BlogCorporate GovernanceInsightsBiopharma Boards Require Lead Independent Directors

Biopharma Boards Require Lead Independent Directors

An analysis of biopharma companies conducted by Liftstream (here) in 2020, found that 65% of the US companies researched have elected a corporate governance structure of combining the Chair of the Board and CEO role. Compared on a multi-sector basis, only 46% of S&P 500 companies had a combined chair/CEO structure during 2019. Despite a long-term trend towards companies splitting these leadership roles, it seems there is resistance to this separation with the biopharma industry.

Most board directors understand the value of independence acutely well, as do other relevant stakeholders. But independence is also a requirement of the listing rules of Nasdaq and NYSE, exchanges commonly chosen by the biopharma companies. Independent directors must comprise the majority of elected board directors, and the independent directors should fulfil the duties of the Audit and Compensation Committees; and Nomination and Governance Committee, where they oversee new director nominations. When considering the respective committee charters and the derived responsibilities which the directors must discharge, it is evident independence delivers better outcomes and contributes to greater confidence in the decisions of the board.

In many regions of the world, the division of the Chair and CEO role is a mandatory tenet of good governance. In the US, the combined structure remains prevalent. Where the board chair is not independent, because they also hold the CEO position or were previously the CEO, a lead independent director fulfils an essential board leadership role. This critical role acts as an independence counterweight to the chair/CEO, while contributing significantly to the functioning of the board. Given the importance of a lead independent director, many chairs, CEOs, and directors must understand the role better than is presently the case.

Lots of institutional shareholders, including proxy firms such as ISS and Glass Lewis, are commonly pushing for the separation of the CEO and chair roles. The Investors for Opioid and Pharmaceutical Accountability, a diverse global coalition of investors with $4.4 trillion assets under management, have made appointing independent board chairs a key area for engagement, with some success.

Despite these campaigns to appoint independent board chairs, many companies persist with giving the CEO the chair title. In some cases, companies are even departing from a divided role to combine the two positions. Brent Saunders at Allergan and Jean-Jacques Bienaime at BioMarin are just two examples of biopharma companies where this happened.  With increasing liabilities associated with risk, stakeholders assert that companies with independent leadership at the board receive better oversight.

In the absence of an independent chair, a lead independent director plays an essential role in bringing independent leadership to the board of directors. While similarities with a chair role exist, they are not the same. Some of the difference lies in the descriptions – ‘chair of the board’ and ‘lead independent director’. The chair has overall responsibility for the whole board, whereas the lead independent director has a leadership role among the independent and non-executive directors.

The lead independent director should not be thought of as a policing role, bringing surveillance to the actions of the chair/CEO. Instead, it is a leadership role, contributing to the effectiveness of governance and ensuring that communication between directors, the Chair, and stakeholders is functioning well. For example, the lead independent director can interact with shareholders who may wish to engage with the company on relevant matters, such as succession planning, executive compensation, and corporate strategy. Substituting the chair or executive management in these discussions can be incredibly beneficial for better investor engagement. Setting board meeting agendas, scheduling, and determining the information, such as pre-reads, that the board sees are also central features of the lead independent director’s role.  

Although the lead independent director should not assume a policing role, they should observe whether the chair of the board is fulfilling the role objectively and to an acceptable level of performance. The lead independent director leads the evaluation of the chair’s performance, a process which should include external input from an advisor or consultant.

Part of this evaluation will demand that the lead independent director communicates fully and openly with the other independent non-executive directors, as well as canvass opinion from the executive board members too. Interactions with fellow directors, many times outside the ordinary course of board business, is an integral part of the lead independent director’s role. The position is therefore well suited to a highly collegiate and communicative member of the board.

The lead independent director, as with any board director, must be independently-minded and capable of both supporting and challenging the chair/CEO. The relationship with the chair is a critical one, and both parties have to work towards maintaining a trusted and valued connection.  Should the lead independent director grow increasingly concerned about the performance of the chair/CEO, they will need to establish a consensus among the non-executive directors for the appropriate remedy, which potentially means triggering a succession process.

