Independent The view is that they may effectively influence

 

Independent
non-executive directors are appointed from outside and they should not have any
material interest in the firm. Dalton and Daily (1999) and Fields and Keys
(2003) argue that independent directors are appointed based on their unique
qualifications, expertise and experience. The view is that they may effectively
influence the board’s decisions and ultimately add value to the firm. It is
argued independent directors provide a unique monitoring function.

(Jensen
and Meckling, 1976; Fama, 1980; Bathala and Rao, 1995; Beasley,, 1996). Farrar
(2005) suggests independent directors play a useful role in strategic planning
and risk management. It is also recognized that independent directors share the
responsibility to monitor a firm’s financial performance. In so doing, they
have authority to question problems of information asymmetry.

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(Ozawa,
2006, p 104), and have the power to make recommendations on executive
compensation and dismissal of the CEO following poor performance (Kesner et
al., 1986; Finkelstein and Hambrick, 1996, p 225; Hermalin and Weisbach,
2003). The practicality of appointing independent directors is challenging.
There is no consensus of a common definition of independent director as yet
(Brennan and McDermott, 2004, p 326). They are neither employees of the
company, nor have they any business relationship with the firm (Hulbert, 2003).
If the

Appointment
of independent directors is to achieve these intended functions,

the
appointment of such directors must be transparent and at arms’ length. However,
such appointments can be controversial if there are questions as to the
independence of appointments. It is possible that independent directors are
known to the CEO or other inside directors prior to their appointments. The new
outside board members who are proposed by inside board members

may
have personal relationships with them (Finkelstein and Hambrick, 1996.

Arguments
have been presented challenging the limitations of outside independent
directors. Nicholson and Kiel (2007, p 588) argue that “inside directors live
in the company they govern, they better understand the business than outside
directors and so can make better decisions”. Their argument is one of
information asymmetry between inside directors and outside independent
directors. They argue that a lack of day to day inside knowledge may reduce the
control role of the independent directors in the firm, and that the independent
directors may fail to perform because of appropriate support by the inside
directors (Cho and Kim, 2007). Brennan (2006) also questions the value of
outside independent directors, as they may not be competent to

perform
their assigned tasks in that they are part-timers and do not have inside information
of the firm. The problem of finding truly outside independent directors has
been noted. Flanagan (1982) argues that 80 percent of the outside directors’
candidature in the United States is known by either the CEO or by other board
members prior to their appointment. Patton and Baker (1987) and Jensen (1993)
argue that outside directors are the creatures of CEOs and are more likely to
be aligned with top management rather than that of the interests of
shareholders, as top management have great influence over who sits on the
board. However, Brickley et al. (1994) argue that due to reputational
concerns and fear of lawsuits, outside directors may be motivated to represent
shareholders, but that the ability to issue commands and instructions by these
directors is limited (McNulty and Pettigrew, 1996). Dayton (1984) argues that
outside independent directors only monitor in the case of crisis. Outside
independent directors may serve on too many boards (Core et al., 1999).

Intellectual capital  is negatively associated with non executive
director efficiency.