Non-Executive Directors Face a More Demanding and Important Role

The Higgs report on the role and effectiveness of non-executive directors (NXDs) was warmly welcomed by the Government when it was published earlier this year with these key recommendations:

4-consulting director, Laurence Grainger, has taken a look at what this report could mean for companies and particularly independent directors.

‘The report is well-focused and merits the closest of attention by all directors, investors and lenders. The recommendation to separate, permanently, the roles of chairman and chief executive, is to be particularly welcomed.

‘The need to recognise the conflicts of interest, inherent in many director share-incentive schemes, is highlighted, and rightly so, in the wake of recent “share-incentivised” accounting scams.

‘There are now many difficulties facing independent directors. If they are to spend sufficient time to function effectively, they must be well-recompensed but be “not so dependent on the income....as to prejudice independence of judgement”. The anticipated involvement of 15-10 days pa (up to 13% of the normal working year) at perhaps £40-60k pa is certainly necessary - but how many willing participants would have their independence truly unaffected by the loss of such income?

‘The lack of legal differentiation between the potential liabilities of non-executive and full-time executive directors, under the UK unitary board structure may well deter the more financially-able from exposing themselves to the possible vagaries of another blue-chip Equitable Life.

‘And there are other issues to consider. Even if a NXD can fulfil their independent duties, will their other NXD colleagues be able to do so? Can they really hope to control their better-informed full-time colleagues on the executive side of the board?

‘The need to radically alter and extend the pool of non-executive “independent” directors is another welcome recommendation. Higgs raises the possibility of able younger people being seconded by their companies to serve as NXDs on boards of “non-competitors” possibly together with professional advisors, people from the non-commercial sector, women, minority groups and others with international experience. Perhaps this will lead to more salesmen, commercial technocrats, engineers and such on boards, and fewer accountants and lawyers.

‘Higgs at one point makes a (very passing) reference to the NXD “profession”. While standards and support groups will undoubtedly be necessary, we must ensure we don’t create a legion of NXDs who have never made a £milllion themselves or experienced the agonies of sleepless nights over looming cash-flow mountains.

‘Higgs may well be unpopular for, quite properly, demonstrating the need for the owners of the company to be properly and independently represented, by “Independents on the board”. Share option schemes have (Enron, Worldcom etc) too-often split the board-members’ interests from those of their employers, and the professions have not been adept at contributing to early recognition and control.

‘If Higgs presents a confusion of conflicts, objectives and interests, it is because the entire area of Corporate Governance is just such a conundrum. What now must begin is the evolution towards an improved form of Corporate Governance.

‘When the Higgs recommendations are implemented they will alter and redefine the City’s operating practices, and perhaps many who have rightly called “shame” over recent scandals and excesses may also find their own freedoms somewhat curtailed.

‘What must never be forgotten is that business evolves with the characteristics of both “good organisms” and, occasionally, of malignantly-mutating viruses. No system of Corporate Governance will ever be able to forecast, identify and forestall all of the latter!’

Laurence Grainger is a director of 4-consulting, click here to view his profile.