Abstract
The emerging economies are usually faced with more uncertainties than developed economies. This provides a harsh environment for operations, which creates a situation where the decisions of the organization are well analyzed before being enforced. This calls for inclusion of an independent body in the decision making body of an organization. This paper will expound on the role of independent directors in an organization in regard to emerging economies.
1. Introduction
1.1. Background
Corporate governance refers to the balance that exists in the management of resources of an organization in the most efficient means in order to achieve the organization goals (Colley 2003 p 15). It calls for accountability of all the activities that are undertaken by the organization as a whole. Recently, it has occurred that organizations must try to adapt their corporate governance practices in a way that meets the current or the existing environmental problems within which the organization is operating especially in the emerging economies (Lazinock et al 2002 p 54).
The emerging economies are those economies, which are in the development stage. These economies are faced with uncertainties, and mostly organizations face several challenges in their operations (Tsamenyi 2006 p 75). They are constrained in the decision making, which constrains such organizations from experiencing growth. The board of directors of these organizations usually lacks the necessary expertise and experience to run the organizations. This is because most members of these boards are consisted of members who are either partners or shareholders to the organizations. This reduces the capability of the boards to make independent decisions concerning the organization. This is a major constraint in the making of decisions, which will lead to growth strategies of the organization. As a result of this, many organizations in the emerging economies have adopted the inclusion of independent director in running the governance of these organizations.
An independent director is an individual given the mandate to run the affairs of the organization but has no direct interest in the organization, i.e. an independent director has no shareholding or any other material or pecuniary interest in the organization that he or she is charged with the responsibility of running (Dravis 2010 p 42). One is only entitled to remuneration by the organization for the duties that he or she performs in the organization (Arijit 2006 p 71). This is different from non-executive director in that the non-executive directors to an organization are allowed to hold shares in an organization (Loh et al 2006:347).
Independent directors appear to be the best suited for running an organization in the emerging economies (Dravis 2007 p 53). This is because they seek to maximize the interest of the shareholders of that organization since their performance is rated according to their results they bring forth in the organization. The future of their jobs highly depends on their performance, and since they want to keep their jobs, there is a possibility that they will have increased productivity to the benefit of the shareholders.
1.2. Objectives of the study
The role of independent directors in an organization especially in the emerging economies is crucial if the organization is to succeed in its operations. This is because, in most cases, the emerging economies are faced with cases of uncertainty regarding the performance or even the outcome of the activities that they undertake. Therefore, the running of the organization should be given enough attention to ensure that the person charged with the ultimate authority of decision making is competent enough so that he or she does not err in the decision making.
This paper seeks to establish the roles played by independent directors, in the emerging economies. It seeks to elaborate the duties of an independent director. It also identifies ways that enable him or her to achieve those goals that an organization has set on behalf of its share-holders. The objectives of this study can be divided into two parts, the general objective and the specific objectives.
1.2.1. General objective
The general objective of this study touches on the identification of the roles played by an independent director in managing an organization in the emerging economies.
1.2.2. Specific objectives
Apart from the general objective, there are other objectives of the study which are illustrated below:
1. To identify the advantages of having and independent director instead of a director with other interests into the organization.
2. To identify the techniques of selecting an independent director in an organization.
1.3. Problem Statement
This research focuses on what the independent directors do in order to achieve the organizational goals of an organization that is in an emerging economy. This has been due to the employment of independent directors in most of the organizations in the emerging economies.
1.4. Research Questions
• What is the role played by the independent directors in an organization?
• What are the advantages of having an organization being run by an independent director if it is in an emerging economy?
• How should the selection of independent directors be undertaken?
Chapter 2
Literature Review
Several studies have been undertaken in order to understand the meaning of quality corporate governance and the role of independent directors. Over the years, several views have been given on the meaning of corporate governance and also on the addition of the term quality with regard to organizations in emerging economies. Shleiffer and Vishny (1997) define corporate governance as those measures or mechanisms employed by the managers of an organization in order to fuel or to improve the growth and also the performance of the organization by providing investors with an assurance of a good return on their investment.
Therefore, it involves the mechanisms of governing of all the stakeholders in an organization, which include the shareholders, the directors, the employees and other stakeholders. They seek to protect the interests of the investors by regulating the actions of all the stakeholders (De Nicolo 2006 p 71). An organization with well-run governance attracts investors easily as compared to those facing governance problems. High governance controls through well set policies and strategies bring forth high returns usually attract more potential investors wanting to make an investment in the organization (Dravis 2007 p 126). This means that an organization that seeks to have more investments in the future must set up proper control measures to control current operations. One of the measures is by ensuring that the board is competent to run the organization well.
Following this argument, it appears that corporate governance is that type of governing an organization in a way that maximizes benefits are reaped from the organization. This means that the shareholders of an organization in the emerging economies must therefore establish good or better methods within which the organization must be run. This will help to achieve the maximum benefits from its operations. One of the ways that this can be achieved is through the use of an independent director. Adam Smith (2006) described an independent director as an individual who seeks to improve the productivity of an organization, in which he/she bears no direct self-interest. According to a summit by the Prime directors in 2005, corporate governance is a practice beyond mere legislation. This summit described independent directors as contributors to the board with different or divergent views. Therefore, they provide more skills different from the ones being possessed by directors with some personal interest in the company. Therefore, they are viewed as “conscience keepers” of the right interests of the company.
