the relative ignorance of directors as well as a lack of incentive to monitor their own pay - something which has been fatal to Australian company performance, he said. 

Swan compared the performance of 969 Australian companies between 2003 and 2011 where 561 changed their board structure following the ASX rule change in 2003. It should have led to more dispassionate, less biased directors, particularly when assessing existing business practices, according to Swan. 

“However change in the rules in favour of independent directors effectively meant they were far less experienced - and they also set pay,” he said. 

The majority of those that made changes to board structure following the ASX’s listing rules have lost almost $70 billion in value compared with other listed companies, Swan claims.  

“Pursuit of private interests seems particularly likely for independent directors as, almost by definition, they have small or negligible shareholding or 'skin in the game’ that diminishes any intrinsic incentive to monitor that the independent director may possess.” 

Queens University Professor Sally Wheeler, speaking at the Association of Superannuation Funds of Australia (ASFA) luncheon last week, said gender diversity had been presented as a way to overcome the failings of structural independence on corporate boards. 

Wheeler, a head of school and faculty of law professor, said her work into corporate board structures could easily apply to super funds in Australia. 

Following the failure of independence on many corporate boards, gender diversity had been promoted as a way to increase independent thought, Wheeler said. 

“Women are being used as a sort of independence plus,” she said. 

“There’s real confusion there I think between independent ideas and thinking and independence as an identity - and what we want surely is independent ideas and thinking rather than people who have independence as some sort of identity.” 

Wheeler said psychological research had indicated that task conflict, which was a productive process in debating issues, was prevalent in atmospheres of high trust and respect for individuals with shared norms and values - something that mandated structural independence worked against. 

Pushing structural independence or the 'diversity agenda’ as a policy for appointing fund directors was at odds with task conflict, Wheeler said, and often produced relationship conflict which research had shown had a negative effect on group decision-making. 

“You’re trying to solve a demographic deficit argument with issues about cognitive skills and behavioural attributes and that just doesn’t work,” she said.