Interview with Herman Daems, Chair of the Board of ECGI

New interview with Herman Daems in 'The Director', a multimedia content platform for directors of companies, associations and public companies.

Independent directors in a family group are not linesmen!They play along!
Herman Daems

Question: What should external or independent directors do on the board of a family group? Who is eligible to be an independent director and what can be expected of them? How long can they be independent directors? What should an independent director earn?

Answer: These are the most important questions that the leading family shareholder or the reference shareholder of a group asks themselves. If the group is listed on the stock exchange, answers are given quickly. The company law, stock exchange regulations and the governance code determine the role of independents. They determine who qualifies as an independent and determine the maximum duration of the mandate. The regulations say nothing about compensation. It is mandatory to disclose the amount of direct and indirect reimbursements in the annual report. But for unlisted family groups or groups controlled by one shareholder, only the corporate governance codes apply, at least if the company imposes them on itself, which is what many companies do today.

Question: What do independent directors do?

Answer: Monitoring the interests of the company. In principle, independent directors ensure that the interests of the company in all cases take precedence over the interests of one or more shareholders or interest groups. The general interest includes the survival of the company (or sometimes the necessary closure), growth, success, realization of the purpose and responsible behavior. How is this principle realized? In practice, this is done by ensuring that the decisions of the management and board are taken in the interests of the company. Some examples illustrate this. The approval of the company's accounts makes it possible to see whether the company's resources are being used properly (efficiently) and for the benefit of the company, whether there is any waste or improper use. Furthermore, the interests of the company require that laws, permits and regulations in the commercial and production areas are followed and that no constructions are set up that are fiscally illegal. Independent directors will pay particular attention to the acquisition price or mutual valuations in mergers and acquisitions. Before submitting the dividend proposal to the shareholders, they will assess whether the dividend will not affect the financing of the strategy. They will also assess and propose capital increases or decreases to the shareholders. Of course, independent directors cannot audit accounts, tax returns and commercial activities themselves; independent directors are not auditors or controllers. They are not linesmen.

Moreover, the responsibility for promoting the interests of the company does not only lie with the independent directors, it is the entire management body that bears this responsibility. The independent directors can therefore best fulfill their task by ensuring that the company develops procedures and engages professionals such as company auditors. In this way, the independent directors can be objectively informed about the relevant data and they can judge whether procedures have been applied correctly and correctly. The other important tool of the independent directors is their right (or more correctly their obligation) to ask questions about procedures, processes, facts and figures and about everything they need to know to perform their duties. The right and obligation to ask questions is of course offset by the obligation of management and the other members of the administrative body to provide correct and complete answers to good questions.

Being a coach for shareholders, board and management.

However, independent directors are much more than supervisors. Supervision is important and essential, but providing knowledge and experience is even more important. Family shareholders often need to broaden the expertise available to the company. They sometimes also need a critical look at the strategy and functioning of the company. The family business has usually grown on the basis of specific technical or commercial expertise. That can make the company strong. But the external director can challenge the management to think about how solid the foundations of the company are. If the company grows and seeks other markets, or if the company is confronted with new technologies or new challenges such as sustainability, a different approach may be necessary and a broader range of expertise is required.

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Original interview with Herman Daems in Dutch is available here. 

Mr. Daems is Chair of the Board of ECGI since September 2021.