Impact of Independent Directors’ role on success and failure of company
Independent director is an individual who is sitting in board of directors and who do not have any material relationship. They are not connected or associated with company, and they work for the purpose of protecting the interest of members of company. Independent director is an important aspect in corporate governance of any company. Research shows that role of independent directors’ impacts on success as well as failure of companies.
Companies having more independent directors in their board are less likely to face financial distress as independent directors are empowered with monitoring and controlling authority over management (Deng and Weng, 2006). Shareholders are the owners of company. Independent directors act as vigilant gatekeepers and their earnings aligned with those shareholders. It is considered that they safeguard the interest of shareholders by discharging reasonable duties and diligence (Ryan and Wiggin, 2004). They ensure the ethical conduct of company and make participation in long term decision making.
As independent directors have no material relationship with company, it is considered that they have artificial interest over company’s performance as compared to management and executives’ context. It is found that lack of related experience sometimes impact their decision making and make them more conservative. As there is no connection of self-interest in company’s performance, independent directors’ concern about company’s performance may be disconnected. When the presence of independent directors in audit committee and overall board is more, it can lead to decreased earnings management (Benkel, Mather and Ramsay, 2006). It is concluded that independent directors monitor the internal processes of company and act for the betterment of shareholders of the company.
Benkel, M., Mather, P. and Ramsay, A., 2006. The association between corporate governance and earnings management: The role of independent directors. Corporate Ownership & Control, 3(4), pp.65-75.
Deng, X. and Wang, Z., 2006. Ownership structure and financial distress: evidence from public-listed companies in China. International journal of management, 23(3), p.486.
Ryan, H.E. and Wiggins, R.A., 2004. Who is in whose pocket? Director compensation, board independence, and barriers to effective monitoring. Journal of Financial Economics, 73(3), pp.497-524.