directorships

The role of a non executive director

Non executive directors can be useful to any company. In many companies, it can be relatively simple for the management structure to slip into an introverted and staid approach to business. It is fairly common for traditional, family owned businesses to fall into the trap of "we've always done it this way - why should we change". A non executive director however can often see risks and opportunities in the market place that are sometimes overlooked by the executive management. This is because they are not wrapped up in the day-to-day running of the business.

A non executive director can, step back from the stress of every day business life and see things from a different perspective. They can provide a vital strategic overview. The role of a non executive director can be particularly important when the Chairman or Chief Executive Officer of a company is especially entrepreneurial or overbearing. Non executive directors can have an influence to moderate a Chief Executive Officer who is doing the business for his own ego or financial benefit and not those of the shareholders.

In other companies, there could be the opposite problem - in that the non executive director is brought in because the organisation lacks the entrepreneurial flair, international connections or drive and dynamism to compete in the modern day market place. Some companies require non executive directors to see them through a corporate transition such as a change in ownership and the non executive director may bring highly specialised knowledge invaluable to a company going through a flotation, relocation, rebuilding programmes and/or strategic alliance. At its simplest level, a non executive director might just be brought in to fill a temporary shortage of in-house qualified directors.

The role and effectiveness of non-executive directors

Non-executive directors bring essential qualities to the board such as specialised commercial and/or technical expertise, an independent perspective, an awareness of the differing approaches taken on issues by other companies and the ability to ask critical, incisive questions which management itself may find it difficult to express. The non-executive directors bring a crucial control element to the board by ensuring compliance with governance codes and best practice and, along with the Company Secretary, should report regularly to the Chairman and highlight any concerns immediately.

Non-executive directors should not all be expected to fulfil all roles. It is more important that the non-executive directors collectively cover a broad range of roles in enough detail. It is part of the role of the Chairman to ensure that there is a balance of skills and experience on the board. The key roles that can be expected of non-executive directors are:

  • strategic input leadership independent oversight governance
  • compliance

Strategic input and leadership are qualities that should be expected from each member of any board, both executive and non-executive. The extent to which a non-executive director would become involved in the areas of oversight, governance and compliance would depend on their being independent and their level of previous experience (i.e. the chairman of audit committee should have relevant financial experience). Non-executive directors should bring a mix of qualities highlighted above to the board and therefore that it is not possible to identify single items from the above list to allocate to individuals. It is the Chairman of the board who should have overall responsibility for ensuring that an appropriate balance of inputs to the board is achieved taking in to account the qualities of the individual non-executive directors. When recruiting a new non-executive director, the Nominations Committee as guided by the Chairman should ensure that any identified gaps - whether through a personal or formal analysis - are filled with candidates of the appropriate calibre to ensure that the balance of qualities is maintained. Increasingly, it is recognised that there are certain specific qualities that are required of non-executive directors who are appointed to board committees. The chairman of the Audit Committee should be someone with the appropriate qualifications, experience and independent oversight to ensure that there is an appropriate level of transparency in the public eye. Equally, the chairman of the Remuneration Committee should bring a significant level of compensation and benefits experience to the table. For this reason it may be sensible for non-executives to limit the number of committees on which they sit (or for the company itself to impose a limit). It is also recognised that, clearly, some non-executive directors may be appointed purely for their industry knowledge and the strategic advice that they could offer whilst others may be appointed because of their independent viewpoint.

As directors without executive responsibilities and therefore no conflict of interest they can provide independent input to decisions.

'All directors should bring an independent judgement to bear on issues of strategy, performance, resources, including key appointments, and standards of conduct. 'Whilst 'professional independence' is required for the general role of each director, for non-executive directors fulfilling a specific role (e.g. compliance) they would need to demonstrate independence from the company and the executive directors on the board. For effective governance, the independence of any director is subjective and cannot be rigidly defined. The definition of independence endorsed by the Association of British Insurers and the National Association of Pension Funds in their voting policy and incorporated in to the Combined Code of the UKLA Listing Rules (Provision A3.2)

It should be for the Chairman and the Nominations Committee to assess whether business or other relationships might materially interfere with the exercise of independent judgement by the non-executive director concerned. This assessment might be done as part of the board's regular review of its effectiveness and supported by recognised external reviewers. There is a tendency amongst certain commentators to view non-executives as simply independent or not, based on arbitrary definitions such as length of service. We consider that where a director has served for a certain period this should not automatically rule out independence. Whilst using three, three-year terms as a general rule of thumb, all factors relating to a director should be considered. It is part of the Chairman's responsibility to ensure that a board refreshes itself on a regular basis and it should be for a board to determine what 'regular' should be, without using prescriptive rules.

