A few years ago, I heard a cruel joke:
Q: Why is a non-executive director like a bidet?
A: No one knows what it’s really for but it adds a touch of class.
Maybe that raises a smile; maybe it doesn’t. But it definitely suggests a lack of knowledge and understanding of what being a NED is really about. (And when there are articles like this one from 2018, viewing a non-executive directorship as primarily an ageing exec’s retirement plan and “a valuable extra source of income”, maybe a bit of general ignorance is not so surprising.)
What is a non-executive director?
A NED is a board member at a firm or non-profit that – unlike executive directors – has no responsibilities for the organisation’s day to day management.
That said, the legal duties of a non-executive director are the same as those of their executive colleagues: essentially, board-level governance roles with a fiduciary duty to the organisation, and required to act in its best interests. Under s.172 of the Companies Act 2006, those ‘best interest decisions’ must take into account:
- Long-term consequences,
- The interests of employees,
- Relationships with suppliers and customers,
- Impact on community and environment,
- The organisation’s reputation,
- The need to act fairly.
The NED role
The UK Corporate Governance Code states that at least half the board should be independent non-executive directors. Their role is to hold the board to account; often described as acting as a ‘critical friend’.
How do NEDs ‘hold the board to account’? By questioning and challenging from a more neutral perspective than exec board members. By inputting on topics such as performance, resources, sustainability, diversity, and strategy.
Such interventions usually require a broad degree of knowledge and experience – not necessarily in the same field or sector as the company they’re non-executively directing but it’s common for NEDs to have functioned at board level in previous roles (again, see the above take on NED as retirement package!)
In light of the need for independence and neutrality, the CEO or Chair of the board should not be a NED.
The good thing about NEDs is…
Being a critical neutral friend sounds good but what does that mean in practice?
- Greater objectivity. Given that NEDs do not hold specific C-level roles, and often spend just 15-25 days per year on non-executive duties (i.e. less likely to develop a personal stake in company issues). Also, the lack of any day to day responsibilities naturally encourages a bigger picture mindset.
- Nous. NEDs are a (I hesitate to say ‘cheap’) way to broaden the board’s collective experience and knowledge. Let’s say they require less investment than executive board roles while potentially bringing all the knowledge benefits.
- Network connections. We all know the value of networking in business, especially at senior and board levels. NEDs broaden the board’s collective network of contacts, often beyond the organisation’s industry sector.
- Public relations. The organisation can benefit from the reputation of its NEDs. In fact, some NEDs are appointed on the basis of their track record specifically to leverage their history on the company’s behalf.
For a start, in line with the UK Corporate Governance Code, you can rule out former employees or people with a “material business relationship” with the organisation. Of course, a similar background can be useful, though bear in mind the benefits of a diverse background mentioned above.
The above-cited article notes that 34% of new NEDs in 2018 had never served on a board before, suggesting a wider net being cast than previously. Though to return to the ‘retirement plan’ aspect, in the same year, the average age of those in NED roles exceeded 60-years-old.
The bottom line is that any NED should bring skills, experience, and knowledge that is otherwise missing or under-represented on the board; thus being a tangible asset as well as ‘bringing a touch of class’!
For more on the director role and how boards function, check out our one-day Effective Director workshop; or give us a call on 01582 463465. We’re here to help.