Effective independent non-executive directors are expected to provide high-quality, objective oversight and scrutiny of a listed company’s strategy and the performance of its executive management. By being removed from the immediate commercial pressures of executive management, they are an essential component for ensuring effective corporate governance and compliance.
The UK’s Corporate Governance Code (the “Code”), which seeks to adopt flexibility through a “comply or explain” approach, recommends that at least half of a unitary board, excluding the chairman, should comprise independent non-executive directors; that each of the audit and remuneration committees should comprise of at least three non-executives (2 for smaller companies); and that there should be a majority of non-executives on a nomination committee.
As a member of a unitary board, a non-executive director owes a duty to act in the best interests of the company, consistent with the statutory dutiesof directors and as such, assumes the same responsibilities and legal liabilities as executive and better-rewarded directors. Indeed, one of the Code’s opening sections recommends that a company should arrange appropriate insurance cover in respect of legal action against its directors and ensure that non-executive director
‘s have ready access to independent professional advice. Aside from the potential legal and financial liabilities, the role of a non-executive director requires considerable commitment and can be extremely demanding. The Code expects independent non-executives to challenge and help develop strategic proposals; to scrutinize executive management’sperformance; establish the integrity of financial information; to ensure that financial controls and systems of risk management are robust and defensible; determine appropriate remuneration levels; and play a key role in hiring and firing executives.
Given these responsibilities, one might wonder who would be prepared to brave the potential liabilities and the populist and legislative downward pressure on all directors’ remuneration, to become an independent non-executive director.
As remuneration has almost become an inquisition issue in the U.K., urgent consideration should really be given to raising the bar for establishing liability or limiting potential liabilities of non-executive directors. Otherwise there is a real risk that those with the requisite talent for ensuring effective corporate governance and compliance will see no attraction at all in performing a non-executive role in today’shighly litigious and regulated environment.
Alistair Craig is a commercial barrister practicing in London.