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Non-executive directorship overview

As my first non-executive director role was approved this month, I had spent some time preparing to make sure that everyone’s expectations were realistic. There is a lot of information out there (there’s an IoD video on my video page too), but I pulled everything in one place in the hope of encouraging more female leaders to investigate their involvement in a non-executive directorship. It’s a bit of a long post this one – but scan to the relevant headers, as you need!

WHAT IS A NON-EXECUTIVE DIRECTORSHIP?

Over recent years the role and prevalence of non-executive directors (NEDs, NXDs) in UK companies have increased significantly.

A non‐executive director is not an employee of a company and will usually only devote part of their time to the affairs of the company as an independent advisor or supervisor.

Essentially the non-executive director’s role is to provide a creative contribution to the board by providing objective criticism.

WHO ARE THEY?

Non‐executive directors have the same general legal responsibilities to the company as any other director as detailed in The Companies Act 2006.

Non-executive directors usually stand back from the day-to-day running of the business, drawing alongside the executive team as required to facilitate the strategic decision-making process. Exactly what this entails will vary from company to company, depending on what is required at each stage of a company’s development.

In a new business, a non-executive director might act as an entrepreneurial mentor, whose regular presence in the office provides inspirational leadership and an experienced voice guiding the company round the common pitfalls that result in many companies failing to fulfil their potential. At the other end of the spectrum, a non-executive director of a listed PLC may just attend board meetings a few times a year.

HOW ARE THEY APPOINTED?

A company must ensure it recruits non-executive directors that complement the balance of skills and experience of the existing board. A non-executive director does not necessarily have to know the industry in which a company is operating, as this knowledge and experience should ideally be provided by the executive directors. Rather, the value of a non-executive director at every level of the corporate ladder lies in their ability to identify and advise upon new challenges, initiatives and market opportunities, and to develop and refocus strategic plans. Therefore it is important that individuals are chosen on the basis of what they can contribute to the company.

Non‐executive directors are appointed in the same way as executive directors and are appointed by the board. A non‐ executive director’s details are filed at Companies House in the usual way.

A non‐executive director will be issued with a contract for services rather than a contract of employment.

This contract stipulates the hours to be worked, expectations, key performance indicators (if appropriate) and the notice period. This provides a framework and ground rules for the relationship between the company and the non-executive director, clearly defining the boundaries in relation to control of the company. Whilst non-executive directors should be remunerated for time spent fulfilling their duties, the contribution this compensation makes to a non-executive director’s overall income should not be significant or their ability to be an independent voice on a company’s board may be jeopardised.

Non‐executive directors may be appointed for a specific term, or for the duration of a particular project. Whilst a non-executive director’s contract may be for a fixed or an indefinite period of time, the UK Corporate Governance Code (2012) advises that if a non-executive director has been advising the same company for more than nine years they should be considered for annual re-election and they may not be considered as independent. All non-executive directors’ terms and conditions of employment should be held at a company’s registered office and available for public inspection between 9am and 5pm each day.

WHAT DO THEY DO?

Non‐executive directors do not report to the chief executive and are not involved in the day‐to‐day running of the business. They are expected to focus on board matters and not stray into ‘executive direction,’ thus providing an independent view of the company that is removed from day-to-day running. Non-executive directors, then, are appointed to bring to the board:

  • independence;
  • impartiality;
  • wide experience;
  • special knowledge;
  • personal qualities.

They tend to be involved with:

  • Strategy– as an ‘outsider’ the non‐executive directors should constructively challenge and contribute to the development of strategy. They provide a creative and informed contribution and act as a constructive critic in looking at the objectives and plans devised by the chief executive and his or her executive team;
  • Performance– non‐executive directors should take responsibility for monitoring progress made towards achieving the determined company strategy and objectives. They are also responsible for determining appropriate levels of remuneration of executive directors, and have a prime role in appointing, and where necessary removing, executive directors and in succession planning;
  • Risk– non‐executive directors should satisfy themselves that financial information is accurate and that financial controls and systems are robust and defensible; and
  • Communication– the company and board’s effectiveness can benefit from outside contacts and opinions. An important function for non-executive directors, therefore, can be to help connect the business and board with networks of potentially useful people and organisations. In some cases, the non-executive director will be called upon to represent the company externally.

