Frequency Of Independent Directors On Board

Published Date: 02 Nov 2017

In this chapter, data obtained from the survey are analysed using appropriate statistical techniques generated by SPSS and Excel. The observation made by the questionnaire survey is threefold:-

Whether independent directors play a crucial role and contribute in the promotion of effective and best corporate governance practices.

To get the views of bank executives as to the contribution of Independent directors on board.

Significance of the role of directors in corporate performance and whether Independent Directors strengthen corporate boards.

5.1. Preliminary analysis

The rate of participation of banks from branches of foreign is 15.3%. Banks being joint ventures have a participation rate of only 7.7%; this is because there is only one bank which is a joint venture in Mauritius. While those banks being foreign subsidiaries and locally incorporated have a higher rate of participation with 46.2% and 30.8% respectively. Table 5.2 and figure 5.2 illustrate the information results

Figure 5.2 Types of bank which participated

5.1.3. Frequency of Independent Directors on board

According to the code of corporate governance of Mauritius (2004), the board should comprise of at least two independent non-executive directors on board. As per the results, out of the 13 banks, 8 banks (61%) have a majority of independent directors on their boards while only 5 (39%) banks have a majority of executives and non-executives on their boards. These figures speak a lot as they clearly demonstrate that the presence of independent director on board holds great importance to the banks such that most of them even have a majority of independent directors on their boards as shown by the pie-chart below:

5.1.4. Hypothesis Testing

Since the majority of respondents are from the locally incorporated banks, it is important to make assurance double sure by testing whether the % of independent directors forming part of the board of directors is free from bias towards the Bank types. The Following hypothesis was developed:

H0: There is no association between bank types and the frequency of independent directors forming part of the board of directors. (accept H0, if p > 0.05)

H1: There is an association between bank types and the frequency of independent directors forming part of the board of directors. (accept H0, if p < 0.05)

To test, the degree of association the chi-square test was performed which resulted into a p-value of 0.765 > 0.05 (Table 5.23). But since 100% of the cells have expected counts of less than 5, the Chi-Square test is not valid. It is the Fisher's Exact test (p=0.930 - statistically quoted as p>0.05) which is to be considered, and it in fact, lends support to the hypothesis there is no association between bank types and the number of Independent directors forming part of the board of directors.

It can be noted from Table 5.4 that out of the 4 foreign subsidiaries banks response, 75% have a majority independent directors on their board compared to local banks (50%) and branches of foreign banks (50%). There is no big difference between observed and the expected value.

Another hypothesis can also be made to test whether there is a relationship between the number of independent directors on board and the total number of board members. The Following hypothesis was formulated:

H0: There is no association between the number of independent directors and the total number of board members (accept H0, if p > 0.05)

H1: There is an association between the number of independent directors and the total number of board members (accept H0, if p < 0.05)

To test, the degree of association the chi-square test was performed which resulted into a p-value of 0.101 > 0.05 (Table 5.23). But since 100% of the cells have expected counts of less than 5, the Chi-Square test is not valid. But, the Fisher's Exact test (p=0.038 - statistically quoted as p<0.05) which is considered hence H0 is rejected and it is deduced that at 5% level of significance, there is an association between the number of independent directors and the total number of board members. This result allows us to state that the frequency of independent directors varies according to the total number of directors on the board.

5.2. Main analysis of responses

5.2.1. Section 1 – Perception on Independent Directors

Q1 (a-g) was based on general perceptions on independent directors. Respondents were asked to choose between the scales 1 to 5. The details are as follows:

1 Strongly disagree

2 Disagree

3 Neutral

4 Agree

5 Strongly agree

Q1 (a) requires respondent to react to the statement that independent directors improving corporate governance practices lie in public perception and not in fact. This has a mean score of 2.19 which mean that most disagree with the statement as shown in table 5.7. Therefore the belief that Independent directors will improve corporate governance does not lie in public perception.

Q1 (b) has aims at prompting the respondents to state whether the appointment of independent director was merely for compliance with the code. The mean score of 2.09 shows much disagreement to the statement this is supported by table 5.8. Thus implying that independent director has an important role to play. Therefore banks employ independent directors not merely to comply with the code but to play broader role on the board. The result, in fact, proves the contrary as discussed in literature review (pg. 5 para 3 and pg 1para6).

Q1 (c) is concerned with whether the presence of Independent alone can improve corporate governance. The objective here is to see to what extent independent directors are crucial in promoting good governance. The mean score of 3.72 indicates that independent directors play a crucial role in area; this is further illustrated in table 5.9 with 21 respondents agreeing and 4 respondents strongly agreeing to the statement.

