What’s the point of non-executive directors?
The idea that non-executive directors (NEDs) are a useful addition to the way that companies are managed or governed has grown from small beginnings to become a massive industry in its own right. There are dozens of websites and programmes to help aspiring NEDs to find roles; and to provide advice and training programmes for them. The FT even offers a Non-Executive Director Diploma which is described as
‘a formally accredited, post-graduate level qualification for current and aspiring non-executive directors.’
It costs £7,000 and has additional benefits like helping to write a credible CV, training in being interviewed to be a NED and of course ‘networking’ Some delicious bullshit from an organisation that offers training for NEDs (anonymous but name on application for aspiring NEDs)
“In essence, corporate governance is not a mere regulatory necessity; it is the bedrock upon which organisational excellence is built. For senior leaders and NEDs, understanding and championing the principles of corporate governance is not just a requirement; it is an investment in the sustainable success of the organisations you lead. As you continue your leadership journey, let corporate governance be your guiding star, illuminating the path to excellence, integrity, and enduring success.” Crumbs!
Being an NED is now a profession in its own right. But are they really necessary? If it hadn’t been for a series of scandals in the late 1980s, Cadbury followed by Higgs whose aims were to investigate the British corporate governance system and to suggest improvements to restore investor confidence in the system would not have been set up. Actually, the role of a non-executive is not a specifically statutory one. The Companies Act 2006 does not define or even use the word non-executive directors nor differentiate them from their executive counterparts. They are just directors with all the duties that all directors, executive or non-executive, statutorily have. Do these need to be replicated?
Why do companies need NEDs?
Mainly because they are under pressure (not a legal obligation) to do so unless they can produce exceptionally good reasons not to.
According to the new (2024) Corporate Governance Code Principle G
The board should include an appropriate combination of executive and non-executive (and, in particular, independent non-executive) directors, such that no one individual or small group of individuals dominates the board’s decision making. There should be a clear division of responsibilities between the leadership of the board and the executive leadership of the company’s business.
So, what is expected of you? In the terms of the new (2024) Corporate Governance Code Principle H
Non-executive directors should have sufficient time to meet their board responsibilities. They should provide constructive challenge, strategic guidance, offer specialist advice and hold management to account.
So how to get on to the NED bandwagon?
The good news is that lots of NEDs are going to be needed. In the terms of the new (2024) Corporate Governance Code Provision 11
At least half the board, excluding the chair, should be non-executive directors whom the board considers to be independent. (Yippee!)
So, how would you like to be a NED? (perhaps you might prefer not to be called that in Scotland where it stands for ‘non-educated delinquent’). You could earn between £40,000 and £75,000 for between 20 and 30 days work a year. And you might be able to fit several of these directorships into your year. Say three? Given that the average age of NEDs is 60-ish, seventy-five days a year will leave you plenty of time for golf or sailing or other pastimes, since you are probably already retired and well provided for. How does £150,000 a year sound? Or more if you can fit in more NEDships into your busy life.
Unfortunately, a large majority of NED appointments (65%+) are through a personal connection. So, the money spent your diploma is probably wasted. That figures. What executive wants anyone they don’t know on their board particularly with some kind of diploma that might give them dangerous ideas?
The ideal NED is therefore someone tried and tested on other company boards or from the public sector for being compliant and not asking awkward questions or rocking the boat. No ‘constructive challenge’ or ‘holding management to account’ here please. If we must have them let us keep them busy with things like
‘geopolitical uncertainty, environmental, social and governance (ESG) reporting, the net zero imperative, growing stakeholder demands, corporate purpose and employee engagement’
and stuff like that as one of the many NED training providers defines the challenges that NEDs can help meet. That’ll keep your NEDs so busy that they won’t have time to enquire into technical matters like an outdated business model, declining profitability, unsustainable debt, incompetent audits, false accounting, failing IT systems or excessive risk taking. All of which are the principal reasons that companies go broke with dire consequences for shareholders, employees, and the local community.
Have NEDs actually prevented corporate scandals or failures?
Despite the lofty ambitions of various codes, innumerable academic articles and studies corporate scandals and failures continue undiminished. While the awful Post Office disaster is the latest and perhaps the most egregious example of the utter failure of NEDs, there has been a string of high-profile examples. Non-executive directors haven’t prevented many corporate collapses and won’t necessarily be able to prevent them occurring in the future. The collapses have been attributed to failures by the board to instil an appropriate culture throughout the organisation and, in some cases, alleged failures by the board/ NEDs to supervise effectively, sometimes due to the NEDs’ lack of expertise.
