2. 2
B U S I N E S S & F I N A N C E
3
All directors should be capable of seeing company and business issues in a broad
perspective. However non-executive directors are generally chosen because they have
a breadth of experience, are of an appropriate calibre and have particular personal
qualities. Additionally they may have specialist knowledge that will help provide the
board with useful insights or, perhaps, key contacts in related industries or in the City.
Of genuine importance is their independence from the management of the company
and any of its “interested parties”. This means they can bring a degree of objectivity to
the board’s deliberations and play a valuable role in monitoring management
decisions. This cannot be the case where the non-executives represent, for example,
the majority shareholder or the controlling shareholder. This in itself produces various
legal difficulties under the new Companies Act 2006 when discussing how those
directors should act, or not act, in contributing to the “success of the company”.
Non-executive directors may have an inherent conflict if it is the intention of the
majority or sole shareholder that they represent their or its interests. In such a case
they may be unable to carry out one of their primary functions – to promote the
success of the subsidiary company. If this in any way conflicts with their duties to their
own parent company then they would have to consider their position. This is often
going to be a practical problem, particularly because of the new requirements of the
Companies Act 2006.
For quoted companies, the various reports that have been produced over the years
stress that the board should include enough independent non-executive directors for
their views to carry significant weight in the deliberations of the board. We note here
that “independent directors”, which is of course not the same as “non-executive
directors”, are essentially persons who “apart from directors fees and shareholdings are
independent of the management and free from any business or other relationships
which could interfere materially with the exercise of their independent judgment”.
In the UK, the management function is delegated to the executive directors. Certain,
limited matters, would generally require board approval. These differ for each
company.
3. The functions of non-executive directors
Non-executive directors are expected to focus on board matters and not “stray into
executive directions”. In so doing they should provide an independent view of the
company, distinct from its day-to-day operations. Non-executive directors therefore are
appointed to bring to the board:
(a) independence
(b) impartiality
(c) wide experience
(d) specialist knowledge
(e) personal qualities.
4. Key responsibilities of non-executive directors
Non-executive directors should be used to provide general guidance and a different
perspective on matters of concern. The board (or the chairman) will often seek their
guidance on particular issues before they are raised at formal board meetings.
Indeed in listed companies some of the main specialist roles of non-executive
directors will be carried out in board sub-committees, in particular, audit or
remuneration committees.
5. Strategic direction
As an “outsider”, the non-executive director may have a more objective view of
external factors affecting the company in its business environment than the
executives. The normal role of the non-executive director in strategy formation is
therefore to provide a creative and informed contribution and to act as a constructive
critic in looking at the objectives and plans devised by the management team.
6. Monitoring
Non-executive directors should take responsibility for monitoring the performance of
executive management especially with regard to the progress being made towards
achieving agreed company strategy and objectives. They may also act as a sounding
board for management. Rather like their audit function (see below) it is up to the
non-executives to probe continually and ask questions of management, especially
where they have particular concerns. They must continually act as a sounding board
for management, and as we have said, probe and ask questions where they have any
doubts or concerns. To fulfill this function effectively they must be fully briefed by
executives and have adequate sight of any information or documents which they
request. It is not appropriate for management to use delaying or other tactics such
that the non-executives only receive, for example, board papers at the last minute
giving them no time to consider these in detail. This may of course lead to conflict
between executives and non-executives but this is something which has to be dealt
with in any company structure. Board and other briefing papers should be full and
complete – if they are not, the non-executives should query the point accordingly.
7. Audit
It is the duty of the board as a whole 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 controls and systems are put into place
and monitored regularly and rigorously. A non-executive director has an important
part to place in fulfilling this responsibility, whether or not a formal audit committee
has been constituted. As previously mentioned, it is essential the non-executive
directors ask appropriate questions when they have any doubts or concerns as to
actions or financial positions or structures being taken or organised by the
management. They must satisfy themselves that the financial information produced is
3. 2
B U S I N E S S & F I N A N C E
3
All directors should be capable of seeing company and business issues in a broad
perspective. However non-executive directors are generally chosen because they have
a breadth of experience, are of an appropriate calibre and have particular personal
qualities. Additionally they may have specialist knowledge that will help provide the
board with useful insights or, perhaps, key contacts in related industries or in the City.