Q1 (d) requires respondents’ opinion on whether independent directors are independent only by definition and may not be so in reality. The mean score 3.03 signify that most respondent are uncertain to the statement, out of the 32 respondents 11 were neutral on the statement as shown in table 5.10. This puts severe doubts as to the independent judgement of independent directors in practice. The response confirms the discussion in literature review (pg. 12, para 6).

Q1 (e) is based on probing respondents to the statement whether independent directors play a crucial role in influencing management decision. The score of 3.09 reveals that most adopted a neutral position in this regard. They are not sure whether independent directors influence management decisions. This is clearly shown in table 5.11 below with 13 respondents being neutral on the subject.

Q1 (f) concerns independent directors hindering the efficient operation due to limited involvement and exposure. The mean score 2.38 shows the degree of disagreement, with 20 out of 32 respondents disagreeing as shown in table 5.12. This means that limited involvement and exposure is not a factor preventing the independent director from contributing to board deliberation.

Q1 (g) deals with the lack of business acumen and knowledge of business environment for independent directors to contribute effectively. The mean score 2.22 implies that the independent directors have the business acumen and being far from the business environment does not handicap them from bringing a significant contribution. Table 5.13 clearly indicates that out of the 32 respondents 20 disagree and 5 strongly disagree to the statement.

Table 5.13 Independent Directors lack business acumen and do not know the business environment to contribute effectively

Frequency

Percent

Valid Percent

Cumulative Percent

Valid

Strongly disagree

5

15.6

15.6

15.6

Disagree

20

62.5

62.5

78.1

Neutral

3

9.4

9.4

87.5

Agree

3

9.4

9.4

96.9

Strongly agree

1

3.1

3.1

100.0

Total

32

100.0

100.0

5.2.2. Section 2 – Contribution of independent directors

Q2 requires respondent to answer by Yes or No as to whether independent directors contribute to effective and best governance practices. 88% agree to the statement, this result is very significant as it clearly indicate that independent directors do indeed contribute to effective and best governance practices (for more details refer to appendix D). The results are illustrated by figure 5.4.

Q3 was based on the satisfaction with Independent Directors in promoting good governance practices, processes and principles in the respondents’ banks. The main outcome is that 59.4% are fairly satisfied and 18.8% are very satisfied, making a total satisfaction of 78.2%. It is important to note that 6.2% are not sure and 15.6% are fairly dissatisfied (for more details refer to appendix D).

Q4 requires respondents to state the extent they are satisfied with the time devoted by independent director is adequate and sufficient. The results are that 43.8% are fairly satisfied and 12.5% are very satisfied, leading to a total satisfaction of 56.3%. The percentage of unsure is 12.5% while the fairly dissatisfied is 31.2%. This is illustrated by figure 5.6

Q5 asks respondent to answer by Yes or No as to whether Independent Directors do full justice to their onerous and demanding responsibilities given the number of directorship they accept. The results from the survey are depicted in Figure 5.7.

Q6 requires respondents to answer by Yes or No to whether Independent Directors strengthen corporate board.

78% agree to this statement and 22% disagree, thus enabling us to conclude that Independent Directors do certainly strengthen corporate boards. The results are illustrated in Figure 5.8

Q7 (a-i) prompt respondents as to in what areas independent directors contribution are important. Respondents were asked to choose between the scales 1 to 5. The details are as follows:

1 Least important

2 Quite fairly important

3 Fairly important

4 Important

5 Very important

Table 5.15 shows the mean score in different areas in which independent directors contribute.

Q 7 (a) broadening strategic views of boards. Responses show a mean of 3.56 implying that the role of independent directors are more than fairly important in this area. This is clearly demonstrated by table 5.16.

Q7 (b) ensuring that the board always have in mind the best interest of the company. Responses give a mean score of 3.59. This means that the respondents consider the role of independent director in that area as fairly important as shown in table 5.17.

Q7 (c) bringing awareness of outside world realities as well as a varied and experienced perspective to the board. The mean score of 4.00 entails that bringing awareness of outside world realities is considered more than fairly important as shown by table 5.18 The results confirm both the statement in the introduction (pg 1, para 6) and the discussion in the literature review (pg 10 para 2).

Q7 (d) shaping the discussion of the board. Responses indicate a mean score of 3.12 which mean that this area is considered fairly important as shown in table 5.19 and this outcome reflects the discussion in chapter 2 (pg 10, para 3).