Given the lead independent director is in a pseudo-chair role, they can be an obvious candidate to fulfil the chair post. In such cases, the process of identifying and electing a new chair needs to be independent, and the lead independent director should recuse themselves if they are involved. The board committee running the process of appointing a new chair needs to distance the lead independent director from the process.

They must also consider whether the lead independent director is the best choice for the chair role, and their standing among the directors will be a determinant of this. In a situation where the lead independent director has driven a process to remove the chair responsibilities from the CEO, the relationship between the two may become fractured. Appointing the lead independent director to the chair role could then inhibit the vital function of the chair – CEO relationship.

This hint towards the duties of the lead independent director gets to a crucial point, which is that the lead independent director role needs a clear role description with associated responsibilities (see below for a sample). The position should be occupied by one of the independent directors, with an existing appreciation for dynamics of the board and the company’s business. Someone respected by the other non-executives. It is common to set a one-year term for the lead independent director, a term that can renew annually. There is not usually an applied upper term limit, but there is guidance on what is considered to be a threshold of service for independence. Appointing the lead independent director from the existing directors, and giving the person a sustained run at the role, is likely to improve the functioning of the board, which will deliver multiple benefits.

Every company has its reasons for wanting to select the leadership and governance structure that it has. As with anything governance focused, there is a need to exercise judgement over the right approach for the entity. Academic institutions, corporate governance think-tanks, standards organisations and many other bodies publish their best practices for corporate governance structures. Still, the real-world context is a vital consideration in designing any board structure. A board must effectively discharge its duties, and it is necessary to optimise the structure for this purpose.

In so many cases, the argument for an independent chair is overwhelmingly convincing. Within the biopharma sector, it seems that two-thirds of the largest companies continue to believe one person serving in both the chair and CEO role is optimal. In such circumstances, the lead independent director offers the counter-balance of power and is vital to an effective board in which stakeholders can have greater trust.  Directors serving on a board should consider there suitability to this position and be willing to raise their hand.

Lead Independent Director – Sample Job Description

Executive Sessions

  • Preside at meetings of the board of directors at which the Chairman is not present, including executive sessions of the independent directors.

Call Meetings of Independent Directors

  • Has the authority to call meetings of the independent directors.

Conducts Evaluation of Chair and CEO

  • Conducts independent director evaluation of the Chair and CEO, including an annual valuation of his or her interactions with the board.
  • Leads the CEO succession process.

Board Performance and Charter Review

  • Responsible for leading the board’s annual self-assessment
  • On an annual basis, the lead independent director, in consultation with the independent directors, shall review the board Charter and recommend to the board any modifications or changes.  

Chairman Liaison

  • Serve as principal liaison between the Chair and the independent directors

Approve appropriate provision of information to the board such as board meeting agendas and schedules

  • Approves information sent to the board, including quality, quantity and timeliness of such information.  
  • Approve the frequency of the board of director meetings and meeting schedules, assuring there is sufficient time for discussion of all agenda items.

Shareholder Communication

  • If requested by shareholders, ensures they are available for consultation and direct communication when appropriate.

Committee Membership and Chair

  • Work in collaboration with the Nominating and Corporate Governance committee and the Chair to recommend selection for the membership and chair position for each board committee.

Recommend Director Candidates

Interview, along with the chair of the Nominating and Corporate Governance Committee, all director candidates and make recommendations to the N&G committee.

Authorizes Retention of Outside Advisors and Consultants

  • Authorizes the retention of outside advisors and consultants who report directly to the board of directors on board-wide issues.

Liftstream is an executive search and leadership advisory company serving companies across the global life sciences industry.

Registered in England No: 5009233
VAT: 843679292

About Us

Follow Us

© 2024 · Liftstream · Site by SMXi