Independent Members of Boards of Directors: An Added Value

Governance in institutions and companies is fundamentally essential to ensure fairness, equality, transparency, and accountability. It is not merely about written systems and regulations; rather, it is an institutional culture for which the board of directors, as the highest supervisory and regulatory authority, is responsible. The board of directors is tasked with managing institutions and companies, overseeing them, including the establishment of general policies, strategic goals, governance standards, and ethical values. It also supervises and monitors the executive management and protects the interests of all stakeholders and others.

With the increasing challenges facing institutions and companies in the business environment and the rise of violations within boards of directors, trust, accountability, and transparency have become essential criteria to ensure the continuity of institutions in the long term. This highlights the importance of having independent members on boards of directors, prompting many countries to adopt strict governance rules through issuing binding instructions to appoint independent members within their boards, setting the standards they must meet and defining their roles and responsibilities within the boards. What is meant by independent members? What importance do they hold within the boards? What are the main challenges that hinder their effectiveness? How can their added value be maximized? What are the key selection criteria for them?

According to Article (172) in the Law No. (42) of 2021 concerning companies, an independent member is defined as a non-executive board member, whether they are a member in their personal capacity or as a representative of a legal entity, who is fully independent and has no interest or relationship with the company, its executive management, its sister companies, or its subsidiaries, or its auditor, except for their connection with their management of the company.

Independent members are a fundamental element in the structure of boards of directors based on their role in:

1. Enhancing integrity and neutrality in making decisions that serve the public interest without being influenced by any internal pressures or bias towards certain parties.
2. Protecting the rights of all stakeholders without favoring any side.
3. Promoting oversight, accountability, transparency, fairness, and equality.
4. Enhancing the effectiveness of committees arising from the board of directors due to their independence and professionalism.
5. Reducing conflicts of interest.
6. Increasing societal and stakeholder trust, as well as regulatory bodies in the performance of institutions and companies.
7. Enriching the board with diverse experiences and knowledge that open new and innovative horizons.
Despite their importance, they face several obstacles, the most prominent of which include:
1. Difficulty in obtaining complete information easily and transparently.
2. Exposure to direct and indirect pressures from executive management or large shareholders or board members.
3. Limited influence, especially if their number is small within the boards.
4. The existence of factions and parties within boards of directors seeking to control them to achieve personal interests and influence their positions.
To maximize the added value of independent members on boards of directors, several effective actions must be taken, the most important of which are:
1. Establishing clear and strict standards for complete independence, especially concerning membership in oversight committees arising from the board.
2. Defining the required specializations and practical experiences that suit the sectors and oversight committees arising from the board.
3. Ensuring they swiftly receive the necessary information.
4. Granting them actual powers within the committees to ensure their effective participation.
5. Periodically evaluating their performance.
6. Guaranteeing an appropriate number so they constitute no less than one-third of the total members to ensure effective and tangible influence.
7. Selecting them in a professional manner according to defined criteria, especially regarding committee membership.
The selection of independent members is not an easy process, as it requires clear criteria to ensure the selection of individuals capable of effectively, efficiently, and objectively fulfilling their roles. Among the most important of these criteria are:

1. Complete independence.
2. Holding academic and practical experiences in governance, risk management, internal control, internal auditing, management, law, strategic planning, economics, finance, and other specializations and experiences that serve the nature of the institution or company or sector in which they operate.

3. Integrity, competence, a good reputation, and possessing an ethical professional record.
In conclusion, one cannot ignore the role that independent members play on boards of directors in enhancing the quality of decisions that serve the public interest and promote sustainability, stability, and business continuity in the long term. Their presence is not limited to practicing effective supervision and monitoring but extends beyond that to include developing institutional performance and transforming boards of directors from their traditional role into an effective governance system.

However, their presence in Palestinian boards of directors remains limited. Their organization has only been clearly mentioned in Article (172) of Law No. (42) of 2021 concerning companies, which addressed the membership of independent members on the boards of public joint-stock companies only. What was mentioned in Instruction No. (10) of 2017 regarding the guide to best practices for banking governance in Palestine and the code of corporate governance principles in Palestine.

Adopting these best practices to encompass a broader scope in Palestinian boards of directors represents a fundamental step towards effective governance, more transparent institutions, greater ability to face challenges, and building a sustainable Palestinian economic environment.