Q7 (e) providing board with knowledge, objectivity, judgement and balance. In this case, the mean score is 4.13 implying that Independent directors play a very important role in this area as demonstrated by table 5.20. The result is in agreement with OECD guidelines that independent directors can bring an objective view to the performance of the board and management (pg 10).

Q7 (f) appointing, monitoring and if necessary replacing Chief Executive Officer. This shows a mean of 2.56, which is the lowest mean implying that the independent directors do not really contribute in this area in Mauritius. Hence, the result is found inconsistent with was discussed in the literature review (pg16, subsection 2.6.6), independent directors do not really act as control mechanisms in the banks in Mauritius. Table 5.21 indicate that out of 32 respondents 11 found this contribution as least important and 8 found it quite fairly important.

Table 5.21 Independent Directors appoint, monitor and if necessary replace CEO

Frequency

Percent

Valid Percent

Cumulative Percent

Valid

Least important

8

25.0

25.0

25.0

Quite fairly important

11

34.4

34.4

59.4

Fairly important

4

12.5

12.5

71.9

Important

5

15.6

15.6

87.5

Very important

4

12.5

12.5

100.0

Total

32

100.0

100.0

Q7 (g) contribute to bank experience, financial expertise and credibility with shareholders. A mean of 4.06 is obtained implying a very important role is played by independent directors in this area as indicated by table 5.22. This result is consistent with what was discussed in the literature review (pg 14 para 3).

Table 5.22 Independent Directors contribute to bank experience, financial expertise and credibility with shareholders

Frequency

Percent

Valid Percent

Cumulative Percent

Valid

Least important

2

6.2

6.2

6.2

Quite fairly important

1

3.1

3.1

9.4

Fairly important

4

12.5

12.5

21.9

Important

11

34.4

34.4

56.2

Very important

14

43.8

43.8

100.0

Total

32

100.0

100.0

Q7 (h) enhance corporate performance. The mean score of 3.00 indicates that the role of the director is fairly important in this area as pointed out by table 5.23, 9.4% find this statement as being least important, 21.9% find it quite fairly important, 34.4% find it fairly important, 28.1% important and only 6.2% find it very important. Therefore we can say that independent directors are neither very important nor least important but fairly important in enhancing corporate performance, the result is in line with the mixed opinion of the different studies mentioned in the literature review (pg 14&15). They might be only fairly important because there are other more important factors that enhance corporate performance. In fact it is important to take note that compared to the other statements, this statement has got a low mean which imply that it is not in this area that independent directors contribute the most.

Table 5.23 Independent Directors enhance corporate performance

Frequency

Percent

Valid Percent

Cumulative Percent

Valid

Least important

3

9.4

9.4

9.4

Quite fairly important

7

21.9

21.9

31.2

Fairly important

11

34.4

34.4

65.6

Important

9

28.1

28.1

93.8

Very important

2

6.2

6.2

100.0

Total

32

100.0

100.0

Question 7

Table 5.24: Mean Score ranking on contribution of independent directors

 

Statement

N

Minimum

Maximum

Mean

(e).

Providing board with knowledge, impartiality, judgement, balance and counselling

32

1

5

4.13

(g).

Contribute to company experience, financial expertise and credibility with shareholders

32

1

5

4.06

(c).

Bringing awareness of outside world realities as well as a varied and experienced perspective to the board

32

1

5

4.00

(b).

Ensuring that the board always have in mind the company’s best interest

32

1

5

3.59

(a).

Broadening strategic view of boards

32

1

5

3.56

(d).

Shaping the discussion of the board

32

1

5

3.12

(h).

Enhance corporate performance

32

1

5

3.00

(f).

Appointing, monitoring and if necessary replacing Chief Executive Officer

32

1

5

2.56

Table 5.24 shows the ranking of mean score of the contribution of independent directors in different areas. The mean ranking in the table indicates that independent directors contribute more in providing board with knowledge, impartiality, judgement, balance and counselling and are less involved in appointing, monitoring and if necessary replacing Chief Executive Officer.

5.2.3. Section 3 Role of independent directors

Q8 (a-d) is based on the respondents’ opinion about the role of the independent directors in the banks

Q8 (a) requires respondents to react as to the role of independent directors as a custodian of governance process. The mean score of 3.91 reveals that most respondents agree with that the role of independent director is that of custodian of the governance process. The result confirms the finding of Higgs (p13 para 1).

Q 8 (b) is about the role of resolving conflict of interest, the results are in Figure 5.9 below:

The results are that 62.5% agree and 3.1% strongly agree, resulting in a total agreement of 65.6%. While on the other hand 12.5% disagree and 21.9% are neutral. The results confirm the Cadbury Committee (1992 paras 4.4-4.6) discussion in the literature review about the usefulness of independent directors in taking the lead where potential conflicts of interest arise.

