Is director independence merely a box ticking exercise? A study of independence determinations in Irish listed companies

Abstract

Purpose

The purpose of this study is to establish whether Irish listed firms comply with the substance of corporate governance guidance rather than the letter of the rule in the determination of director independence. The paper examines non-executive director independence from three perspectives: the first is from the viewpoint of the sample firms, the second from that given in corporate governance guidance when applied to the sample firms, and the third based on extensive financial statement analysis, prior research and prior literature. By exploring multiple perspectives of director independence, disparities in the interpretation of non-executive director independence can be identified.

Design/methodology/approach

Descriptive statistics and non-parametric statistical analysis are used to examine for differences between multiple perspectives of non-executive director independence.

Findings

The study identified significant disparities in the interpretation of independence by Irish listed firms. This may be explained by a misunderstanding of what director independence means, a deliberate choice to ignore pre-existing norms regarding NED independence or the desire to exceed such norms. The findings suggest Irish financial institutions exhibit higher levels of NED independence than the remaining sample firms explained in part by linkages with the institutions themselves. Findings suggest a lack of adequate oversight in the sample firms, which could ultimately lead to greater agency costs for shareholders.

Practical implications

Policymakers and other stakeholders valuing director independence may need to reassess guidelines for interpreting director independence and related reporting, policies regarding adherence to such guidelines and associated director training requirements.

Originality/value

This study is timely, topical and the first of its kind in relation to Irish listed firms and provides evidence into the lack of compliance within Irish listed companies with best practice guidance. The findings clearly identify a notable lack in a consistent means of interpretation in the sample firms as to what non-executive independence is and why it is an important part of good corporate governance. The paper provides a basis for future research. Such research may include studies of firm motivation in interpretation choice and comparative studies with other jurisdictions.

Citation

Mulgrew, M., Lynn, T. and Rice, S. (2014), "Is director independence merely a box ticking exercise? A study of independence determinations in Irish listed companies", Corporate Governance, Vol. 14 No. 2, pp. 141-161. https://doi.org/10.1108/CG-03-2012-0015