Should an independent director have 'skin in the game'?

I was recently drawn into a debate about whether an independent director could purchase shares in a public limited company. The discussion became particularly interesting because the issue was raised by the ICC Banking Commission Chairman in Bangladesh and also a former deputy governor of the central bank. 

His view was that an independent director cannot be a shareholder, on the grounds that independence requires the absence of shareholding and, by extension, the absence of any potentially compromising interest. 

I don't blame him since he might not have enough clues on how our capital market is usually run, managed and regulated. I was the SEC nominated director to Chittagong stock exchange for almost ten years and had the proud privilege of launching the largest IPO in the local market. PwC also put me on a three-week-long 'Director Development Programme' with a very prestigious institution in the region. 

However, it seemed at odds with the views I have encountered during conversations with a wide range of stakeholders, including senior officials at the Bangladesh Securities and Exchange Commission (BSEC) and Dhaka Stock Exchange (DSE), two former DSE presidents, and several lawyers active in the capital market. Their reading of the framework led me to revisit the issue more closely.

The Bangladesh Securities and Exchange Commission's Corporate Governance Code, 2018 provides guidance that's quite clear. It states that an independent director must either hold no shares or less than one per cent of the company's paid-up capital. A holding above that threshold disqualifies the individual. By implication, the law does not prohibit all shareholding; it simply sets a ceiling that preserves independence.

The same Code also requires companies to disclose, in their annual directors' report, the shareholding of every director along with that of their spouses and minor children. This disclosure ensures that investors and regulators are fully aware of directors' financial positions, no matter whether they are independent or not.

From my own experience, even a token investment has value as a very small stake can contribute to ensure better accountability. It is not enough to create a conflict of interest, but it is sufficient to align the director, however modestly, with the wider shareholder base. In difficult market conditions, this alignment becomes particularly important. 

As far as my investment is concerned, it will make me more sincere as I know that a fraction of my own capital is at risk, driving me to read papers more carefully, to question assumptions more thoroughly, and to think harder about long-term value.

I have also seen the other side. Larger shareholdings can cloud judgment and compromise independence, gradually pulling directors into the orbit of sponsor shareholders. The balance lies in keeping the investment symbolic—a gesture of commitment, but never one that binds the director's independence. 

In several boards I have served, minority shareholders and institutions took comfort in knowing that independent directors had put even a small sum at stake. It lent credibility to the role and turned it into more than just a matter of compliance. 

Of course, governance is not only about formal rules. It is also about perception. In markets like ours, where institutions are still developing, the confidence of investors and the public depends as much on the integrity of directors as on the implementation of regulation. Independence is not simply the absence of shareholding; it is the presence of judgment, discipline and the willingness to stand apart when it matters most. 

However, whether independent directors should hold shares reflects the larger tension between principle and perception. The law allows a modest holding, and in practice it can enhance accountability. Yet the real safeguard lies in the character of the director. 

In a country where rules can be read in more than one way, there will always be grey areas. The task of an independent director is to navigate those grey areas with clarity and conviction, ensuring that independence is not just a legal definition but a standard followed in practice. 

To conclude, having a 'skin in the game' by an independent director may instil a lot of comfort among common shareholders as well as encourage others in the professional world to take risks. 

Mamun Rashid is an economic analyst and Chairman at Financial Excellence Ltd. 

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views and opinions of The Business Standard.