Author picture

Are independent boards the way to go?

Hope you are having a great week and welcome back to our brief thoughts on ESG.  This week I’d like to share some ideas on corporate governance inspired by Warren Buffet’s latest letter to Berkshire Hathaway’s shareholders. In particular, I’d like to talk about independent board members and their effectiveness.


Who is an independent board member?

An independent director or board member is defined as a someone who doesn’t have a material or pecuniary relationship with the company either directly or through one of the company’s partners, shareholders, or management members, except for the fees it gets from being a board member. In a nutshell, an independent board member should not have any conflict of interest that would prevent them from exercising independent judgment in any and all topics discussed during board meetings. In theory this allows them to better consider all stakeholders (in particular, minority shareholders) and make the best decision for all.

Now, it is easier to put in paper when someone is independent than to judge independence in real life. Many market organizations (NASDAQ, NYSE, LSE, HKSE, among others) have tried to enumerate rules to better define where conflicts of interest exist. But life is complex, and with complexity comes subjectivity. So, investors are left to the very difficult task to not only see the percentage of independent board members in a given board, but also to judge whether these board members are actually independent.


Is an independent board always better?

This is a tough question. Several academic studies have tried to tackle it and the answer is not always straightforward.

Some supporters are:

  • A very large study of 10,314 firm-year observations belonging to 34 countries shows that board independence is positively associated with firm performance.
  • A study of 200 firms in both the UK and the US showed that there is a significantly positive relationship between the number of independent board members and firm performance.
  • A study of the FTSE100 constituents in the UK showed that board independence has a significant strong positive impact on firm performance (both contemporaneous and subsequent).
  • A study for Chinese companies covering almost all publicly traded firms on both the Shanghai and Shenzhen stock exchanges from 1999 to 2012 found that independent directors have a positive effect on firm performance. This relationship was even stronger in government-controlled firms and firms with lower information acquisition costs.
  • A study for 80 listed Pakistani firms, also shows a significant positive impact of independence on firm performance measures.
  • A study of 64 industrial firms listed in the Amman Stock Exchange in Jordan found that board independence is significantly and positively related to ROA.

Some opponents are:

  • A study in Saudi Arabia and Bahrain analyzing data for 162 companies found an inverse relationship between board independence and firm performance.
  • A study in Bangladesh found that independence and economic performance did not positively affect each other in the 135 firms studied in the local market.
  • A study of 200 firms in Malaysia concluded that independent directors significantly and negatively affect firm performance.

Some mixed bags are:

  • A study of 2883 US companies found that board independence is positively related to firm value before the introduction of the Sarbanes-Oxley Act, and negatively related after the introduction.
  • A study of Southern European companies found that the optimal proportion of independent directors is lower in family businesses than in non-family ones.


If you look for similar studies, you can find many covering many different geographies and yielding many different conclusions. Thus, we now have an additional layer of complexity. Not all independent boards yield the same results (even if the theory behind an independent member better representing a minority is sound).


How would a great board look like then?

Quoting the source of inspiration for this week’s topic: “Despite the illogic of it all, the director for whom fees are important – indeed, craved – is almost universally classified as “independent” while many directors possessing fortunes very substantially linked to the welfare of the corporation are deemed lacking in independence. Not long ago, I looked at the proxy material of a large American company and found that eight directors had never purchased a share of the company’s stock using their own money.


… I feel better when directors of our portfolio companies have had the experience of purchasing shares with their savings.”


We believe independence is important, but it’s not a silver bullet. A combination of having an independent board (with board members who truly understand their fiduciary duty, are prepared for the task, and have minorities’ best interests at heart) and the right alignment of interests is the ideal. Board members should be aligned to care about their decisions more than they care about their board fees. Investors should be empowered to speak up when board members are not delivering. Track record should matter.

In Mexico we have a lot of family-controlled businesses in the market. As a result, we see most boards with a minority of independent members. While we believe over time Mexican companies will improve their corporate governance standards to align with what investors ask for, we don’t see a Mexican market with less control group power in the near term. Under these conditions, we believe companies need to make sure their independent board seats are being optimized. We provide some food for thought here:


  1. Do you have the best board member sitting there? Someone prepared with useful knowledge for where your industry is heading? An independent thinker who will speak up if needed?
  2. Are your independent board members up to speed to what their fiduciary duty entails?
  3. Are your independent board members too busy to truly dedicate time to your board?
  4. Are your independent board members correctly incentivized?
  5. Do your board members care more about their reputation and interests of minorities than the privilege of sitting on the board?
  6. Are your independent board members friends or business acquaintances of the controlling shareholders? Do they sit on other boards together?
  7. Have independent board members been on the board for over a decade compromising their independence?


In addition, in Mexico shareholders who represent 10% of the economic capital of a company have the legal right to choose a board member. Groups of shareholders can club together to meet the 10% threshold and jointly appoint a board member. In many cases AFOREs thus qualify for board seats, as do certain large international shareholders (Blackrock, Wellington, Fidelity, etc.). We believe AFOREs and other investors should take up this right, and if they do not want to be an insider in the stock, appoint a reputable external person accountable to them. For the most part it makes sense to do this in a friendly, collaborative way, and reach a consensus with the company on the right person to fill the seat, if possible. The objective is not to be confrontational, but to help the company take better decisions and operate in the interests of all stakeholders.


Hope this was of use. As usual, if there is anything we can help you with, please reach out. Also, don’t forget to recommend any ESG subject matter that you would like us to research and put in a forthcoming weekly.




Partner, Miranda ESG

Contacts in Miranda Partners

Damian Fraser
Miranda Partners

Marimar Torreblanca
Miranda ESG