Do you exercise independent judgment as a company director? Of course you do. Saying “No” is almost like admitting you are lazy or stupid. But not so fast. Would you know what “independent” and “judgment” mean in practice?
That’s not easy. There is no official guidance, or even definition. If pushed on what it is, the reaction of many is often “I’m not sure, but I know it when I see it”.
As someone who’s been on more than 20 boards, I know that kind of phrase is not very helpful when the chips are down. The stakes are also higher than hoping for the best because, as a director, independent judgment is not an optional extra. The Companies Act says you are obliged to exercise it. What’s more—and this will be a surprise to some—the obligation is not just for non-executives. It applies in just the same way to the executives on the board.
That’s why I talked to a lot of directors and those that advise them, as well as using my own experience to pin it down. I’ve also drawn on the work I’ve being doing on judgment in management more generally, using the definition of judgment as “The combination of personal qualities with relevant knowledge and experience to form opinions and take decisions”.
The result is a list of 12 elements, grouped in three categories:
The raw material
• Giving full attention to the written and spoken material presented
• Checking, and where necessary questioning, the information provided, including measures and assumptions used
• Avoiding undue reliance on a single individual’s expertise or the majority view
• Taking account of context – objectives, precedents, relevant comparisons, legal requirements and ethical issues
Attitudes and feelings
• Developing an informed view based on the appropriate method of challenge
• Freedom from undue influence by sectional interests or agendas
• Awareness of one’s own biases, agendas and emotions as well as collective values, such as fairness
• Understanding risk and uncertainty and how to mitigate them
• An environment where diverse views are encouraged and dissent is seen as safe
• Checking for the way options have been framed, including those which might have been excluded from consideration
• Appreciation of the implications of trade-offs in the choice, including timing, consequences and feasibility
• Awareness of the need for any consultation on the choice with relevant stakeholders and other interested parties
For those who want more details of the 12 elements, these are available in a booklet published by the Chartered Governance Institute. The booklet also includes illustrations of each of the elements.
Independent judgment in practice
To give just three examples of the 12 elements:
On developing an informed view: “You should be passionate about the purpose of the organisation but dispassionate about the way it is run, so it realises its potential. The courageous director, coming out of a meeting, should ask whether they have asked the right questions and whether other questions ought to have been asked. Management needs to be made accountable, but not in a belittling way.” (Interview with Sir John Tusa, serial chair and non-executive director, arts and culture organisations)
On being aware of one’s own biases, agendas and emotions: “There are many times when boards are asked to suspend their ideological views for the sake of the company’s future. In these moments, the judgment of the board—both individual members and the board as a collective—becomes critical. For example when presented with complex decisions, the board generally exercises its judgment and discretion under a cloud of uncertainty, since board members do not have all the information they need. At these moments it is the judgment of the board that reigns supreme and ultimately seals a company’s fate.” (How Boards Work by Dambisa Moyo)
Appreciation of the implications of trade-offs in the choice: “I’ve learned to be very suspicious of people who say in advance of a discussion ‘Be aware this is an £x million decision.’ They are trying to skew the trade-offs, often because they are not confident in their arguments.” (Interview with Sir Richard Lambert, former editor, Financial Times)
This list will hopefully be of use in the induction of someone who has never been a director, as well as for those on boards faced with difficult choices and in regular board appraisal and review. Identifying areas for improvement (aka weaknesses) can help to improve not just individual effectiveness but the quality of group discussions and meetings.
Sir Andrew Likierman is professor of management practice at the London Business School.