Business Management

The roles of the non-executive directors of a listed company

The board of directors of a listed public company will usually consist of executive directors, who hold specific responsibilities within the business (for example personnel director), and non-executive directors, who do not have specific responsibilities. Non-executive directors are usually employed on a part-time basis and are not involved in day-to-day operational matters. Nevertheless, executive and non-executive directors have the same legal obligations towards the shareholders of the company.

Non-executive directors have a valuable role to pay in the development of strategy and in monitoring the actions of the executive directors. In carrying out this role, non-executive directors are expected to challenge the decisions of the executive directors and to highlight bad practice or poor performance.

Non-executive directors should add value to the company in some way and their ability to do so may depend, to a large extent, on the personal qualities that they possess. They should normally bring to the company broad experience of the commercial world as well as considerable expertise in their particular field. These qualities may help to add value through identifying new opportunities, developing new performance measures or improving existing control system. In addition, non-executive directors may be a valuable source of new contacts for the company. Non-executive directors can often provide objective and independent advice to the Board of Directors. This should be of particular value during periods of change or crisis, when a detached view can help the executive directors, maintain perspective.

There are a number of potential problems connected with the role of the non-executive director. It has been suggested that there is a conflict between the strategic role that non-executives are required to play and their monitoring role-even though both are important in representing share holders’ interests. The development of strategic plans involves teamwork and co-operation between the executive and non-executive directors whereas the monitoring role requires that non-executive directors remain independent from the executive directors. Although non-executive directors should be able to fulfill the two roles, it may require a delicate balance to be struck.

There is a risk that the relationship between the executive and non-executive directors will compromise the monitoring role that non-executive directors must carry out. Executive directors normally have an influence over the selection of non-executive directors. In addition, cross-holdings of non-executive directorships and social links between non-executive and executive directors may create close bond between the executive and non-executive directors. Thus, non-executive directors may not always provide the independent voice that shareholders wish.

The attitude and behavior of an executive director towards the non-executive directors can be crucial in ensuring that non-executive directors are able to carry out their roles effectively. There is a risk that the executive will seek to undermine the monitoring role of non-executive directors by failing to provide relevant information. In addition, the attitude and behavior of non-executives towards their role can be a problem. Some non-executive directors have been accused of accepting too many non-executive director appointments. As a result, they have insufficient time to devote to the increasingly complex problems of directing and controlling a company.

The potential problems identified may be dealt with in various ways. To help ensure the independence of non-executive directors, shareholders may be given a bigger role in the recruitment and selection process. Regular meetings between non- executive directors and shareholders may help to strengthen links between the non-executive directors and the shareholders and help to create greater independence from the executive directors. Where non-executive directors challenge the executive directors on particular matters, there should be safeguards to ensure that they will not be penalized for so doing.

Non-executive directors must have access to all relevant information. This means representation on key committees of the board such as the audit committee, which is designed to improve the quality and integrity of financial reporting and controls, and the remuneration committee, which recommends compensation for executive directors. In addition, non-executive directors must have the expertise to ensure that relevant information is identified and fully understood and the strength of character to ensure that executive directors are properly challenged. Given the increasing complexity of modern businesses, it may be necessary for non-executives to participate in training courses in order to fulfill their role effectively.

The increasing burdens placed on non-executive directors means that a significant amount of time must be spent in dealing with company affairs. Non-executives should be properly rewarded for the time spent in order to encourage a diligent attitude. In some, restriction on the number of non-executive appointments that an individual can hold may be desirable.