Non‐executive directors bring an important ‘checks and balances’ function to the board. By virtue of their independence from executive office and because of the absence of any significant financial interest in the company, they counter‐balance the power and operational interest of executive directors.

The UK Corporate Governance Code 2012 gives some practical guidance specifically to non-executive directors, stating that:

‘As part of their role as members of a unitary board, non-executive directors should constructively challenge and help develop proposals on strategy. Non-executive directors should scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance. They should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible. They are responsible for determining appropriate levels of remuneration of executive directors and have a prime role in appointing, and where necessary removing, executive directors, and in succession planning.’

ICSA also recommends that following their appointment to the board non-executive directors:

  • Should have input into their induction training. They should receive a comprehensive, tailored induction but they should take responsibility for their ongoing training and request support from the company when necessary.
  • Should receive a schedule of future board and committee meetings in advance so they can make sure they attend. They should also ensure that they receive high-quality information sufficiently in advance of meetings.
  • Should understand that their role is to provide independence, oversight and constructive challenge to the board.
  • Should speak to the company’s executives at any time over any concerns they may have. They should also take independent professional advice at the company’s expense if they consider it necessary to discharge their responsibilities.

Similarly, the Walker Review issued in November 2009, makes recommendations to directly affect and enhance the quality and effectiveness of NEDs. It recommends that NEDs:

  • should receive sufficient training to ensure they have sufficient knowledge and understanding of the business and sector
  • should have access to support to allow them to fulfil their duties
  • should have an overall time commitment greater than in the past and time commitment should be clearly indicated in their letters of appointment
  • should be ready, able and encouraged to challenge and test proposals
  • should chair Risk Committees.

WHAT LIABILITIES ARE NON-EXECUTIVE DIRECTORS LIKELY TO FACE?

Although non-executive directors are not responsible for a company’s day-to-day management, since they have the same legal responsibilities and duties as executive directors, they are similarly liable to disqualification under the Company Directors Disqualification Act 1986. If a company’s board of directors is investigated for ‘wrong doing’, then such an investigation will include the actions or omissions of non-executive directors.

In general, a director can be disqualified for general misconduct in connection with companies or for being unfit to act as company director. The maximum period of disqualification is 15 years. However, there have been a number of cases that show that the courts may exercise their discretion and apply a lesser period of disqualification in recognition of the role and relative responsibilities of non-executive directorship.

A consultation paper issued by the then Financial Services Authority (FSA) entitled Effective corporate governance (Significant influence controlled functions and the Walker review) published January 2010 stated that “NEDs have a pivotal role to play in the active governance of firms. Where it appears to us that executives have persistently made poor decisions, we will look closely at NEDs’ performance if we feel they have not intervened in a timely and sufficient way. We are concerned that the existing guidance could be misinterpreted and taken to mean that we would not hold NEDs responsible for, for example, failing to intervene and challenge the executive. This is not the case, as we see such challenge and intervention as a key part of any NED’s responsibilities.”

WHAT SKILLS DO NEDS NEED?

The following are the skills that NEDs need in order to perform their role:

  • integrity
  • high ethical standards
  • sound judgement
  • willingness to challenge
  • interpersonal skills
  • confidence
  • understanding of how conflict occurs and how to deal with it effectively
  • behavioural skills
  • listening skills
  • ability to communicate ideas
  • sensitivity, openness and awareness of non-verbal communication
  • persuasiveness
  • leadership and self-awareness, ability to gain respect and attention
  • critical thinking, creativity and strategic awareness
  • business acumen, ability to identify new business opportunities
  • forward perspective, willingness to embrace change and innovation
  • an inquiring and inquisitive mind – with an ability to assimilate, assess and analyse information, especially financial information
  • co-operation and teamworking
  • facilitation skills
  • the ability to take the wider, strategic view
  • political astuteness and ability to play the ‘diplomat’
  • determination, with the tenacity and drive to succeed
  • keenness to gain new knowledge and skills to develop competences further
  • availability to prepare for and attend meetings
  • an ability to identify potential problems and deal with risk
  • and finally, a sense of humour!

