WIRECARD AG How is the role of non executive directors changing?
In 1992, the Cadbury Report was the first major report on Corporate Governance published in the
Ever since then the role of NEDs has evolved from a box-ticking exercise of practicing 'good governance' to a widely accepted professional role, requiring expertise and 'independent judgment to bear on issues of strategy, performance, resources, including key appointments, and standards of conduct (s. 4.11 of the Cadbury Report) to best represent company shareholders and add constructive value to boards.
What is the role of a NED in a modern company?
Principle G of the
It is the role of the NED to support the CEO and board as a whole with their sector expertise as well as offer a different perspective on matters of concern e.g. operations, remuneration, audit, strategy.
However, it is also important for NEDs to bring a strong 'independence of mind' to be able to challenge dominant board members, demanding answers where needed. NEDs are subject to the same codified duties as their executive counterparts under s. 171 - 177 of the Companies Act 2006 (CA 2006), so it is key that NEDs remember to fulfill their duties as an individual as well as encourage the collective board to protect the interests of their stakeholders and shareholders.
Had the NEDs for
For the reasons above, taking on a NED role in the current climate is a big responsibility entailing risk. A NED is subject to personal damage to its reputation that could negatively affect any future opportunities to work with other companies. It is therefore important that, before a NED accepts an appointment, they should have a comprehensive understanding of the company's history, the current structure of the Board, and whether or not the NED deems themselves to have the correct level of skill and experience required to fulfill the role. Likewise, the Board should also determine if the NED is well suited in order to effectively serve the Company.
How much time should a NED devote?
Unless stated within the NED letter of appointment, there is no clear timeframe for the input required from the NED and this will vary between businesses depending on the size, sector, and complexity of the organization.
The Walker Report 2009 recommends that the overall time commitment 'should be greater than has been normal in the past.
For NEDs on the board of an
Is a NED an employee?
There is no statutory definition or legal distinction between a NED and its executive counterparts, but in practice, a NED is a director who is not a full or part-time employee of the company.
On the other hand, similarly to an executive director, a NED may be required to sign a director's service agreement, which will set out their scope of duties, service period, and remuneration, as determined by the company's articles of association, board or remuneration policy to best reflect the NEDs' responsibilities and involvement in accordance with the code.
However, it is important to note that although NEDs may be entitled to claim employment rights (depending on their scope of work) such as protection against unlawful discrimination, unfair dismissal, etc that they are a director of the company and not an employee.
Provision 10 of the code highlights circumstances, which are likely to impair or could appear to impair a NED and its independence. Below are some examples of the circumstances.
If the NED:
- is or has been an employee of the company or group within the last five years;
- has served on the board for more than nine years; and
- has received or receives additional remuneration from the company apart from a director's fee
It is therefore important for companies to consider their NEDs' terms of appointment as well as their re-election period or be prepared to explain why a NED has remained appointed for more than the recommended time.
What are the risks?
As touched on above, NEDs are subject to the same codified duties as their executive counterparts.
In light of this, NEDs are also liable for disqualification under the Company Directors Disqualification Act 1986 (CDDA) should they fail to meet their legal responsibilities or demonstrate 'unfit conduct'. Examples of unfit conduct are; fraudulent behavior, conduct that seeks to deprive creditors of assets, or failure to comply with regulatory requirements.
In cases of fraud or negligence such as
Moreover, if failing to do so, questions would be raised on whether the appointed NED had sufficient expertise or experience to have foreseen the warning signs and prevented the negligence.
For that reason in order to mitigate NED risk, the FRC guidance on board effectiveness recommended for appointed NEDs to be partnered with an executive board member to 'speed up the process of them acquiring an understanding of the main areas of business activity, especially areas involving significant risk.'
As although it is the responsibility of the NED, to contribute objective, independent and unbiased advice to the company board, it is also their legal obligation to the shareholders and stakeholders of the company to record advice provided and question the company, CEO, or its board when advice is ignored and report when fraud or other criminal activities are suspected.
NED v COVID-19
COVID-19 forced a situation where companies had to react and make quick decisions to adapt to the changing environment. If a company did not adapt, then this created a real risk to the future of that company.
Given the unusual circumstances of the new environment, it was therefore increasingly important for NEDs to bring in their wealth of experience and provide support to the CEO on how to navigate the situation.
A company may find itself in a situation where it will have to reach out to investors to raise additional capital to get through the pandemic. In this instance, it would be of high importance for the NED to introduce the company to potential contacts in the market and to provide market and financial advice.
Likewise, the company may be in a situation where it might have to reduce the size of the business to concentrate on the core business lines. NEDs who have dealt with business change in the past would be in an important position to be able to advise and guide the CEO on their previous experiences with managing change.
Now the country is starting to ease the lockdown rules and recommendations, it is prime time for a board to evaluate how they have dealt with a crisis on this level. Companies should look to identify if the board had the correct level of skill and experience to deal with the pandemic and consider if the NEDs provided the advice and support that was required during the period.
How has the role of NED changed?
The role of the NED has evolved significantly since its first publication in the Cadbury Report 1992, going from strength to strength with the emergence of the code in the
With the increasing importance of corporate governance, the impact and challenges of COVID-19, over 2020/2021, it only served to highlight the importance of diversity, variety of experience, perspective and overall balance of members on boards.
A NED now has an increased responsibility to gain significant experience in their chosen field, in order to be able to advise and guide the board through future difficult times.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Mr Ben Harber
No 1
B4 6AA
© Mondaq Ltd, 2021 - Tel. +44 (0)20 8544 8300 - http://www.mondaq.com, source
