Hi Juliet,

the most common way is to consider independent directors as a percentage of the the total number of directors. This information is usually provided by the relevant database, such as Datastream or Bloomberg for listed companies. In fact, SMEs rarely have independent directors and, in any case, it is quite difficult to get this kind of information. 

Regards, Fabio

Hi Fabio,

The question is: when may we assume that director is really independent? The only info we may get is the statement of the company that some particular members of the board are independent. Some researchers notice for example that every non-executive boards are independent, which is not right (in most entities) in my opinion.

Hi Radoslaw, 

thanks for your opinion but I suppose Juliet was not asking when we can assume directors are really independent, but instead which concretely variables should be used and how these variables are measured. Of course, you can get this information from corporate governance statements directily by listed companies. However, this is a very time-consuming activity as you have to hand-collect it for each report and if you need a large sample it could be very difficult. Second, this information cannot be verified and you can only trust it...on the contrary when international databases such as Bloomberg or Datastream collect this and other information, they pose many questions allowing to verify the realibility of the answers provided by companies. 

For sure, as you outline, independent directors are not simply non-executive directors. Finally, independence is a very controversial issue and while you can get data on formal independence, you'll never know about substantial independence, as for auditors...

Regards, Fabio.

Ps.: Poznan is a lovely town! I really appreciated when I was there two years ago.

Board of Directors main purpose is to protect interests of owners of a company. Why this is necessary in the first place? You can refer to agency theory and agency problems for more details. The point is: interests of management are not those of owners/shareholders. If we think about 'independence' it may mean freedom in voting at the Board meetings (instead of simply following instructions from some other parties). This may be the case in state-owned enterprises, where Board members appointed by the Ministry of (Treasury/Finance/Infrastructure/etc.) are simply representatives of interests of someone else. This is all about 'representation' even in case of private sector companies. 

Therefore, 'the independence' may not be there for measuring at all. However, with some simplifying assumptions you could develop some indicators, as suggested above. In general, competent Directors tend to be more independent, so looking at experience, skills and education, and other credentials - may be quite useful in answering your question. 

Dear Juliet Ifechi Kenn-Ndubuisi

Greetings,

Yes. I agree what Pawel Mlodkowski · said 

Best Regards

Board independence may be captured in two ways.  First, from the structure of the Board proxies such as number or proportion of non-executive directors are commonly used.  Comments about the efficacy of these proxies have been made by others but they are at least consistent with prior research.

Second, consider the output side of financial performance.  A more independent board will exert more influence over over management, including the executive directors and we should expect agency costs both Principal - Agent and Principal - Principal to be lower.  Opportunities for expropriation and tunnelling should be less.  Accordingly you can try some typical agency cost proxies.

It is an excellent question to ask.  As a closing thought issues like diversity on the Board, not just gender, may also suggest greater degrees of independence of views.  Good luck with the research.

I also gained a knowledge by reading all the answers, thanks a lot. I agree with the comments given by Fabio La Rosa.

But I have a question unanswered here, that is "do proxy variables really explains the phenomenon". 

Dear Juliet,

The question of board members' independence has long been at the core of EU (European Union) policies relating to corporate governance.

Hence, the EU came up with a list of (objective criteria) which were published in Annex II of the Commission Recommendation of 15 February 2005 on the role of non-executive director of listed companies (see here http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2005:052:0051:0063:EN:PDF). This list very much influence the criteria-based definition of independence of many national codes of corporate governance in the EU.

It is worth mentioning however, that EU policies in this area has gradually shifted from the concept of " board independence" (left aside against the lack of empirical evidence of board independence added-value) to the concept of "board diversity" which is now prominent in political and academic debates.

Best wishes

From research, I found that it is measured as a percentage of independent directors to the total number of directors. From work experience, I believe its chairman independence and board size.

Form the extended literature about corporate governance, i learned to calculate the board independence by calculating non-executive directors to total directors.And also, in our country Corporate governance  Code of ethics also support the above way to calculate board independence.

Dear Julliet

Please have a look at the research paper I prepared about the independence of the members of the audit committees in the U.K. You will be able to see which variables I applied as proxies for the committee independence and you can just do the same for the Board of directors.   Good luck

Hi Juliet,

have a look on my paper.

Cheers,

Gilbert

Thank you all, Contributions noted.

Dear Juliet,

Regarding  board Independence and a general analysis of corporate governance mechanisms at place against international best practice, please feel free to refer to my research paper: "Case Study: Analysis of Corporate Governance and Management Control at Kendallville Bank": https://www.researchgate.net/publication/306515523_Case_Study_Analysis_of_Corporate_Governance_and_Management_Control_at_Kendallville_Bank

It was published in the International Journal of Applied Economic Studies Vol. 4, Issue 3, pp. 14-20 and thus can be used for referencing.

Paul

Article Case Study: Analysis of Corporate Governance and Management ...

HI,

This recent paper may be of interest for you:

H chou, P Hamill, Y Yeh, "Are regulatory compliant independent director appointements the same? An analysis of Taiwanese board appointments", Journal of Corporate Finance, 2016, forthcoming.

Best regards

From a finance perspective there are two issues that I have found to be important, regarding the level of indepence of non-executive directors:

1.  Is the director aligned with a mjor shareholder, and

2.  Is the director aligned with an associated company, ie

a.  ownded by the the same principals as those of the company of which they are a director, or

b  owned by a major supplier or purcheser in the companies supply chain?

In each case if the answer is yes then there are likely to be Agncy Costs, specifically  PP agency cost.

Good luck with your research.