Q8 (c) is based on the role of enabling a consensus-based decision making. The outcomes are illustrated in figure 5.10

From figure 5.10, 37.5% agree with this role and 18.8% show a level of strong agreement. However, 15.6% disagree with this role and 28.1% are neutral. The result is in agreement with the role of consensus – based decision-maker (Tricker, 1978; Pro Ned, 1992 – pg 13 para 1 in literature review).

Q8 (d) prompts respondents as to independent directors reviewing the performance of the board and the executives. The results, illustrated by figure 5.11, are rather mixed, 6.2% strongly agree and 34.4% agree whilst 40.6% disagree and 18.8% are neutral. These results prevent us from confirming the Cadbury Committee (1992 paras 4.4-4.6) discussion in the literature review about the contribution of independent directors in reviewing the performance of the board and the executives.

Kruskal Wallis test was performed to know the level of importance attached to the different roles as per each respondent category and to test the following hypothesis:

H0: There is no significant difference in ranking importance of the different roles among respondents (accept H0, if p > 0.05)

H1: There is a significant difference in ranking importance of the different roles among respondents.  (accept H1 if p < 0.05)

Table 5.25 Kruskal-Wallis tests

The descriptive statistics table shows the mean of the roles: to act as custodian of the governance process is considered most important among the different respondents’ category with a mean of 3.91 and to review the performance of the board and the executives has got the lowest mean because of the mixed result.

As a result, there is found to be no significant difference in ranking importance of the different roles among respondent categories since (p > 0.05) as reported in Test Statistics table. Therefore we accept H0 and reject H1.   

Q9 requires respondents to answer by Yes or No as to whether the power between internal and external stakeholders influences the effectiveness of independent directors. The results are illustrated in Figure 5.12 below

88% are of opinion that the power between internal and external stakeholders does not influence the effectiveness of independent directors. The result is in contradiction to what has been identified in the literature review (pg 13 para 2).

5.3. Section 4: Analysis of Annual Reports

5.3.1. Overview

All the banks have a statement of Corporate Governance in their annual report. In fact, the banking sector was among the earliest sectors in adopting good governance that’s why most of them have got a well defined and structured statement of corporate governance.

Even though there are disclosures about composition of the boards, categories of directors, and attendance in different board committees, the annual reports do not give a comprehensive picture as to the roles played and contribution of independent directors. It is in fact based on a compliance basis. However, the Independent directors are somewhere promoting the corporate guidelines because they are themselves on the committees

From an analysis of the annual reports of 9 banks (see information extracted from the annual report in the appendix), we can clearly say that all the banks have got at least 2 independent non-executive directors on the board The two major commercial banks MCB and SBM have a majority of Independent Directors on their board.

Figure 5.13 Number of Independent Directors and Total number of board members

The diagram above clearly shows that the number of independent directors varies from bank to bank giving us an indication that it somehow varies in proportion to the total number of directors on the board and thus is quite consistent with the hypothesis formulated on pg 31.

5.3.2. Helpful information from Annual Report that may allow us to deduce the effectiveness of Independent Directors:

Profiles

The profiles of all the directors more specifically Independent directors are very crucial to see whether the directors have sufficient experience and educational background.

In this regard, the annual report is helping the users and shareholders to analyse whether the directors are of required calibre so that they are capable of contributing from the start.

Number of directorship

The disclosure of the number of directorships that a director is accepting is meaningful information given that it will clearly indicate to what extent a director can honour his commitments towards the bank in circumstances whereby there may be too many directorships accepted by the directors. This can help the user determine to what extent the independence may be impaired.

Composition of board committees

It is clear that the annual reports are not helping users to a great extent to see the importance of independent directors on boards but we do see, through the listing of the composition of the board committee, in which area they are contributing the most that is audit and governance committees which comprise entirely of independent directors. This might imply that the roles of Independent directors are more prominent in those areas leading us to conclude that independent directors may be less involved in broadening strategic views.

All the banks are well aware of corporate governance practices and are attempting their maximum to put them into practice.

It is also important to note that some banks like Standard Chartered Bank even carry out an assessment on director independence and publish the results in their annual report.

Matching profile with roles in different committees

This is an important source of analysis which a user can do. An independent director could be the chairman of the audit committee (or even a member) but while screening his profile, he may be far from having good financial literacy. This is an area which can help to determine whether independent director are just employed for the sake of compliance.