Non-executive directors are playing an increasingly important role on company boards, but who are they, what do they do, and how do you become one?
The life of a non-executive director isn’t what it once was. Where previously it may have been acceptable to turn up for an hour at a board meeting, enjoy a hearty lunch and then head back to the golf course, today’s NED is expected to get more closely involved in business performance.
The change has been driven by increased levels of boardroom regulation, such as the 2014 UK Corporate Governance Code’s focus on risk management, and high-profile governance failures, including Co-op Bank and Volkswagen. Investors and other stakeholders are demanding more oversight and control and NEDs are expected to play their part.
“There’s a bigger spotlight on NEDs now,” explains Helen Gale, Head of the Non-Executive Directors Programme at Deloitte. “If a company fails, there are more questions asked of the board than there were 10 years ago. There’s a bigger focus on corporate governance, not just in the public sector but also private businesses that want NEDs to help them develop best practice.”
Peter Mills, a Director at Optimus Group and Chair of the Guernsey NED Forum, adds: “A NED can help a company’s overall performance by using their knowledge of an asset class or experience in, say, marketing products to new countries. They can help steal a march on rivals.”
What is a NED?
So who are NEDs and what do they do? In short, while an executive director helps run a company’s business, a non-executive has no such daily management responsibilities. They are expected to contribute to the development of company strategy; monitor management performance; and ensure financial information is accurate and risk management systems are robust. Succession planning and remuneration strategy can also be on their agenda.
“NEDs are there to point out what executives, who are tied up in day-to-day management, don’t know,” says Mark Dunster, a Partner at Carey Olsen. “This could be employment problems, or issues with a commercial landlord, the regulator or pensions. The trick is to challenge executives and management constructively.”
Under the UK Corporate Governance Code, publicly listed companies should appoint independent NEDs to ensure ‘that no individual or small group of individuals can dominate the board’s decision-taking’, but exact numbers for all UK quoted and unquoted businesses are difficult to pin down.
According to the Non-Executive Directors’ Association, there are an estimated 15,000 NED positions on UK company boards, but this comes with the proviso that some NEDs may hold two or three roles.
And it doesn’t include NEDs on public sector boards and not-for-profits, or trustees on charities. The association also estimates that there is an average of four NEDs on each board of a large business in the UK and Channel Islands. The Guernsey NED Forum has 160 members. Smaller firms and even start-ups are also adding to the numbers as they look to NEDs for direction, expertise and industry contacts as they grow.
“Companies absolutely need NEDs, especially when they have a wide shareholder base,” says Adam Moorshead, Managing Director, Guernsey, at JTC Group. “A NED represents the interests of the shareholder by helping to deliver the best results for the company. They do this objectively, acting independently of the executive directors. NEDs are a key control element of the board.”
They can also help fill in any glaring skills gaps. “In the Channel Islands especially, there’s a focus on NEDs who can play an important role in financial sector areas,” says Moorshead. “A NED with expertise in asset management and distribution can help an investment fund; a surveyor can be important to a real estate fund.”
Gale accepts this need for specialism, but believes the focus must be on a diversity of sector skills. “You need to look at a board as a whole, so a range of NED skills, be they technical, financial or legal, and a range of backgrounds and knowledge is important,” she states.
Soft skills such as marketing, HR, understanding digital technology and the ability to engage with stakeholders are also vital.
Because of this greater focus on board composition, skills and governance, NEDs are giving up much more of their time to the role. “To be a top-drawer NED you have to give this commitment to the board and give the time to fully understand the company’s operations, strategy, products and the requirements of the shareholders, including meeting them face-to-face,” says Moorshead.
Mills adds: “There’s much more time given by NEDs to understanding the regulatory and risk issues a business faces, as well as the strategic direction of the company. It’s no longer a case of turning up for four meetings a year. There are many more informal meetings with executives, discussing strategy, or with auditors.”
