Secrets from the boardroom.
One of the lesser-known roles in a firm is that of the Non-Executive Director (NED). While an Executive Director is a member of the board of a firm or organisation who also has management responsibilities, a Non-Executive Director is a board member who is practically an ‘outsider’, without a managerial role or involvement in the daily operations of the company or organisation.
Before we dive deeper into the role of a non-executive director, it is important to say that there is no legal distinction between executive and non-executive directors. As a consequence, NEDs have the same legal duties, responsibilities and potential liabilities as their executive counterparts (at least in the UK Corporate Governance Code). Clearly, it is appreciated that NEDs cannot give the same continuous attention to the business of the company. However, it is important that they show the same commitment to its success as their executive colleagues.
Indeed, in the UK, under the Corporate Governance Code, at least half of the board directors in larger companies should be non-execs. Smaller companies should have at least two. The composition of leading companies such as HSBC, which has 14 non-execs, and Barclays, with 10, shows the value these companies place on their contribution.
The role of a board member is increasingly complex, and requires specific skills and knowledge. It is not merely the natural extension of an executive career. Although the law defines few prerequisites for becoming a company director, those who wish to exercise their role in a professional manner will recognise the need for a significant investment in their own skills and competencies before accepting a board-level mandate. Non-execs must be prepared to commit the time needed to fulfil the demands of the job and be aware of their duties and responsibilities. This is likely to be 15 to 25 days a year. It is hard work, especially in the first few months and will involve much more than simply attending scheduled meetings and reading in preparation for them.
Prior to accepting a non-executive appointment, the prospective appointee must ensure they have a comprehensive understanding of the company they are about to join and have undertaken their own due diligence. Once appointed, a NED should ensure that they keep up to date with developments in the company and the relevant business sector. The UK Corporate Governance codes states, “Non-executive directors should have sufficient time to meet their board responsibilities. They should provide constructive challenge, strategic guidance, offer specialist advice and hold management to account.”
All directors should be capable of seeing company and business issues in a broad perspective. Nonetheless, NEDs are usually chosen because they have a breadth of experience, are of an appropriate calibre and have particular personal qualities. Additionally, they may have some specialist knowledge that will provide the board with valuable insights or, perhaps, key contacts in related industries. Of the utmost importance is their independence of the company management and any of its ‘interested parties’. This means they can bring a degree of objectivity to the board’s deliberations, and play a valuable role in monitoring executive management.
From our experience as NEDs on several Gibraltar based companies, we can say that above all, good non-execs need diplomatic skills. They need ‘emotional intelligence’ – the ability to evaluate people’s characteristics and their agendas quickly and thoroughly. They should never appear to be domineering, especially when dealing with executive directors who are unused to being challenged. Equally, they should never forget that it is their job to hold the board to account.
The Key Responsibilities of NEDs
Essentially the NED’s role is to provide a creative contribution to the board by providing independent oversight and constructive challenge to the executive directors. More generally, the key responsibilities of NEDs can be said to include the following:
- Strategic Direction
As an ‘outsider’, the non-executive director may have a clearer or wider view of external factors affecting the company and its business environment than the executive directors. The normal role of the NED in strategy formation is therefore to provide a creative and informed contribution and to act as a constructive critic in looking at the objectives and plans devised by the chief executive and the executive team.
- Monitoring Performance
NEDs should take responsibility for monitoring the performance of executive management, especially with regard to the progress made towards achieving the determined company strategy and objectives. They have a prime role in appointing, and where necessary removing, executive directors and in succession planning.
NEDs are also responsible for determining appropriate levels of remuneration of executive directors. In large companies this is carried out by a remuneration committee, the objective of which is to ensure there is an independent process for setting the remuneration of executive directors.
The company and its board can benefit from outside contacts and opinions. An important function for NEDs, therefore, can be to help connect the business and board with networks of potentially useful people and organisations.
- Risk and Audit
NEDs should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible. In large companies NEDs often sit on a company’s Audit Committee.