Carillion – a badly run major construction company that left important projects incomplete and many small sub-contractors in trouble. It used a complex system of reverse factoring to conceal cash flow problems that eventually brought it down. Carillion’s board was blamed as both ‘responsible and culpable for the company’s failure.’ Out of Carillion’s seven-member board, five were NEDs.
RBS – a banking collapse that cost the British taxpayer billions. The PRA/FCA report suggested that ‘as a group, the non-executive directors (NEDs) on the board lacked sufficient experience and knowledge of banking,’ despite being drawn from Scotland’s great and good. For example, only two of the NEDs on the board during the review period held direct banking experience. The report argues that this lack of expertise hindered the ability of the NEDs to hold executive management to account.
Tesco – Fined for market abuse for overstating profits by £263 million. Tesco’s 10-member board included no fewer than nine NEDs, none of whom had any previous retail executive experience at the time the scandal first hit.
BHS – part of Taveta Group went into administration, leaving 11,000 jobs at risk and 20,000 pensioners facing substantial cuts to their entitlements. Taveta’s weak corporate governance, including failure to address the pension deficit and to challenge effectively a proposal to buy BHS by Dominic Chappell, had contributed to its ultimate demise. Auditors had signed off a statement of it as a going concern just weeks before.
HBOS – The PRA/FCA report attributed ultimate responsibility for HBOS’s failure to its board. In particular, the report argues that the board failed to instil an appropriate culture at HBOS. For instance, there was little evidence of the board debating the firm’s reliance on wholesale funding or the risks associated with high levels of asset growth.
Debenhams – It was the end of a slow death resulting from persistent failure to adapt to a changing business environment. A report stated that successive owners stripped money out when it needed the opposite – investment in product, its people, and stores. The majority of the board consisted of NEDs.
How can NEDs prove their worth?
One report into a major corporate collapse commented that
‘the company’s non-executives, who were meant to challenge boardroom strategy, were ‘unable to provide any remotely convincing evidence of their effective impact.’
There must be some specific cases where NEDs have been vitally important and when NED have actually fulfilled their duty to ensure good corporate governance? Of course, it has always hard to prove that what you did prevented misbehaviour or disaster. It’s rather akin to that unanswerable question ‘Have you stopped beating your wife?’ Nonetheless it would be fascinating go hear from one or more NEDs a narrative of how they persuaded executive directors to do or not to do something that might have led to failure of ‘corporate governance.’
It would also be interesting to hear of examples of NEDs who publicly resigned as a result of their concerns that were voiced but not listened to about the way the company was being managed. Or perhaps even an NED that became a whistleblower.
AI to the rescue!
Thinking that AI might provide me with answers to those vexed questions I asked:
Give me specific corporate examples of non-executive directors being very effective!
and got the answers:
I’m sorry, but I couldn’t find specific examples of non-executive directors (NEDs) being very effective in corporations. However, I can share some general information about the role and importance of NEDs. (blah! blah!) Co-pilot
One specific example of non-executive directors being very effective is in the case of Apple Inc. Apple has a history of having strong and influential non-executive directors who have played a crucial role in shaping the company’s strategic direction and governance. One notable example is Arthur D. Levinson. ChatGPT
How can NEDS be held to account?
The Higgs report suggests that a non-executive director can only be described as independent when
‘there are no relationships or circumstances which could affect or appear to affect the director’s judgement’ Money?
Moral behaviour always comes with a price either reputational or financial. Good heavens! What might those other boards which made up your portfolio of directorships think? And what about that new NED appointment that was under discussion? And what about losing that handsome remuneration?
There is not a lot that can be done about corporate failures that are a result of failures that are the result of the ignorance, incompetence, or negligence of directors (either executive or non-executive (remember that the Companies Act does not differentiate their duties and responsibilities). Corporate manslaughter applies only to the company itself. Gross negligence manslaughter is an offence that has cause the death of a person to whom the person accused owes a duty of care. Possible, I guess, give the deaths and suicides of sub-postmasters; but unlikely to stick. The only offences for which directors are usually punished are if there is evidence of offences such as breach of duty, fraudulent misrepresentation, fraudulent trading, bribery, falsifying documents, false accounting, health & safety breaches, negligence, tax evasion and data protection breaches. Surely the directors and NEDs of the Post Office could be shown to have committed at least one if not more of these. Cn you be so naive that you really think so?
