Many of our members at AFIG, at one stage or another have served either as a Chairman or as a Non-Executive Directors on publicly listed Boards. Our experience as investors and mentors in start-ups and in the due diligence process also gives us some insight on what those roles should be about.
There are a number of Corporate Governance guidelines and look at a number of jurisdictions such as UK, Germany and the Australia to glean insight and guidance for such roles.
In our experience, the composition of an efficient and responsible board should include a balance of executives and non-executives, from a variety of industry sectors which may include psychology, arts, science, education (outside the company’s business), have equal representation of genders, and always be an odd number. The Chief Executive Officer should never be a chairman. On the other hand, non-executives are there not for the business necessarily, but to guide the executives and maintain an independent role on behalf of all the shareholders. We believe a company should have at least two or three independent roles, and much of the committee work (compensation, audit, risk, social responsibility) should be chaired by independents.
Although non-executive directors are not involved in the daily business activities, they are still responsible for the business and have the same obligations, duties and responsibilities as the executives. For this reason, the non-executive directors have to be across all the company’s strategy, decisions and directions.
So, what are the functions of Non-Executive Directors
Non-executive directors are expected to focus on board matters and provide an independent view of the company that is generally removed from the day-to-day running. A non-executive director can therefore bring:
- wide experience;
- specialist knowledge;
- leadership and EQ qualities; and
- valuable contacts
Non-Executive Directors can also assist by providing strategic, innovative and entrepreneurial leadership of the company. They help set the company’s values and standards and ensure that its obligations to its shareholders and others are understood and met.
Non-Executive Directors should be used to provide general counsel and a different perspective on matters of concern. They should also seek their guidance on particular issues before they are raised at board meetings.
Some of the key responsibilities of Non-Executive Directors may revolve around the following:
- Strategic direction
- Monitoring performance
- General governance
A non-executive director will have a different perspective to executives. They may have a clearer or wider view of external factors affecting the company and its business environment. In strategy formation they can provide a creative and informed contribution and to act as a constructive critic in looking at the objectives and plans devised by the chief executive and the executive team.
Non-executive directors should take responsibility for monitoring the performance of executive management, especially with regard to the progress made towards achieving the determined company strategy and objectives. They have a prime role in appointing, and where necessary removing, executive directors and in succession planning.
Non-executive directors are also responsible for determining appropriate levels of remuneration of executive directors. In large companies this is carried out by a remuneration committee, the objective of which is to ensure there is an independent process for setting the remuneration of executive directors.
Non-Executive Directors can help connect the business and board with networks of potentially useful people and organisations. In some cases, non-executive directors may represent the company externally.
Non-Executive Directors should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible, and also ensure that proper risk analysis and mitigation plans are in place.
It is the duty of the whole board to ensure that the company accounts properly to its shareholders by presenting a true and fair reflection of its actions and financial performance and that the necessary internal control systems are put into place and monitored regularly and rigorously. A non-executive director can be responsible for instigating and leading a number of committees which may include an audit committee. Non-executive directors typically sit on the main board and have responsibility on the board sub-committees (e.g. Audit Committee, Risk Committee, Nomination Committee, Remuneration Committee, etc.).
The role of non-executive directors is broad. Non-executive directors are not employed by the company but appointed through a letter of appointment. However, they always act on the interests of stakeholders which include shareholders, employees, pensioners, funds, suppliers etc.
More importantly, they mentor, challenge and question in creative ways to increase performance and ensure standards are adhered to.