NON-EXECUTIVE DIRECTORS AND THE STRUCTURE OF THE BOARD

As well as providing additional skills, expertise and perspective, the appointment of non-executive directors is an effective means of balancing interests in the boardroom. Non-executive directors bring a level of independence and detachment to discussions. The UK Corporate Governance Code 2012 (‘the Code’) recommends that the listed public limited companies within the FTSE 350 should have at least half the board, excluding the chairman, as non-executive directors; companies outside the FTSE 350 should have at least two non-executive independent directors.

The Code further recommends that the Chairman of the board should meet the non-executive directors separately from the other directors on a regular basis, and that they should also meet on an annual basis, without the Chairman, to review and appraise the Chairman’s performance. The nomination committees, responsible for evaluating, vetting and recommending the appointment of candidates for directorship, should also comprise a majority of non-executive directors.

WOMEN ON BOARDS @WOBUK

In March 2014 we celebrated the fact that one in five FTSE100 board members are now women and that only 2 all-male boards remain in this select group of companies (now down to zero). But is 22.8% really such a great achievement when women make up half the population and more than 50% of university graduates? Beyond these headline successes:

  • There are only 5 female Chief Executives in the FTSE 100 and only 5.3% of executive directors in the FTSE 250 are women
  • Only 22.5 % of MP’s and 13.6% of the senior judiciary are women
  • Recent research for the 30% Club shows that a man joining a law firm is 10 times more likely to be promoted to partner than a woman and the comparable figure in the corporate world is four and a half times.

This absence of women from the senior ranks of organisations and politics is rooted in history. Women were only granted the vote in the UK in 1918 and up until 1968, Cambridge University did not award degrees to women. And it is only in the last 50 years that contraception has enabled women to choose the size and timing of their families. So most organisations were designed by men for men; and these cultures are proving difficult to change:

  • One reason is that very few boards have access to good data about where and when they are losing women from the organisation;
  • Another is that unconscious bias and gender stereotypes run deep in all of us and play a significant part in determining who succeeds;
  • And thirdly, there’s the myth of meritocracy. People shy away from setting gender targets because they believe that this undermines merit – but merit is a subjective concept whose rules are defined by the dominant culture.

The third annual report on the progress made on each of the recommendations produced in the 2011 Women on boards report by Lord Davies was published in May 2014. The following findings are of particular relevance to female non-executive directorship:

  • In FTSE 100 companies women accounted for 25.5 per cent of non-executive directorships.
  • In FTSE 250 companies women accounted for 19.6 per cent of non-executive directorships.
  • Most of the improvements in representation come from increases in non-executive director appointments.

A report by the Equality and Human Rights Commission published in July 2014 stated that the European Commission’s proposal for a new directive on improving the gender balance among non-executive directors of companies listed on stock exchanges has been drafted to accord with EU law on equality between men and women. The directive provides that the means to achieve the legally binding objective of ensuring that by 1 January 2020 at least 40 per cent of non-executive board members come from the currently under-represented sex must use ‘pre-established, clear, neutrally formulated and unambiguous criteria in selection processes’. It would be permissible under the directive to give priority based on gender to a candidate from the under-represented gender group where they are judged to be equally qualified in terms of suitability, competence and professional performance. However, the directive includes no other exception from unlawful discrimination.

 

With thanks to my sources of information, especially CIPD.co.ukwomenonboards.co.uk, Warner Goodman (online), IOD.com