Features
Nick Martindale 9 Nov 2018 12:03pm

A look at the NED's changing role

After a number of business failures, the role of the non-executive director is coming under scrutiny. Nick Martindale investigates how the duty and scope of the NED’s role has changed

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Caption: Illustration: Michal Bednarski

The global financial crisis of a decade ago and subsequent high-profile business failures have thrown a spotlight on the role of the non-executive director (NED) in advising and challenging executives and wider business decisions. “When we see corporate governance issues, it often comes down to whether NEDs have truly challenged and gone through in detail the strategy and decisions the company has made,” says Iain Wright, director, corporate and regional engagement, at ICAEW.

“You need that ability to challenge now more than ever.” The role has evolved, believes Matthew White, a senior partner at BDO. “A few years ago NEDs might have been part of a ‘good governance’ box-ticking exercise, but the role has developed and the expectations of NEDs from executives and other stakeholders is far greater,” he says. “NEDs should be supporting the board and CEO by challenging and thinking outside the box.

With CEOs under increasing scrutiny, it is beneficial to have trusted NEDs to advise and be on hand to bounce ideas off.” The job itself is a far greater undertaking these days, says Adrian O’Connor, founding director of the Global Accounting Network, partly as a result of increased regulation and the pace of globalisation. “Competence has now become paramount,” he says. “It’s not just about providing a strategic vantage point from 50,000 feet, it’s also about understanding the real operational detail. Emphasis on certain technical skills such as risk, finance and technology has risen and will continue to be in demand.”

Alongside this, elements of the NED role are coming under scrutiny. One issue is just how much time should be spent on a post, as NEDs seek to gain the necessary understanding of the business to hold it to account without being so involved that they potentially compromise their independence. Gary Dixon, chairman of the notfor-profit organisation the Association of Independent Non-Executive Direc tors, believes the role of NED goes far beyond what is in the job description.

“In the more senior roles, so if you’re a chairman, you’ll have a number of discussions outside the formal board meetings with some of the directors about their performance, their plans and how the board develops,” he says. “You also expand into things like strategy days, where once or twice a year you take people off-site and think about how you can achieve more and how the board team works together. Anyone who thinks they can just rock up to a meeting once a month and spend half a day there is fooling themselves. You’re going to have to
spend as an average two to three days a month just to keep on top of this.”

Suzanne Baxter is former CFO at Mitie Group and currently audit committee chair at WHSmith, as well as a recently appointed government commissioner for policy and human rights. She also highlights the need to attend relevant internal meetings – including the value in meeting divisional finance directors – but warns of the risk of being drawn too far out of the NED role. “In some roles your general expertise can be quite valuable so you do have to be careful that you don’t end up spending so much time there that you have to compromise your independence.”

There is certainly a risk that NEDs can become too embroiled in the day-to-day running of the business, says Mark Freebairn, partner and a member of the board practice at Odgers Berndtson. “The more involved you become, the less independent you look,” he says. “It’s extraordinarily difficult to break that cycle. If you’re a grandparent and you come into the house once a month you get a very superficial overview of what your children are like as parents.

If you’re there every week you become much more informed and you might start trying to give them some advice. But it’s a delicate tightrope, and while it’s easy to say the more time they spend in a business the more likely they are to pick up a problem, equally the more time they spend the less independent they appear.”

The amount of time that is required to conduct a NED post effectively is closely linked to the number of such roles people take on. Dr Keith Arundale, former NED at Berkshire Healthcare NHS Foundation Trust, who now acts in a NED capacity at Henley Business Angels and is a visiting fellow at Henley Business School, suggests around five or six is the maximum anyone can realistically have. “I would like to see the job being done properly, and if that means someone taking on fewer roles then so be it,” he says.

Overboarding is a real risk, says Louis Cooper, CEO of the NonExecutive Directors’ Association. It can create an unhealthy situation where there is a “merry-go-round” of the usual suspects. “NEDs need to be sensible and assess their time commitment, especially where year-ends and corporate reporting requirements converge at the end of December or March,” he says.

“Sensible NEDs now look to build a balance of, say, three corporate roles and two personal interest, which are not-for-profit, charity or public sector roles.” Often people will take on their first NED role while still a full-time executive director. “You can’t really do more than one external while you’re full-time employed,” says Dixon.

“If you’re lucky enough to have retired from your executive roles or perhaps got out early, you can run three or four NED roles at the same time. You can’t get much above that because everyone wants to have their board meetings at the same time of the month and you will also struggle with issues of independence.” There’s also the question of just how accountable NEDs should be for wider company decisions or failings. Andrew Webber, partner at UK law firm TLT, points out that NEDs are subject to the same director duties and obligations as an executive director.