Of genuine importance is their independence from the management of the company
and any of its “interested parties”. This means they can bring a degree of objectivity to
the board’s deliberations and play a valuable role in monitoring management
decisions. This cannot be the case where the non-executives represent, for example,
the majority shareholder or the controlling shareholder. This in itself produces various
legal difficulties under the new Companies Act 2006 when discussing how those
directors should act, or not act, in contributing to the “success of the company”.
Non-executive directors may have an inherent conflict if it is the intention of the
majority or sole shareholder that they represent their or its interests. In such a case
they may be unable to carry out one of their primary functions – to promote the
success of the subsidiary company. If this in any way conflicts with their duties to their
own parent company then they would have to consider their position. This is often
going to be a practical problem, particularly because of the new requirements of the
Companies Act 2006.
For quoted companies, the various reports that have been produced over the years
stress that the board should include enough independent non-executive directors for
their views to carry significant weight in the deliberations of the board. We note here
that “independent directors”, which is of course not the same as “non-executive
directors”, are essentially persons who “apart from directors fees and shareholdings are
independent of the management and free from any business or other relationships
which could interfere materially with the exercise of their independent judgment”.
In the UK, the management function is delegated to the executive directors. Certain,
limited matters, would generally require board approval. These differ for each
company.
3. The functions of non-executive directors
Non-executive directors are expected to focus on board matters and not “stray into
executive directions”. In so doing they should provide an independent view of the
company, distinct from its day-to-day operations. Non-executive directors therefore are
appointed to bring to the board:
(a) independence
(b) impartiality
(c) wide experience
(d) specialist knowledge
(e) personal qualities.
4. Key responsibilities of non-executive directors
Non-executive directors should be used to provide general guidance and a different
perspective on matters of concern. The board (or the chairman) will often seek their
guidance on particular issues before they are raised at formal board meetings.
Indeed in listed companies some of the main specialist roles of non-executive
directors will be carried out in board sub-committees, in particular, audit or
remuneration committees.
5. Strategic direction
As an “outsider”, the non-executive director may have a more objective view of
external factors affecting the company in its business environment than the
executives. The normal role of the non-executive director in strategy formation is
therefore to provide a creative and informed contribution and to act as a constructive
critic in looking at the objectives and plans devised by the management team.
6. Monitoring
Non-executive directors should take responsibility for monitoring the performance of
executive management especially with regard to the progress being made towards
achieving agreed company strategy and objectives. They may also act as a sounding
board for management. Rather like their audit function (see below) it is up to the
non-executives to probe continually and ask questions of management, especially
where they have particular concerns. They must continually act as a sounding board
for management, and as we have said, probe and ask questions where they have any
doubts or concerns. To fulfill this function effectively they must be fully briefed by
executives and have adequate sight of any information or documents which they
request. It is not appropriate for management to use delaying or other tactics such
that the non-executives only receive, for example, board papers at the last minute
giving them no time to consider these in detail. This may of course lead to conflict
between executives and non-executives but this is something which has to be dealt
with in any company structure. Board and other briefing papers should be full and
complete – if they are not, the non-executives should query the point accordingly.
7. Audit
It is the duty of the board as a whole 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 controls and systems are put into place
and monitored regularly and rigorously. A non-executive director has an important
part to place in fulfilling this responsibility, whether or not a formal audit committee
has been constituted. As previously mentioned, it is essential the non-executive
directors ask appropriate questions when they have any doubts or concerns as to
actions or financial positions or structures being taken or organised by the
management. They must satisfy themselves that the financial information produced is
