What is a Non-Executive Director?
The FRC issued a report into the adequacy of the explanations provided as part of the UK ‘comply or explain' regime for Quoted Companies under their UK Corporate Governance Code.
Read First Flight's Chair and Non-Executive Director Guidelines on the search, selection and remuneration of Non Execs.
Read the IoD's Corporate Governance Report for unlisted Companies.
Good Corporate Governance
is accountable to shareholders & collectively responsible for the success of the company: providing entrepreneurial leadership within a framework of prudent controls including risk assessment & management.
Directors have a general duty to act within powers, promote success of the company (with regard for likely long term consequences, interests of employees, business relationships with suppliers & customers, impact on community & environment, high standards of conduct, act fairly between members), exercise independent judgement, reasonable care, skill & diligence; avoid conflicts of interest, not accept benefits from third parties & declare interests.
Chairman runs the board; creates conditions for effectiveness; sets agenda, forward looking & strategic; ensures time for complex or contentious issues; encourages active engagement by all; represents company externally & with shareholders.
Chief Executive/Managing Director runs the business; develops & delivers the strategy & business plan; directs management & controls operations; communicates with the board.
Non-Executive Directors provide independence & wider perspective; challenge strategy & scrutinise management; ensure robust controls & risk management; determine remuneration of executives; link with major investors; take lead role in appointing & removing directors.
Audit Committee of independent Non-Executives: monitor integrity of financial statements, review internal controls & recommend arrangements with auditor.
Remuneration Committee of independent Non-Executives: set remuneration of Executive & Non-Executive Directors & monitor remuneration of senior management; so that remuneration is linked to corporate & individual performance; & is sufficient to attract, retain & motivate. Main shareholders should be consulted.
Nomination Committees are the guardians of a company's Board composition but they are often referred to as the weakest Board subcommittee. They generally have insufficient oversight of succession planning and they do not always approach Board appointments in a professional or trasparent manner and very often are unduly influenced by the Chairman. The Nomination Committee should with much greater rigour than is often seen at present, review the structure, size, and composition (including skills, knowledge, experience, and diversity) of the Board and make recommendations to the Board with reagrd to changes.
Matters Reserved for the Board include: Finance (e.g. policies & controls; expenditure, contracts & acquisitions/disposals above specified levels etc); Strategy (setting strategic aims, policies & budgets; ensuring financial & human resources in place; reviewing management performance etc); Governance (roles of directors & board committees; delegated powers etc); & shareholder recommendations (e.g. annual/directors report, accounts, dividends etc).
Success depends on: transparent, appropriate & timely information; balance of executives & non-executives; no individual or group dominating; induction, development & evaluation; progressive refreshing; dialogue with shareholders, participation at general meetings.
Letter of Appointment for Non Execs should cover: minimum number of Board Meetings p.a., annual away day, strategy sessions & other meetings e.g. committees; induction, training & evaluation; access to insurance & professional advice.
Non-Executive Director Legislation & Code of Conduct
The US approach to the responsibilities of Directors including Non-Executive Directors (which they call outside Directors or Independent Directors) contrasts with the UK. The US has introduced legislation whereas the UK has taken a "Code of Conduct" approach.
In the aftermath of the Enron collapse in the US, President Bush's hastily introduced 2002 legislation which became known as Sarbanes-Oxley.
The objective of the Sarbanes-Oxley legislation, known as Sarbox was to prevent corporate fraud and protect investors. The legislation placed stringent responsibilities on Corporate Executives or Directors in the US.
US Regulators now admit that the legislation which is seen as somewhat draconian has damaged Corporate America. Some companies have delisted from American exchanges while many others have spurned the US altogether and the London exchanges have benefited.
UK Code of Conduct
The UK has taken a different approach to Corporate Governance and the responsibilities of Directors including Non-Executive Directors with a "Code of Conduct" whereby companies have to comply or explain why they have chosen not to comply.
The UK's code based approach was established by the Hampel Review and the Cadbury Committee and subsequently in the Higgs report published in January 2003.
The Cadbury Committee stressed the corporate governance benefits of a strong Non-Executive representation on a Company's Board.
The Hampel Review also emphasised the strategic input and benefit of Non-Executives.
The Higgs report noted that: "Non-Executives are the custodians of the Governance process".
Higgs referred to the hastily passed US Sarbanes-Oxley legislation and likened their legislation to "dealing with dangerous dogs".
Higgs recommended the code based approach established by Hampel and Cadbury because "it offers flexibility and intelligent discretion and allows for the valid exception to the sound rule".
Comments are often made that Higgs made his recommendations regarding the role of a Non-Executive Director only in listed & Quoted Companies but he made the point that Small Medium Enterprises (SMEs) and owner managed companies will derive substantial benefit from having Non Execs on their Boards too (to provide skills they might not have and to provide business experience - First Flight's expertise too).
The Combined Code states in their Code A.3 regarding Board Balance and independence: The Main Principle: The Board should include a balance of executive and Non-Executive Directors (and in particular independent Non-Executive Directors) such that no individual or small group of individuals can dominate the Board's decision taking.
The Combined Code states in their Code A.3.2: Except for smaller companies (one that is below the FTSE 350), at least half the Board, excluding the Chairman, should comprise Non-Executive Directors determined by the Board to be independent. A smaller company should have at least two independent Non-Executive Directors.
Non Execs have an important and highly beneficial role to play in growth companies, Small Medium Enterprises (SMEs) and family businesses as well as AIM Companies, Mutuals, Building and Friendly Societies - all of whom are now recognising the benefits they derive from having not just a Non Exec but the right Non Exec with the right skills.