Board independence is one of the cornerstones of corporate governance. Independent board directors are key to mitigating the agency problem of corporations in which ownership and control are separated. They monitor and counterbalance executive management or controlling shareholders on the board by ensuring that decisions are made in the best interest of the company and are fair to all shareholders. When independent directors fall short or breach their duties and responsibilities, the quality of decision making by the board and its overall competence and effectiveness become impaired.

CFA Institute defines an independent director as a member of the board of directors who is not biased or otherwise controlled by the company management, other groups exerting control over the management, or shareholders. As a matter of best practice, independent directors should constitute a majority of the board, and play a significant role on board committees, such as the nomination, audit, and remuneration committees. We also believe that the chair of the board should be an independent director.

In practice, the roles and functions of independent directors vary significantly from market to market because of differences in regulation, ownership structure, types of shareholders, history, and cultural context. Similarly, regulatory definitions of independence and the criteria used for its evaluation differ among markets. These differences are particularly pronounced among markets in Asia Pacific—a region with a wide range of historical, legal, regulatory, and cultural contexts, where weak legal protections and concentrated ownership structures are common. It is not uncommon, for example, that independent directors are incentivized to submit to the decisions of the controlling shareholders because they tend to have much greater influence on the election and retention of independent directors. Studies have found that powerful management, especially those holding both CEO and chairperson positions, could weaken the independence of independent directors, because they are empowered to adjust board members’ compensation. Given these challenges, the ability for independent directors to disagree with founders and top management so they may uphold corporate governance standards becomes vital.

In this report, we explore the following key points:

• the effectiveness of regulatory reforms in strengthening the role and responsibilities of independent directors;
• issues limiting director independence;
• the extent to which independent directors act with true independence, particularly in markets with controlling shareholders;
• the adequacy of qualifications and skillsets of independent directors; and
• whether having an independent chair, separate from the CEO, contributes to board effectiveness.

We examine regulatory frameworks and codes of corporate governance to understand how regulators and standard setters approach board and director independence. Our research was also informed by insights from industry practitioners who shared how these concepts are applied in practice.