The challenging and significant role of Non Executive Directors

In recent years the role of the company board and its Non Executive Directors (NEDs) has been

the subject of increased scrutiny and analysis. Long gone are the days when the ‘old boys’

network’ helped those with the right connections to secure a lucrative position on the board of

a company of whose business they had little working knowledge or relevant skills and therefore

had little to contribute. With the turn of the century, and then more notably following the

financial crisis, renewed attention has been focussed upon the inner workings of the board

and the essential role that it should play in both guiding a company’s strategic direction and

monitoring its performance, and that of its management.

 

The board plays a critical role in any large public company, and also many smaller private

enterprises. Rules, regulations and guidelines have been developed to ensure a board has the

capacity to fulfil its guiding and oversight roles. As part of this team NEDs are designed to bring

into the company a breadth of experience; they will be of a high calibre, with intelligence,

maturity and integrity and are also often selected because they possess specialist knowledge or

have key connections deemed beneficial to the company. They should increase the diversity of

the board.

 

As custodians of the governance process NEDs are expected to contribute to the delivery

of strong organisational governance, ensuring the company operates in an ethical way and

fulfils its objectives. They should constructively challenge and contribute to the development

of strategy. The company’s performance, as well as that of the management, should be

scrutinised by NEDs, who are also responsible for determining the appropriate levels of

remuneration of executive directors. They have a prime role in appointing and, where

necessary, removing senior management, and in succession planning. This is in addition to

ensuring that financial information is accurate and that financial controls and systems of risk

management are not only robust, but also defensible.

 

To fulfil all these criteria NEDs have to possess a level of understanding of the business itself,

which means that NEDs will need a firm grasp of financial matters, in addition to an ability

to understand concepts and issues quickly and thoroughly. The type of person that a board

requires will depend on the composition of the board and the company. NEDs should bring

to the table the elements that the board lacks to ensure the strength of the overall team.

However, although the board is acting as a unitary body with all members part of the single

decision-making whole, the role of the NEDs, and the chairman, is to challenge the executives,

to make sure they are acting in the best interest of the company and its shareholders.

The role of NEDs was first examined in detail by the Cadbury Report in 1992, then the Hampel

Report in 1998, and the Higgs Report in 2003. The recommendations of these reports have

been fed into the compilation of the UK Corporate Governance Code, which is overseen by the

Financial Reporting Council. It is a set of principles of good governance aimed at companies

listed on the London Stock Exchange and the most recent edition was released in October 2014.

The Code operates under the principle of ‘comply or explain’, with listed companies required

to either comply with the provisions of the Code or explain to their shareholders in the next

annual report why they have not done so.

 

The board should consist of executive directors and NEDs, independent and non-independent,

with a chairman, as head of the board, and a chief executive, as head of the company. The

chairman and the chief executive should not be the same person, although Marks and Spencer

contravened this rule in 2008 when Sir Stuart Rose took on both roles. However the company

assured its shareholders it was a short-term strategy, which in fact did end in 2010.

According to the UK Corporate Governance Code at least half the board, not counting the

chairman, should be independent NEDs. Independence may be seen as a prized attribute

but good judgement is more important, especially when challenges need to be made. The

important balancing act that NEDs must perform is having the ability to operate as part of the

team to help the company meet its overall objectives, without getting involved in the day-

to-day running of the organisation, and then being able to present a well-informed challenge

when necessary. The role of NED is challenging and yet ultimately rewarding for the right

candidate.

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