MH Article

Non-Executive Directorship- is it worth it?

The current financial downturn has brought a debate about whether or not it is possible to be truly independent into the spotlight.

The scandals a few years ago at Equitable Life, Enron and Worldcom have been eclipsed by more recent corporate disasters at leading financial institutions such as RBS, Northern Rock and Lloyds. Once again the spotlight is back on corporate governance and the role of Non-Executive Directors, leading some to question whether the obligations, and liabilities, that come with such as appointment make it worthwhile.

But what is actually meant by Non-Executive Director? The concept itself has no legal statutory definition. English law only defines a director as “any person occupying the position of director by whatever name called” and makes no attempt to distinguish between the different types. As a result, Non-Executive Directors have the same potential liabilities as Executive Directors, and over recent years courts have imposed much more demanding standards.

For some critics, there is a belief that the relationship between Non-Executives and the Board has become “too cosy”, impairing independent judgement. The issue of independence lies at the heart of the role of NEDs- can someone ever be independent if they are paid by the company, or if they have an existing relationship with members of the Board?

So what exactly are the roles and responsibilities of Non-Executive Directors?
They should:

• Review the management’s performance and assume a prominent role where there may be any potential conflict of interest (e.g. boardroom conflicts).
• Constructively challenge and help develop proposals on company strategy.
• Scrutinise the performance of management in meeting agreed goals and objectives and monitor reporting.
• Satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible.
• Be responsible for determining appropriate levels of remuneration for Executive Directors, and have a prime role in appointing, and where necessary removing, Executive Directors and in succession planning.


Above all, they need to establish and maintain confidence in the conduct of the company through the supervision of management, participation in the direction of the company’s business and affairs, and voicing opinions firmly and objectively on issues that come before the Board. They should be independent in judgement and build recognition among Executive Directors in order to promote a climate of transparency and trust.

How can a Non-Executive Director apply best practice to his or her role in a company?
Due diligence: before accepting, establish how the Board will operate, and identify the major strategic and commercial issues facing the company.

Remain independent: voice opinions which reflect independent judgement.
Play an active role: contribute to strategy, test the conclusions and actions proposed by the executives and play a prominent role in areas such as audit and executive remuneration.

Challenge Executive Directors: don’t be afraid of asking awkward questions which would otherwise go unanswered.

Insist on timely, relevant and accurate information: by doing this, effective oversight of strategy and internal controls can be exercised. Most importantly, information on company accounts and other financial matters including Executive Directors expenses documentation.

Constantly review information flow: ask whether the quality of information received is appropriate and whether sufficient time has been given to absorb the information before board meetings.

Be on the relevant distribution list: get added to appropriate emails, press releases and other significant distribution lists, both to receive information and to enable informed contribution to any Board discussions.

Can Non-Executive Directors ever be truly independent?

Some critics suggest that the role of Non-Executive Directors should be abolished completely, principally on the basis that NEDs can never second-guess the executive management, and they will never understand the business as well as their executive colleagues. As a result they serve little purpose. Others believe that this approach is one stop too far but there should be some statutory regulation of Non-Executive directors to ensure that they are fully aware of their obligations to ensure that they discharge their duties effectively as guardians of the company’s best interest, increasing shareholder confidence in their role. Others suggest that NEDs should be “qualified” in some way. Some advocate that the NEDs should be required to meet at least a couple of times a year away from executive management to review the strategic direction of the company and the various committees on which they sit, including their terms of reference. Of course directors can always obtain insurance to protect against certain civil liabilities. Such protection is not available for criminal liabilities but some still feel uncomfortable relying on insurance with its uncertain outcome, many exclusions and often inadequate level of cover.

Lance Feaver, MH Corporate

En Passant Magazine - The Business Voice
Opinion
03/08/2009



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