“This reinforces the need for NEDs to fully understand the business and the requirements of the role before appointment and to have the ability to access information regularly, not just through the formal board meetings and presentations,” he says. “This should be documented along with the terms of appointment, scope of the role and objectives with a clear performance appraisal process.”
The recent demise of Carillion has highlighted the practical repercussions of getting it wrong, says Freebairn. “If you look at the board that was sitting around Carillion’s table, that group of people universally have lost every NED job that they had, and that has been quite a sobering moment,” he says. “The anxiety that NEDs feel – that their reputation and portfolio may vanish if the business they’re involved in does something wrong or stupid – is a very interesting and quite valuable development.”

The financial services sector, though, is governed by the Senior Managers Regime and the Senior Insurance Managers Regime, which outline specific responsibilities and under which audit chairs can be held personally accountable. But while some of the principles can be applied to other sectors, Shonaid JemmettPage, current chair of insurance group MS Amlin and until recently non-exec director at GKN, sounds a note of caution. “It’s hard to get people who are qualified enough to sit on the boards of banks and insurance groups but there is also this perceived added responsibility that makes it difficult,” she says.

“You have to be very careful not to make it too onerous, and it’s not particularly well remunerated, so if you don’t get that balance right it could scare people off.” The issue of NED pay is particularly
contentious, says Lucy Baird, senior consultant at Newcomen Partners. “If they are remunerated more, for taking on what are deemed to be more risky endeavours, then it opens the door for all kinds of questions and issues,” she says.

“It could be perceived that by suggesting certain NED roles require more remuneration then it somehow invalidates the previous model. On the other side of the coin, if an individual is going to be liable for the actions of a company they do not work for full-time, it becomes difficult.” Jane Williams, founder of People Innovation, has held a number of executive and non-executive roles. “In the commercial environment many are paid, yet below their commercial salaries,” she says.

“There is a belief that no one undertakes these roles for the pay. It has to be an individual company decision, depending on the time commitment and the quality of contribution needed by the business.” There are signs that the role is evolving. Dixon points to the rules announced last year by the Financial Conduct Authority requiring a minimum number of independent NEDs on asset management boards.

“They need people who are absolutely independent and can’t have worked in an executive capacity or been remunerated by the fund or fund manager for five years, and there’s quite a big drive towards enhanced consumer advocacy,” he says. “Financial services has been at the forefront of this because they tend to have done things wrong earlier than other industries, and been held to account.”

Abe Doctor, a partner at executive search firm TritonExec, points to a trend towards bringing in NEDs with expertise in specific areas, such as cybersecurity, digital transformation or fintech. It is already starting to happen in the US. “We will see a more hands-on approach, and that will lead to NEDs spreading their time across fewer boards and being more accountable,” he predicts.

Alongside this, there’s a move towards more gender and minority-diverse NED appointments in the US, he says. Freebairn, meanwhile, believes the NED role will come under pressure, including a move to restrict the length of time a chairman can serve, in a bid to keep boards fresh. “Boards are starting to think about refreshing any time after six years, rather than six months before the ninth year is up,” he says. “Where organisations have run longer than nine years we have seen some quite strident challenges from shareholders about why that was appropriate. That’s not a bad thing.”

Alternative systems

Different countries have different methods designed to ensure oversight and accountability in corporate governance. Germany, for instance, operates a two-tier board structure, where a supervisory board appoints, supervises and advises the management board, but has no formal authority and cannot make executive decisions. The supervisory board itself is elected by representatives of shareholder and employees, with one-third made up of employee representatives in businesses of more than 500 employees and half in those with more than 2,000. It also determines the level of pay for management board members. Similar systems exist in other European countries, including Austria and the Netherlands.

China also uses a two-tier system, with a board of directors and a board of supervisors, which is responsible for appointing auditors, requiring directors and senior management to rectify acts which are not in the interests of the company, and calling interim meetings with shareholders where appropriate. One-third of the supervisory board must be made up of employee representatives.

The US operates a very similar system to the UK, with a single tier board of directors made up of executives and, predominantly, nonexecutives. The biggest difference with the UK is that in the US it is more common for the CEO to also serve as chairman of the board, although this has come under pressure from investors in recent years.

In a market dominated by family businesses and a strictly hierarchical society, Japan introduced a corporate governance code for the first time in 2015 and implemented a revised version this year, as part of the third element of prime minister Shinzo Abe’s “Abenomics” policies for boosting the economy.

Under this, most listed companies signing up to the code must have at least two outside directors, with appropriate experience. Investors are continuing to push for greater accountability, with more emphasis on board committees, diversity, and greater use of external directors.



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