A perfect match
So, where can businesses find their ideal NED? They tend to be people with current or previous managerial experience in areas such as sales, marketing, legal or IT. They may hold a full-time job, be retired, be a newbie NED or hold at least one other NED role. An executive recruitment agency is one route, as well as recommendations from local introducers and word of mouth.
Indeed, Gale argues, recruitment methods can often be the cause for ineffective NED input. “A lot of NEDs are appointed through personal contacts and companies tend to pick people from similar backgrounds and specialisms. A more formal method of recruitment needs to be developed, with company bosses taking a step back and properly assessing who and what they need. Carrying out regular reviews of the board and its effectiveness can help you find any gaps you need to fill,” she says.
The Channel Islands, it seems, has a problem with NED diversity. According to Dunster, who is also Chairman of the Guernsey Association of Compliance Officers, the pool of NEDs is far too small. “There’s a small clique of people holding NED roles. There should be a maximum number of directorships, which would allow a wider spread of talent,” he says.
Mills says businesses creating a clearly defined role and job description for their new NED could help. “You need a strong role profile and a strong letter of appointment, setting out exactly what the expectations are,” he explains. “You also need to ensure they have the right personality for the group. Will they work well together? Are they strong at communicating and happy to speak up?”
And it’s not just the business that needs to be careful in its selection. A NED must also do his or her own due diligence.
“NEDs face considerable personal risks in terms of personal liabilities and potential criminal charges,” says Moorshead. “They’re as accountable as the other directors to the regulators and the shareholders if a business goes wrong or gets into trouble. You need to know exactly what you are getting into, including the past history of a business. Without that you can be legally exposed.”
Indeed, according to the Guernsey Financial Services Commission’s 2012 Corporate Governance Code, whilst there are clear operational differences between a NED and an executive director, they have the same legal duties, responsibilities and potential liabilities.
“As a director you can end up in court, you can end up being sued,” says Dunster. “The code fails to recognise the commercial reality that executive directors deal with the everyday running of the business and are expected to have a good knowledge of everything that’s going on.
“A NED has much less involvement but when things go wrong they’re legally targeted in the same way. Obviously, punishment is needed when they have been dishonest, but there’s too much expectation of what a NED can do within a business. Regulators need a change of emphasis when it comes to enforcement.”
Dunster believes the increasing likelihood of the legal risk is another factor prohibiting strong talent from moving into NED roles. “Why put your career and your livelihood on the line? We need to encourage good, intelligent people to come forward and become NEDs,” he states.
NEDs will never be as vital to the success of a business as an executive director or the management team, but they can provide the expertise, advice, probing, wisdom and belief, which can help pave the way.
• Peter Mills, Mark Dunster and Adam Moorshead will all be speaking at BL’s Channel Islands NEDs Forum on 23 March 2017 at the Royal Yacht in St Helier. For information on the schedule and speakers and to book tickets, visit www.cineds.com
Want to be a NED?
“People want to become a NED for a variety of reasons. Many have gained a lot of experience and want to continue working in a business environment. Others may have worked in one type of business to executive level and want to do something different,” says Louis Cooper, Chief Executive of the Non-Executive Directors’ Association. He offers these six tips to land that first NED role:
• Understand the role Research what it means to be a NED. You need to operate at more of a strategic level, challenge executives and provide an independent perspective.
• Small steps Develop boardroom skills by becoming a school governor or taking a trustee role at a charity.
• Set clear objectives Select sectors and areas that are appropriate to your skills. Match your experience with a NED role.
• Tailor your CV Detail how you motivate people, or negotiate with clients or suppliers, communicate with different stakeholders, analyse complex information and make tough decisions.
• Network Think about who can help you and who you can approach. Utilise existing contacts and reactivate ones from the past. Try and find an existing NED to act as a mentor.
• Continuous learning NEDs need to keep on top of legal, regulatory and technical changes, as well as honing their soft skills.