Question

Some commentators have questioned the contribution which non-executive directors (NED's) may make to the work of the board. Discuss the criticisms which have been made concerning the effectiveness of NED's (20points)

Answer 1

The key responsibilities which make effectiveness of NED's-:

Chairmen and chief executives should use their non- executive directors 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. Indeed, some of the main specialist roles of a non-executive director will be carried out in a board sub-committee, especially in listed companies. The key responsibilities of non- executive directors can be said to include the following:

Strategic direction

As an ‘outsider,’ the non-executive director may have a clearer or wider view of external factors affecting the company and its business environment than the executive directors. 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 chief executive and his or her executive team;

Monitoring performance

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 are also responsible for determining appropriate levels of remuneration of executive directors, and have a prime role in appointing, and where necessary removing, executive directors and in succession planning;

Communication

The company’s and board’s effectiveness can benefit from outside contacts and opinions. An important function for non-executive directors, therefore, can be to help connect the business and board with networks of potentially useful people and organisations. In some cases, the non-executive director will be called upon to represent the company externally;

Risk

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.

The functions of NEDs

Non-executive directors are expected to focus on board matters and not stray into ‘executive direction,’ thus providing an independent view of the company that is removed from day-to-day running. Non-executive directors, then, are appointed to bring to the board:

• independence;
  • impartiality;
  • wide experience;
  • special knowledge
• personal qualities.