Murray Steele

Importance of independence

A non-executive director, according to the Higgs Report, is considered independent when the board determines that the director is independent in character and judgement and there are no relationships or circumstances which could affect, or appear to affect, the director’s judgement.

Such adverse relationships or circumstances would include where the director:

is a former employee of the company or group unless employment (or any other material connection) has ended five years earlier

has, or has had within the last three years, a material business relationship with the company either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the company

has received or receives additional remuneration from the company apart from a director’s fee, participates in the company’s share option or a performance-related pay scheme, or is a member of the company’s pension scheme

has close family ties with any of the company’s advisers, directors or senior employees

holds cross-directorships or has significant links with other directors through involvement in other companies or bodies

represents a significant shareholder

has served on the board for more than nine years.

Investors view independence as a safeguard against conflicts of interest that might allow executives to ‘capture’ NEDs and restrain them from challenging executives because they share their mindsets.

Non-executive director dilemmas

There are three fundamental dilemmas which NEDs face:

Engaged and non-executive

NEDs’ effectiveness stems from their degree of engagement with the company. Today it is no longer sufficient just to turn up at board meetings. Research has shown that executives on boards attach great weight to NEDs having previous executive experience but this can lead to problems.

An example was a FTSE 350 company with a young Chief Executive of whom the board had high hopes that he would lead the company into the FTSE 100. The Chairman, through search consultants, managed to persuade a Chief Executive of a FTSE 100, upon his retirement, to become an NED of the company. This would be his first NED position and the Chairman and the rest of the board hoped that he would mentor their young Chief Executive. At his first board meeting, the first item on the agenda was a decision that the board

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