The Role of the Non-Executive Director

We are constantly being asked about the benefits to a private company of appointing a non-executive director. This short guide offers a practical overview to the non-exec’s role.  

UNTIL relatively recent times, non-executive directors were seen as the almost exclusive domain of PLCs and the very biggest private companies. Not any longer. Increasingly, private companies of varying sizes are recognizing the virtues of having a voice in the boardroom independent of the executive management team.

NEDs, as we will call them from now on, are generally appointed to offer a “creative contribution” to the board of directors by giving objective criticism and advice. Whilst it is accepted that they can’t give the same continuous attention to the business of the company as the executive directors, they are expected to show the same commitment to its success.

Their independence from the management of the company is essential to their effectiveness. This allows them to bring a degree of objectivity to the board’s deliberations and play a valuable role in monitoring management decisions. As the 1992 Cadbury Report stated “they should bring an independent judgment to bear on issues of strategy, performance and resources including key appointments and standards of conduct.”

NEDs are generally chosen for their calibre, their breadth of experience and their personal qualities. They may also possess specialist knowledge of use to the Board or have key contacts in related industries or financial institutions.

Whilst being careful not to stray into executive directions, NEDs should always be available to provide general guidance and to offer a different perspective on matters of concern.

Their principal responsibilities lie in the following areas:

• Strategy: NEDs should constructively challenge and contribute to the development of strategy.
• Monitoring: NEDs should scrutinize the performance of management in meeting agreed goals and objectives. They should continually act as a sounding board for management, but also probe and ask questions where they have doubts or concerns.  
• Audit: NEDs should satisfy themselves that financial information is accurate and that financial controls and systems of risk management are robust and defensible.

They should also provide independent views on resources, appointments and standards of conduct.

In 2011, the Financial Reporting Council produced a report, ‘Guidance on Board Effectiveness’, to help companies apply the principles of the UK Corporate Governance Code. It outlined the role of NEDs as follows.

* A NED should, on appointment, devote time to comprehensive, formal and tailored induction which should extend beyond the boardroom. Initiatives such as partnering a NED with an executive board member may speed up the process of him or her acquiring an understanding of the main areas of business activity, especially areas involving significant risk. The director should expect to visit, and talk with, senior and middle managers in these areas.

* NEDs should devote time to developing and refreshing their knowledge and skills, including those of communication, to ensure that they continue to make a positive contribution to the board. Being well-informed about the company, and having a strong command of the issues relevant to the business, will generate the respect of the other directors.

* NEDs need to make sufficient time available to discharge their responsibilities effectively. The letter of appointment should state the minimum time that the NED will be required to spend on the company’s business and seek the individual’s confirmation that he or she can devote that amount of time to the role, consistent with other commitments. The letter should also indicate the possibility of additional time commitment when the company is undergoing a period of particularly increased activity, such as an acquisition or takeover, or as a result of some major difficulty with one or more of its operations.

* NEDs have a responsibility to uphold high standards of integrity and probity. They should support the chairman and executive directors in instilling the appropriate culture, values and behaviours in the boardroom and beyond.

* NEDs should insist on receiving high-quality information sufficiently in advance so that there can be through consideration of the issues prior to, and informed debate and challenge at, board meetings, High-quality information is that which is appropriate for making decisions on the issue in hand. It should be accurate, clear, comprehensive, up to date and timely; contain a summary of the contents of any paper; and inform the director of what is expected of him or her.

* NEDs should take into account the views of shareholders and other stakeholders, because these views may provide different perspectives on the company and its performance.

EMC has extensive experience of acting as or advising on the appointment of NEDs. If you would like to find out more, call us on 01273 945984 or email natasha.askaroff@emcltd.co.uk

 

March 2014