Non-Executive Directors

By Jamie Ferguson, Vice President US and Latin America, Maxwell Drummond

A recent survey found that the average time non-executive directors (NEDs) spend on the job has risen to an average of 24 days a year as increasing levels of regulation and risk have placed greater demands on the NED community. Beyond the boardroom, the important role of the NED is largely invisible and poorly understood. Yet when corporate strategies fail or governance lapses, all eyes focus on the contribution, or lack of, of the NEDs. As the role and responsibilities of NEDs widens, the decision to embark on a fresh directorship must be made with a thorough understanding of the challenges and changes facing a NED in today's boardroom.

In 2003, in light of recent public boardroom scandal such as those at Enron and WorldCom, the British Government commissioned the Higgs Review to examine the role and effectiveness of NEDs. Chairman Derek Higgs strongly backed the existing non-prescriptive approach to corporate governance, also known as 'comply or explain' originating from the UK Corporate Governance Code 2010. He also advocated more provisions with stringent criteria for the board composition and evaluation of independent directors. He wanted to remove some of the discretion that the Code allowed. In the US, the Sarbanes–Oxley Act of 2002, (also known as SOX), set new and enhanced standards for all U.S. public company boards, management and public accounting firms. As a result of SOX, top management were forced to individually certify the accuracy of financial information. In addition, penalties for fraudulent financial activity are much more severe. Also, SOX increased the independence of the outside auditors who review the accuracy of corporate financial statements, and increased the oversight role of boards of directors.

Whilst the role of a NED varies greatly depending on the business and sector in which it operates, generally there are four areas where NEDs should focus their attention.

• Strategy: Non-executive directors should constructively challenge and contribute to the development of strategy.

• Performance: Non-executive directors should scrutinise the performance of management in meeting agreed goals and objectives and monitoring and where necessary removing, senior management and in succession planning.

• Risk: Non-executive directors should satisfy themselves that financial information is accurate and that financial controls and systems of risk management are robust and defensible.

• People: Non-executive directors are responsible for determining appropriate levels of remuneration of executive directors and have a prime role in appointing and where necessary removing, senior management and in succession planning.

One of the most important attributes of a NED is their ability to offer objective and critical insight into a business. This objectiveness allows them to firstly, protect shareholders' interests and secondly, to ensure that the business is being operated responsibly, both corporately and socially by ensuring that internal controls are in place to mitigate risks. Although only listed companies are required to have NEDs, many private companies are choosing to as they recognise the value of having independent counsel challenging directors. It is an easy option to be on a board that does not challenge itself or implement key performance indicators for the next six months or year. It is a much tougher, but ultimately more rewarding role to develop relevant strategy, tackle challenges and make a tangible impact on a business and its future. The NEDs ability to challenge directors will create richness in debate and thought process in strategy, thus creating better solutions.

The fundamental difference between boards in the US and UK is the separation of a chairman and chief executive role (CEO). As a result of the UK Corporate Governance Code, this has been separated but in the US, it is still common for one person to hold both roles. The benefit of splitting the roles is clear. Who holds the CEO accountable if he or she is also the chairman? Who provides the independent challenge? A rich, independent board, including the chairman, provides for a much better governed and more sustainable business in the long run whilst also protecting stakeholders.

About the author

Jamie Ferguson joined Maxwell Drummond's Aberdeen team in 2006 to focus on executive search in the energy sector. In 2007 he was promoted to General Manager in Aberdeen and in 2009 Jamie relocated to Houston as Vice President of Maxwell Drummond's USA and Latin America business.

Maxwell Drummond International is a world leading retained search consultancy offering professional search services to clients in all sectors of the energy and natural resources industries.