EC Urges Reinforced Presence Of Independent Directors On Company Boards

by Ulrika Lomas, for LawAndTax-News.com, Brussels

11 October 2004

Following its recent guidance on transparency with regard to the remuneration of company directors, the European Commission last week also published a Recommendation urging EU member states to ensure a strong role for independent directors in corporate settings.

The non-binding Recommendation concentrates on the role of non-executive or supervisory directors in key areas where executive or managing directors may have conflicts of interest, and includes minimum standards for the qualifications, commitment and independence of non-executive or supervisory directors.

The main principles in the Recommendation are that:

• The administrative, managerial and supervisory bodies should include overall an appropriate balance of executive/managing and non-executive/supervisory directors so that no individual or small group can dominate decision-making;
• Boards should be organised so that a sufficient number of independent non-executive or supervisory directors play an effective role in defining and dealing with potential conflicts of interest. To this end, nomination, remuneration and audit committees should normally be created within the supervisory board;
• A director is considered independent when free from any business, family or other relationship - with the company, its controlling shareholder or the management - which might jeopardise his or her judgement;
• The supervisory board should be composed of members who, taken together, have the diversity of knowledge, judgement and experience to properly complete their tasks; and
• All directors should devote to their duties the necessary time and attention. When the appointment of a director is proposed, his or her other significant professional commitments should be disclosed.

Internal Market Commissioner Frits Bolkestein explained:

“There are groups within listed companies which sometimes have different interests – management, major shareholders, minority shareholders. There need to be ‘referees’. So boards should have a sufficient number of independent non-executive or supervisory directors who can nip potential conflicts of interest in the bud."

He went on to observe that:

"Independent directors have a role to play both in companies with dispersed ownership, where managers need to be made accountable to weak shareholders, and in companies with controlling shareholders, where independent directors can help protect minority shareholders.”

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