The role and selection of non-executive directors
In this article, Clive Stevens, Chairman, highlights the five qualities that companies should be looking for when appointing a non-executive director.
The appointment of non-executive directors (NED) to company Boards is now part and parcel of developing corporate governance processes in line with best practice.
As far as listed companies are concerned, the role of NEDs is governed by the UK Corporate Governance Code. The main principle enshrined within the Code is to ensure NEDs constructively challenge the executive and help develop company strategy as well as scrutinise the performance of management in achieving key goals. As such NEDs are expected to be independent and provide objectivity to Board deliberations. They act as part of a unitary Board in the best interests of the company and the shareholders as a whole (especially minority shareholders). In this capacity they have a vital role to play on audit or remunerations committees.
To act effectively, there are a number of qualities that companies should be looking for in any NED and, in my view, there are five essential attributes when considering such an appointment:
Vision and strategy – while the executives are responsible for business strategy, NEDs need to be able to challenge plans supportively by asking searching questions. They should be clear on key performance goals and ask to be regularly updated to make sure they are met.
Governance – it is key to have people who understand the law and regulation under which the business operates. They should be demanding clarity over the roles and responsibilities of the Board and have experience of what good governance looks like in today’s business environment.
Independence – NEDs must have an independence of mind. Being able to take an objective view, they must be able to maintain integrity and ensure the Board does the right thing not the most expedient.
Ambassadors – all directors are ambassadors of the business and it is essential to have someone you trust to represent the business to all stakeholders.
Energy and commitment – it can be a challenging role. You must therefore give new NEDs time to get to understand the business and how it operates. They will need personal energy and commitment to work effectively on your behalf.
NEDs who display these qualities should also be able to build trust with the rest of the Board and will have a way of communicating that enables them to influence without appearing dictatorial.
The formal guidelines for listed companies can also, with a little modification, apply to private companies, many of which could benefit from the insights that an independent NED might bring.
Indeed, I haven’t met a successful business person who hasn’t had the benefit of a mentor to help them in their decision making and there comes a time in the development of all businesses where this relationship should be formalised into a longer term non-executive Board position – possibly with the benefit of recruiting other talented people to support the business as it grows – and when selecting a NED for the first time, business owners should probe for the above qualities before making any appointment.
It will also be wise to agree a fixed term contract – say three years – so that the business has flexibility to select further NEDs as the business develops or rotate Board membership to gain as much as possible from other influences. The ability to refresh the makeup of a Board and bring diversity is now a principle enshrined in best practice. NEDs should be involved in the appraisal and measurement of Board members and be subject to the same appraisal processes so you can measure their impact.
As businesses develop, NEDs can fill gaps in experience and provide specialist knowledge, whether market insight, overseas expansion, public offerings and fund raising and regulatory requirements. Their appointment must be seen in the context of the strategic plans for the business and what skills are required. The appointment of people with true calibre can give outside financiers and other third parties confidence in Board decision making and effective change management. This can be particularly important in times of uncertainty, or when business performance is weak, as much as when the business is growing.
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