To ensure that the non-executive directors as a group can be effective they need to represent a significant proportion of the board. The Combined Code suggests that non-executive directors comprise not less than one-third of the board.

Commitment and contribution

To ensure that non-executive directors can devote the time required to each post the number of positions that any one person takes on should be limited but individual companies should be left to decide what might be appropriate in the circumstances. What is important is ensuring that the acceptance of any external directorship is agreed by the Chairman of the company on the basis that it does not materially interfere with the ability of the individual to undertake their principal role.

The expected contribution of non-executive directors to company business has increased enormously in recent years given the public scrutiny that they are under and the complexity of corporate transactions. The membership of non-executives on board committees should equally be limited to ensure full and appropriate consideration is given to these duties. Such restrictions will affect some individuals who may be required to limit the number of posts that they hold.

Qualities of non-executive directors

The qualities required of new non-executive directors are often negative in nature; for example that they must not have any conflicts of interest, that they must not have other links to the company, etc. It is obviously of equal value to specify general experience that non-executive directors should bring; vision, strategy, direction, and requirements more specific to a company's business. Additionally all non-executive directors need at least a basic understanding of finance and of business issues.

Whilst it is important that some of the non-executives on the board have specific knowledge relating to the industry/operations of the company, equally important is a broad range of backgrounds to provide diverse viewpoints so as to drive performance. Each non-executive director appointed to the board of a company will bring with him or her a set of skills that is appropriate to the needs of the board as a whole. These skills may be financial, commercial, regulatory or others but which, together with other non-executive directors, will contribute to the development of a clear and coherent strategy to be implemented by senior executives and management.

All non-executive directors should have personal qualities such as an ability to scrutinise, analyse and constructively challenge management to make sure that when decisions are made, they are based upon informed debate and robust dialogue. Non-executive directors should only establish a relationship with the executive directors through the board. Any contact with senior management should be through board meetings, committees of the board of when the non-executive is seeking additional information on specific issues. Senior management would also be encouraged to attend the board for discussions on their area of the business. Non-executive directors should have no contact with key advisers outside of board/committee meetings and board briefings without first discussing this with the Chairman.

Roles and responsibilites

It is good policy to write up and agree between the Chairman and the Chief Executive their respective roles and areas of responsibility. Effective performance can be supported by ensuring that all board and committee papers are circulated to non-executive directors in a timely manner. It is also important that the Company Secretary is available to answer any questions that the non-executives may have and to facilitate their access to independent professional advice where appropriate. The Company Secretary should also act as a contact, source and mentor should non-executive directors require any further information.

It is likely that non-executive directors will have too much information than not enough. It should be part of the role of both the Chairman and Chief Executive to ensure that the quality of the information provided is such that non-executive directors can consider those issues which they need to and not have to sift for the important information. Non-executive directors have a responsibility to ensure they ask for and get information appropriate to their needs. It is important to ensure that where possible non-executive directors have access to a cross-section of management, rather than just executive directors and their direct reports. This can be achieved by site visits, strategy meetings etc.

Training & development

Companies should provide training and development for all members of the board. This should apply not only where a director may feel they would like a greater understanding but also to ensure that all directors are up-to-date on important issues. It is important to ensure that the induction for all directors is completed. Where necessary this should include terms of reference, the role of the post on the board, directors' duties, and extensive information relating to the company. The Chairman brings to the attention of non-executive directors what matters need to be addresses and provides feedback on their performance.

Executive v non-executive directors

There is no legal distinction between executive and non-executive directors.

The role of the board

It is generally accepted that the role of the board is principally the creation of shareholder value through directing and controlling the company and establishing the strategy and vision for the company. The role played by the board in the delivery of shareholder value is something that it should determine, formally set out, and present to shareholders.

The role of the board does not necessarily overlap with any statutory statement of directors' duties as proposed in the Company Law

The role of the Chairman is to direct and control the running of the board and to ensure that it conforms to all relevant rules and codes of practice. The Chairman is responsible for the management of board succession. Whilst the board as a whole must consider continuity in its membership, it is important that this forms part of a Chairman's role.

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