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Attracting Independent Directors For Family Businesses

Published on Thu, Sep 22,2011 | 17:50, Updated at Thu, Sep 22 at 18:01Source : Moneycontrol.com 

How To Attract Professional Independent Directors For Your Family Business?

This article has been excerpted from Grant Thornton's newsletter 'Aspire'. It is authored by Lav Goyal, Partner - Business Risk Services, Grant Thornton India.

"The outside world view and unbiased opinion that independent directors bring to a company far outweighs the (mis)perceived loss of control in the board."

It is desirable for a family business to establish a board or a council in which independent directors constitute a majority. However, owners and families may find it hard to cede control, until they have experienced the benefits of independent directors over a long period of time. In fact, the by-laws of a family enterprise may ensure family control even if there is a majority of independent directors on the board by providing for the removal of directors if the shareholders believe their interests are not being adequately served. Thus, a family enterprise can enjoy the benefit of having objective outsiders controlling the board without risking the unwanted loss of ownership control.

However, once you decide that you want independent directors on your company’s board, you would find that it has become increasingly difficult to find and retain well-qualified independent directors. Businesses run by professional management teams, demonstrating adherence to regulatory compliance and respect for law will certainly attract a good pool of independent directors. Regulatory non-compliance is the biggest risk perceived by independent directors. A company which may foster regulatory change favouring independent directors or one that nurtures strong internal risk review mechanism and compliance will go a long way in attracting as well as retaining quality directors. Further, legislative changes on liability laws and the administration of such laws has proved instrumental in forming an effective independent board of directors.

An independent director must be provided unhindered timely information and an environment which is receptive to an independent opinion.

Additionally, an effective working of the whistle-blower policy coupled with transparent reporting to the audit committee is favoured in the eyes of independent directors. The Directors' & Officers' (D&O) liability insurance is another vital aspect that independent directors look for before joining a board.

D&O Liability Insurance

D&O liability insurance offers individual directors and officers the protection they need from personal liability and financial loss arising out of alleged wrongful acts committed in their capacity as corporate officers and/ or directors.

The D&O policy does not belong to the company. It is a personal policy belonging to each and every director and officer of the corporation and its subsidiaries.

Key features of a D&O policy include the following:

• it does not cover intentional breach of faith and fraud by directors

• it does not differentiate between executive and independent directors

• it typically covers defense costs and settlements, if any

• premium amount typically depends on asset size, geographic location and product of the company

It is interesting to note that no other policy presents as complex an array of insurance, indemnification, corporate governance, litigation issues involving liability exposures in virtually every substantive area of the law, including securities, mergers and acquisitions, fiduciary duty, bankruptcy, employment and criminal law.

It is desirable for a family business to establish a board or a council in which independent directors constitute a majority. However, owners and families may find it hard to cede control, until they have experienced the benefits of independent directors over a long period of time. In fact, the by-laws of a family enterprise may ensure family control even if there is a majority of independent directors on the board by providing for the removal of directors if the shareholders believe their interests are not being adequately served. Thus, a family enterprise can enjoy the benefit of having objective outsiders controlling the board without risking the unwanted loss of ownership control.

However, once you decide that you want independent directors on your company's board, you would find that it has become increasingly difficult to find and retain well-qualified independent directors. Businesses run by professional management teams, demonstrating adherence to regulatory compliance and respect for law will certainly attract a good pool of independent directors. Regulatory non-compliance is the biggest risk perceived by independent directors. A company which may foster regulatory change favouring independent directors or one that nurtures strong internal risk review mechanism and compliance will go a long way in attracting as well as retaining quality directors. Further, legislative changes on liability laws and the administration of such laws has proved instrumental in forming an effective independent board of directors.

An independent director must be provided unhindered timely information and an environment which is receptive to an independent opinion.

Lav Goyal

Grant Thornton

 
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