Six out of every 10 Irish public companies breach the guidelines for independence set out in the recent Higgs report on corporate governance, according to a new report.
The report, "Are Non-Executive Directors of Irish plcs Independent?" by the Institute of Directors'(IoD) Centre for Corporate Governance at UCD found that 61 per cent of companies breached one or more of the independence criteria laid out by former banker Mr Derek Higgs earlier this year in a report commissioned by the British government.
Seven companies accounted for 48 breaches of independence between them.
The IoD report found that only 41 per cent of Irish companies complied with recommendations for separate audit, remuneration and nomination committees, while 40 per cent of companies do not have a majority of independent directors.
Board sizes average 9.4 members, well below the British average of 12 to 13 members. This may breach the Higgs recommendations that boards should be of sufficient size and have an appropriate balance of skills and experience, the report revealed.
The report shows that many Irish listed companies will need to make considerable changes if the recommendations of the Higgs report, designed to avoid further Enron-style governance scandals, are to be implemented here.
Fund managers have also applied pressure to Irish companies to guarantee the independence of non-executive directors in the interest of shareholders.
Individual non-executive directors failed to meet the criteria for independence for reasons such as previous association through business, auditing or family, years served without re-election or a history as a former employee.
Interlocking directorships, where directors sit on each other's boards, were found in six cases. The report notes that this number was comparatively lower than in other countries and was not as high as might be expected in the Republic's close-knit business community. It attributes this to the influence of multinationals and the semi-state sector.
There was some confusion as to what criteria constitute an independent director, while some firms failed to disclose sufficient biographical information on directors in their annual reports.
The report says there is a need for greater consistency in the information being disclosed in annual reports and recommends that the definition of independent director be clarified.
The Institute of Directors Centre for Corporate Governance wants existing codes of governance to be enhanced.
Mr Willie O'Reilly, president of the IoD, said it could not tell people how to run their business, but could only make recommendations on best practices. "It is increasingly important for companies to have an individual on board, who is seen to be independent," Mr O'Reilly said.
"I would urge chairmen and managing directors of Irish plcs to study this report carefully. Good governance should not be a threat to profitability and can have a positive effect on share values," he said.
Mr O'Reilly added that it would take longer for the Higgs recommendations to filter down to Irish companies because they were smaller on average than their UK counterparts.
The research, based on 80 of the 81 Irish companies listed on the Irish Stock Exchange, was carried out by Prof Niamh Brennan, academic director of the IoD centre, and consultant Mr Michael McDermott.
The Centre for Corporate Governance, a joint venture between the IoD and UCD, provides training to directors.
