GRC in Malta: Independent Thinkers for Effective Board Governance

It is acknowledged that governance set-ups can differ between organisations and there is no set-up which is better than another or which is free from flaws. However, there are some aspects which, at least for regulated entities, should be considered non-negotiable and which go beyond the complexity, size or nature of activities of the particular entity. One such aspect is the independence of mind with which Board members should approach their role and duties Together with competence, knowledge, experience, integrity and time commitment, a director cannot be considered “fit and proper” if he or she does not possess independence of mind.

At the outset, independence of mind goes beyond formal independence. It should not be confused with a qualification or designation of “independence” granted to certain non-executive directors.  Typically, an independent director is one who does not have any links or relationships with the entity itself, its controlling shareholder or its management, with some sector-specific regulations or guidelines specifying in more detail those situations which can lead to non-independence. Requiring the presence of independent non-executive directors on the Boards of financial services entities has become the norm while the membership of certain Board Committees may also call for independent directors.

Independence of mind should however be a key attribute of any director sitting at the Board table. It is a fundamental behavioural skill or pattern which emerges primarily during Board discussions. Being an independent thinker, translates into the ability to resist groupthink and the pressure to conform, the ability to constructively challenge management and ask probing relevant questions, and ultimately the ability to take decisions in an objective manner without allowing anything or anyone to cloud or impair one’s judgement. Indeed, a common cause of corporate governance failures is the presence of weak individuals on a Board who rubber stamp anything brought to them by management or who allow one or more dominant members of the Board or management “to run the show” without questions, leading to ineffective oversight. Even though Boards must take decisions collectively as a team, the individual directors must bring individual judgement. In other words, each director should be able to stand up to his or her own opinions.

Admittedly, when interviewing prospective candidates for the post of director and assessing their suitability, it is difficult to evaluate ‘independence of mind’ and anticipate how a director will conduct himself or herself on the Board. Will the director shy away from asking difficult questions? Will the director be content to acquiesce to anything the others say? It is potentially easier to assess integrity and reputation since this involves mostly an “anything known against?” test. In principle, this should be an absolute test – is a person of good repute or not, primarily if there no evidence or reason to suggest otherwise. Independence of mind is however at the core of an individual’s personality and whether this trait is possessed will become more evident with the person’s ongoing behaviour once he or she is appointed. At that stage, the periodic assessments of suitability can assess independence of mind based on evaluation of feedback from the discussions taking place at Board or Board Committee level or using any other input such as Board evaluation exercises, particularly when carried out by external facilitators. However, it is important that at nomination stage, the suitability assessment should at least include a frank and transparent dialogue with the candidate. In addition to competency or knowledge-based questions, a candidate may be asked to provide examples of instances where during past positions held desirable behavioural traits such as constructive challenge, assertiveness or resilience have been demonstrated. This may help to assess their propensity to independent judgement during deliberations.  This kind of open dialogue should also disclose other attitudes such as leadership, clarity of thought, commitment and assertiveness.

Conflicts of interest can however constitute an immediate stumbling block to independence of mind. At the outset, potential directors should not have conflicts of interests to an extent that would impede their ability to perform their duties independently and objectively. They must also actively prevent any potential conflicts of interests, in other words, also appear to be independent. Conflicts vary and can arise from an array of situations. Some are pecuniary, others are non-pecuniary.  Some are obvious, some are subtle, others are recurring. Not all conflicts may obviously disqualify a person from taking up a role. Certain conflicts can be addressed or mitigated.  First and foremost a director should therefore be able to recognise a conflict of interest. This takes skill, awareness, and good judgement. Supervisory reviews sometimes reveal that certain conflicts of interests were not disclosed by directors. Secondly, a conflict may not exist upon appointment but may arise as a result of new situations, relationships and circumstances. A re-assessment of conflicts of interests should therefore also be part of ongoing suitability exercises.

Board members who think and decide independently are essential for ensuring that checks and balances are more than mere concepts. A Board member needs to train oneself to eliminate any undue influence by other interests or agendas and to be aware of one’s own biases and emotions. Finally, the fostering of an environment within the boardroom where diverse views are encouraged, and dissent seen as safe will also go a long way towards independence of mind and critical judgement.

This article forms part of a series of publications focusing on cross-sectoral matters relating to governance, risk, and compliance. This series aims to offer legal and practical insights, a valuable resource for understanding and navigating the dynamic landscape of GRC in Malta.

This publication was first published in the Times of Malta on 10th March 2024.

Author: Catherine Formosa (Senior Associate, Ganado Advocates)