In recent times, the world has seen a turnover in the composition of the board of directors. There has emerged a rapid inclusion of independent directors into the board of directors. Investors have adopted the inclusion of independent directors as a result of the desire to have a neutral party in the decision making of the organization. Hermes et al (2006) illustrates that governance codes all over the world are changing whereby organizations are required to include a certain proportion of indirect directors into their board of directors. Several governments have been seen demanding that a certain minimum proportion of independent directors be included in the board of every organization. This is done so as to ensure that quality is maintained in the organization.
Independent directors are viewed to fit broadly in the overall structure of corporate governance. They ensure that the board is balanced and effective as the most significant tool in corporate governance. Thus, the issues surrounding their appointment are qualifications and also on certain fixed proportion. The notion of independent directors has been derived from agency theory (Bushman & Smith, 2003 p 76). Agency theory elaborates the function of a third party to act as a representative to one of the parties in a transaction. Independent directors seek to safeguard the interest of the other shareholders who are not represented in the board of directors in the organization (Schlesinger 2004 p 54). Therefore, they act as agents of the shareholders in the board of directors where they represent the interests of the shareholders by ensuring that good and well analyzed decisions are made. This shows that even though there are not physically present in the board of directors meetings, they are assured of the safety of their investments. This is because they have agents who are there to safeguard these investments.
The independent director emerges as a tie breaker in an organization. In some instances, the board is faced with a situation where the directors with direct interests in the organization are in disagreement concerning a certain issue. The independent director’s decision is sought to decide on which path to follow. This role helps the organization to act with speed since no decision is left unsolved as a result of disagreements between directors with interests into the company.
The contribution made by independent directors to the board broadly surrounds constructively the development policies and strategies adopted by the organization. This is done in the sense that they lack affiliation to the company in whichever means, which allows them to make independent decisions on matters surrounding the company. According to NYSE and NASDAQ rules, an independent director should not hold any office or interest of any form in the company since this might interfere with the decision making of that director. There, they are best suited in the decision making by the board of directors.
A study in India by Jitendra (2007) views an independent director as a guardian to the interests of the shareholders of the organization. This is done where the independent director applies personal skills and also questions the strategies and the policies adopted by the company’s manager and also by the board of directors. In most cases, it was observed that companies with a board of directors which comprises of interested parties in the company are faced with a possibility of failing (Baxi 2007 p 234). This is because the board might in most cases adopt strategies which seek to benefit them while the resulting effect is a burden or a violation of the shareholders' interests.
Venkiteswaran (2005) argues that the key to every business’ success is the board of directors. This gives ultimate authority to the board to make decisions concerning the business operations. However, the decisions made could lead to biasness or the implementation of weird practices by the organization. Thus, Venkiteswaran in his study recommends that the board of directors should comprise a minimum of 50% representation of independent directors. This will help in the making of decisions, which are not biased or influenced by the fact that some directors have some interest in the company as partners or shareholders to the business. It simply gives the idea that independent directors give the necessary expertise required to run the organization with some level of independence on what they hold towards the organization.
Chapter 3
Research Methodology
3.1. Introduction
This chapter will provide an overview analysis of the methodological approach used in the research. The process of gathering the necessary information necessary concerning the roles played by the independent directors in the organizations based in emerging economies is illustrated.
3.2. Research Design
The study makes use of qualitative data to identify the role played by the independent directors in the organization. The data will be based on information collected from several developing countries across the world, especially African countries. The information used is secondary and is mostly based on findings by other studies done on several organizations existing in these economies. Analysis of the data will provide a general view of what the independent directors have done to ensure the growth of these organizations. It will also include the process followed in the selection of the directors so as to enhance their independence in decision making.
3.3. Validity of the Study
The growth and high returns from an organization are the ultimate objectives of most investors in the world today. Most investors want to see their investments grow and generate high returns. However, this is subject to the way an organization is being run. The process of running an organization in terms of making critical goals concerning this organization is bestowed on the organization's board of directors. However, the board can err in the decision making process. There are instances where the board makes decisions which make an organization into jumping into a downfall rather than meeting the desired goals and objectives of the shareholders. This occurs where the board is comprised of individuals who have a direct interest into the organization. Therefore, the decision made by such a board is faced with a level of lack of independence.
The lack of independence by the board of directors can be neutralized by having independent directors being included into the board. The independent directors will help make independent decisions and also make amicable representation of the shareholders into the board. Therefore, this study is essential since it will provide the necessary information concerning the roles played by independent directors in the running of an organization. The study will also give the advantages that are associated with having independent directors in an organization.
3.4. Reliability of the Study
The study will be based on real occurrences in organizations based in the emerging economies. Therefore, the conclusions drawn will act as a clear guideline for organizations in these economies.
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