Murray Steele

the same time monitoring risk to the company, ‘the downside’. Working with the executive directors on these areas should lead to greater success for the company and hence enhanced shareholder value which, as Figure 3.1 shows, flows through into better pensions for everyone.

In the non-corporate sector there has been a growth in demand for independent NEDs in areas such as Government departments, the NHS, education and charities. Since its election in 1997, the Labour Government has promoted the usefulness of independent NEDs as members of top management teams both to strengthen their capabilities and to undertake a monitoring role on behalf of stakeholders.

Personal skills and attributes of an effective non-executive director

The personal skills of an effective NED fall into two categories – technical and interpersonal.

Technical

Effective NEDs should have a sound understanding of:

1.Strategy and development, including an understanding of:

the company’s external environment

the dynamics of the industry in which the company operates

the markets in which the company operates

the requirements of its customers

the nature of its competitors and their strategies

risk management

2.Legal, regulatory and corporate governance, including an understanding of:

the principles of strategic change

relevant developments in the Companies Act and securities laws

developments in regulation, such as health and safety; competition and employment

the trends in corporate governance

3.Finance, including an understanding of:

the principal components of the Annual Report and Accounts – profit and loss account, balance sheet and cash flow statements

operating financial reports, the financial information discussed at board meetings

the economic model of the company

raising capital, appropriate capital structures and cost of capital

evaluating investment decisions

the drivers of shareholder value

shareholder relationships.

54

The role of the non-executive director

That a lack of understanding in these areas can be dangerous was brought home to me in a seminar I organised for members of audit committees of listed companies. During a discussion, I commented that all directors, regardless of whether they were executives or non-executives, shared the same responsibilities and liabilities in the eyes of the law. To my astonishment, a director of a large company, supported by four of his colleagues, told me in no uncertain terms that I was talking utter rubbish. This small example highlights a level of ignorance which could damage the individual director’s credibility.

Interpersonal

The technical skills outlined above will only be of value to a board if the individual NED also has the interpersonal skills to utilise them appropriately. This is summed up perfectly in the Higgs Report: ‘The key to NED effectiveness lies as much in behaviours and relationships as in structure and processes.’

It is important to establish a spirit of partnership and mutual respect on the board. This can only be done if NEDs make effective contributions which enable them to gain the trust of the executives. This can be difficult given the fundamental tension that exists in the split role of an NED: both to support executives in their leadership of the business and to monitor and supervise their conduct.

Essential personal attributes for effective NEDs are integrity and high ethical standards, which are a prerequisite for all directors. Sound judgement and an inquiring mind are also essential. So situations in which NEDs can find themselves rarely conform to any predictable pattern. Relying on judgement, developed from experience, is often the only route available to NEDs, who should have the ability and willingness to challenge and probe the executive directors. This requires them to have sufficient strength of character to seek full and satisfactory answers. A critical area of judgement for an NED is how far to push questioning if they are not receiving acceptable answers. Not pushing far enough may mean they are not fulfilling their obligations as a director; pushing too far could mean destabilising relationships and upsetting the collegiality of the board. The basis for NEDs challenging the executives should be their relative distance from day-to-day matters combined with their external experience.

Summarising the personal skills and attributes of effective NEDs, they should:

question intelligently

debate constructively

challenge rigorously

decide dispassionately.

All are equally important.

55