The role of the non-executive director

regulation and compliance, human resources, remuneration policy, organisational theory and change management.

On a personal level, he or she will be an experienced diplomat, negotiator, lateral thinker, communicator, trouble shooter, and will have the drive and energy to ensure successful outcomes.

Pay and benefits negligible. Risks potentially enormous.

Role of a non-executive director

This chapter is intended to bring alive both what is the role of an effective NED and the personal qualities required to be successful in the role. The Higgs Report provided a clear summary of the role of an NED:

Strategy: NEDs should constructively challenge and contribute to the development of strategy.

Performance: NEDs should scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance.

Risk: NEDs should satisfy themselves that financial information is accurate and that financial controls and systems of risk management are robust and defensible.

People: NEDs are responsible for determining appropriate levels of remuneration of executive directors and have a prime role in appointing and, where necessary, removing senior management, and in succession planning.

This summary caused some consternation among company executives, particularly the item on strategy. This is best described by a personal experience. Since the 1980s, I have facilitated numerous board strategy awaydays. During the planning I would always inquire who would be attending. Invariably the conversation went something like this:

MS: So who’ll be attending the strategy awayday?

CEO: Myself, the Finance Director, the HR director, the marketing director and the two divisional directors.

MS: So only executive directors. What about inviting the NEDs to attend? CEO: Why would we want to invite them? We’ve always found that they don’t make much contribution to the strategy debate when there is the

opportunity to do so.

MS: So the executives will go on the strategy awayday, develop the bones of a strategy, come back and the FD will flesh it out. At the next board meeting you’ll present it to the NEDs, almost as a fait accompli.

CEO: That’s a good way of describing it

Higgs concluded that NEDs can bring valuable insights to the strategy development process, but only if they are involved from the beginning. They can make significant contributions through effective challenging of executives as a result of their relative distance from day-to-day operations combined with their

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Murray Steele

external experience. However, to do this effectively they have to be engaged with the business, which means they should have an understanding of:

the company’s operating environment, particularly the major forces which could impact the company’s prospects such as technological change; legal and regulatory developments

the essential dynamics of the industry in which the company operates

competitors – who are the key ones; what is the basis of their competitive position?

customers – which are the key customer segments, how are they changing, what are the forces that shape changing demand?

Without this knowledge and understanding it will be difficult for NEDs to establish their credibility with the executive directors. In addition to developing their own understanding, effective NEDs should be satisfying themselves that the executive directors are keeping their own knowledge up to date.

In many instances, challenging the executives means getting them to distinguish between their prejudices and the facts. There is a temptation, especially where executives have worked together over an extended time, for management to lapse into Acceptable Underperformance. This occurs when members of a management team have roughly the same mindset which manifests itself in the belief that the effort required to improve performance cannot be justified: ‘Where we are is good enough and cannot be improved upon.’ A typical Acceptable Underperformance conversation between an NED and a marketing director might be as follows:

NED: What’s our current customer service rating?

Mkt. Dir.: The last survey we did showed that we had a 90% level of satisfaction.

NED: Are you happy with that? Where does it place us relative to our customers?

Mkt. Dir.: It’s OK. We’re in the second tier, probably second percentile. NED: What would it cost to improve our satisfaction level to say 95% and

what would the return be?

Mkt. Dir.: It wouldn’t be worth the effort. Everybody knows that. NED: Have you got any empirical analysis to support your views? Mkt. Dir.: Well no, but the board are all agreed . . .

This situation could be acceptable if the executive directors had hard evidence to support their views, but, as so often happens, all they have is the strength of their convictions based on their experience. The basis of effective challenging is therefore to ask good questions.

Importance of the role of non-executive director

Figure 3.1 explains the importance of the role of NED. Corporate boards are responsible for the governance of their companies, and executive boards (or

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The role of the non-executive director

Source: Hermes

Figure 3.1 The importance of the role of non-executive director

committees) are responsible for the management and performance of the company. Both have a significant responsibility for generating shareholder value. Why is shareholder value so important in today’s economic climate? Companies have workforces who will ultimately be pension beneficiaries. The pension fund trustees invariably delegate the management of the fund to professional investment managers, and what do they invest in? Companies, either listed on stock markets or privately held through private equity or venture capital funds/companies. Unfortunately this is where the cycle breaks down, as few investment managers are interested in engaging effectively with the companies in which they have invested to improve their performance, thus driving up shareholder value for the benefit of all of us as current and future pensioners. Sadly, they are mere ‘renters’ of shares, selling them at the slightest hint of trouble and thus passing the problem on to another investment manager. This approach was summed up nicely by a senior investment manager who said: ‘No one ever washes a rental car.’

Consequently the role of the NED is both vital and complex. Institutional investors expect NEDs to bridge the gap between themselves and the companies in which they invest. They expect them to be both the promoters and the custodians of shareholder value through the application of effective corporate governance, whilst at the same time fulfilling their duties as directors of the company. The law does not recognise any distinction between executive and non-executive directors. NEDs can suffer from schizophrenia in that they should be encouraging the development of the company, ‘the upside’, while at

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