FIGHT FOR INDEPENDENTS
What criteria should you use to choose an independent director for your board?
By Jamie Paton, director North Asia for 3i Asia Pacific

The outside, independent director has long been an essential ingredient in the public corporation, ensuring that a company’s true owners – shareholders – have a guardian of their interests against management abuses or incompetence. But the job description has never been fully defined. Often independents grapple with an ad hoc brief and little support and are forced to invent the job on the spot. In the search for a systematic method on how to pick outside directors and prepare them for their jobs, CFO Asia turned to Jamie Paton, director for north Asia at 3i, a venture capital and private equity investor listed in London with a global portfolio of US$13 billion. 3i selects and appoints several hundred independents a year, in an effort to safeguard the company’s interests. His message: it takes a lot more than putting a whistle-blower in place.

Regardless of whether you lead a large multinational or are running a newly started business, adding an independent director to the board is a deeply personal thing for those doing the choosing. In fact, any change to the board, whether executive or non-executive, affects team dynamics, so it’s important to get it right.

At 3i, we’ve long believed in the power of good independent directors to add value to our investments. With more than 14,000 investments and an independent directors program that includes more than 600 members in 14 countries serving on the boards of more than 1,200 3i-backed businesses, we’ve learned what works and what doesn’t.

The Right Reasons

Any appointment should be based on a clear rationale if it is to work, which means beginning with the fundamental questions, “Who are we looking for and why?” The clearer the criteria are before the search begins, the easier it will be to find an appropriate fit. You also need at the outset to think about the role of the board since a potential independent director must be seen in the context of the board as a whole.
In our view, regardless of the size, location or sector of the business, the role of the board is threefold:

To ensure not only that the right strategy is in place but also that it is being implemented and reviewed regularly.

To ensure that the right resources are in place to deliver that strategy (people and money being the most important) and that they are in the right place at the right time; and

To ensure that the company has high standards of corporate governance and investor relations, and that the business complies with all rules and regulations relevant to its particular circumstances. We call this element “keeping out of jail”.

What is the independent director’s role in all of this? Fundamentally, it is to help the executive directors achieve their business objectives. This is a far cry from the commonly held perception that it’s only about policing and governance. Indeed, the rewards can be significant if you find someone who can both help you with decisions on strategy and resources and bring the necessary experience to ensure appropriate corporate governance. Think of your board as a team and the independent director as an integral member of that team. You need to find a fit in terms of complimentary skills, experience and personality. To increase the chances of success, you need to empower the management team to pick someone who will be useful to them.

Judgement and Influence

So, what are the qualities we look out for in independent directors? Probably the most underused word in the process is “judgment”. One of the defining characteristics of a strong independent director is good judgment, both of people and commercial situations. Judgment is vital because most boards will have only four or five really significant things to decide every year. So an independent director who can help you decide these things and can provide insights into them is indispensable.

In order to retain a good sense of judgment, a solid dose of reality is essential. Keeping a grip on the real world is tricky for highly successful executives. All too often, dangerous feelings of invincibility and delusions of super-competence emerge - unless they receive regular injections from the real world.

An independent director you respect who also has broad and current experience within other businesses helps in this regard. Someone who has really been through what you are about to go through and has been successful is also likely to have a sense of judgment. Experience in leading successful entrepreneurial ventures can be particularly useful. And since internationalization is a component in the strategy of many of today’s businesses, experience operating in other countries is also useful.

How do you tell whether someone has good judgment from an interview? Obviously, their track record gives an indication, but the first signal is how well they listen during the interview. Good independent directors are generally great listeners and are unlikely to talk on and on about what they have achieved or the people they know. Even at the initial interview, they will listen carefully and ask short but thought-provoking questions in an attempt to get a feel for your strategy and that of the business. By talking through current issues, you should also be able to measure their reasoning power and make some judgment as to whether they are someone you could trust.

But judgment is useless in a director who can’t get heard. So the ability to “influence” is also important. When it comes to the capacity to influence others, personality and interpersonal skills are all-important. It is hard to influence someone if they don’t respect you no matter how user-friendly you are. An impressive track record may help you generate initial respect, but real respect will come only through a combination of achievement and personality.

Vigor and Rigor

So what sort of personality should you look for? Aside from good listening skills, the ability to recognize and deal with conflicts of interest is also important. I like a “cuddle and kick” mentality. That is the ability to provide both broad encouragement, while at the same time ensuring that there is appropriate corporate governance.

Quiet confidence and wisdom are the traits of the natural confidant. You should feel able to confide in your independent director – and they should have the confidence to debate the things closest to your business heart. Other vital attributes are vigor, rigor and motivation. Gaining familiarity with the business and becoming a valued member of the team requires considerable commitment and a sharp mind.

Be wary of a candidate who already has more than five or six such appointments – this may give rise to questions about their motivation and their ability to commit real time and energy to your business. Avoid appointing from just a close circle of influence or a small cadre of experienced non-executives or well-known names. The net should be cast wide and be driven by the need rather than by the ease of filling the situation quickly.

One final characteristic of a good independent director is that they will recognize when it is time to go. Perhaps this is the ultimate test of good judgment.

And in closing - one more observation about choosing an independent director. Those who succeed in their search for the really effective candidate investigate their candidates with skill and care. They talk to other managing directors who have seen them perform at their board meetings and they listen and take advice. This is often the most important stage in making a decision that could really help a business achieve its objectives.

Abe De Ramos is executive editor, Hong Kong at CFO Asia.