Are the roles of non-executive directors going to change forever?
Peter Whitehead, former editor of the FT Non-Executive Directors’ Club, wrote in a Financial Times article titled Non-executive director: a task for which no one is qualified: “The list of attributes required of a non-executive director is so long, precise and contradictory that there cannot be a single board member in the world who fully fits the bill.”
There is no doubt that the role of the non-executive director (NED) has changed significantly, the position today barely resembling what it did even just 15 years ago. Substantial business experience remains a prerequisite, but NEDs are now being subjected to regulatory changes that are increasing personal risk and liability.
The legal duties, responsibilities and accountabilities should not be underestimated by those considering taking on such roles. Even though NEDs don’t generally take up the position for the money, the financial remuneration for an increasingly demanding job remains paltry. They share increasingly onerous legal responsibilities with executive directors and in many cases they are more experienced, yet the increase in fees has been approximately 3 percent/annum in comparison with 21 percent/annum for CEOs of FTSE 100 companies.
Throughout much of the latter part of the 20th century, the corporate focus was on management, not on corporate governance. Marketing, production, finance and management information systems were at the forefront of interest.
Even though studies of organisational structure and behaviour gathered pace, the board of directors seldom appeared on the organisation chart. The Cadbury Report on corporate governance – issued in December 1992 – was to change that. The Report also became the catalyst for the development of similar governance codes in other countries: US Congress passed the Sarbanes-Oxley Act into law in 2002, followed in the UK (2003) by the Higgs Review (effectively an update on the Cadbury Report) on the role and effectiveness of non-executive directors. Higgs was later updated by the Financial Reporting Council in March 2011
Corporate governance has now become the focus for the 21st century. The global financial and economic crisis that began in 2008 and the subsequent recession that followed, have firmly focused all stakeholders’ attention on the contribution of non-executives. Coupled with increasing levels of regulation, are we expecting too much from NEDs?
To answer this question, Tyzack Partners with Advanced Boardroom Excellence surveyed our combined community of chairmen and non-executive directors, asking them to consider this question. The survey also looked at the increasing demands and pressures on non-executive directors to identify whether the conventional understanding of the NED role needed radical rethinking – or, indeed, whether it had become untenable. Either way, could a better system be developed?
In the early stages of our interviews, it became apparent that there was a wide divergence of views about the level of knowledge of the business that NEDs were expected to have. In many cases, this came down to a straight difference between whether the business was in a regulated (primarily financial services) or non-regulated environment.
Those NEDs in heavily regulated sectors were becoming increasingly concerned about the level of regulation, their personal liability, the ‘senior manager’ rule and the impact of the current views on knowledge and responsibility held by the FCA and the PRA.
NEDs in less regulated environments remained much more sanguine about their prospects, although many did comment on a fear of ‘regulation creep’.
What was universally accepted, however, was that we do expect increasing knowledge (both of the company itself and its working as well as the business environment in which it operates) from non-executive directors. They need to be financially astute, have a deep understanding of corporate governance, risk management, business strategy and compliance obligations, possess effective communication skills, coupled with the ability to build good working relationships with the executive management team.
Furthermore, the non-executive oversight role demands that the holder evaluate and synthesise huge amounts of information and then ask questions of executive management that are challenging but not threatening.
Gone are the days when NEDs could turn up for a board meeting, offer the benefit of their seemingly vast experience and then not be seen for another month or so. Depending on the size of the company, they will now probably attend around ten board meetings a year and spend a further two to five days in preparation for each meeting. There is also travel time to take into account. If they are chairing a committee, a great deal of additional hours will be required.
Given that NEDs’ time commitments have increased substantially, their legal responsibilities challenging and their remuneration paltry, could there be a more effective system of overseeing corporate governance?
In the UK, we have a unitary system of board structure. Across much of Europe, there is a two-tier structure that consists of a Supervisory Board and a Management Board. There are advantages and disadvantages with both systems and neither is more effective than the other at overseeing corporate governance.
Perhaps the way forward is not to change the system but to change our approach to recruitment and professional development. One of the most striking findings of our research was a general view that Chairmen, nominations committees and, indeed, our own profession had historically failed to address the overall composition of the board sufficiently seriously.
It is clear that, even with the decline of the “old boys’ network”, there has nevertheless been a lack of imagination and foresight in constructing boards which work well together, think thoughtfully and are able to provide sufficient challenge and support to the executives. From Tyzack’s perspective, that will definitely change.
Regarding professional development, some universities and other organisations (for example the Non-Executive Directors Association and the FT Non-Executive Directors’ Club) are offering CPD courses for NEDs. Their objective is to provide an understanding of the broader context in which boards operate and the responsibilities that come with a board mandate. Additionally, they provide an overview of the knowledge and competencies required in an evolving environment, teaching the essential behavioural skills needed to make an effective contribution to the board.
Probably more than anything else, CPD programmes should contribute substantially to the development of skills that contribute to the creation of an effective board culture and performance. Coupled with a more effective approach to recruitment, it’s quite possible that the demands currently placed on non-executive directors will become less onerous.