Non-Executive Directors

Mervin Messias

Chairperson: Estate Planning Committee of the Law Society of the Northern Provinces

What is a Non-Executive Director?

A non-executive’s role tends to be that of an outsider looking in rather than that of an inside employee. As a part-timer with less experience of the business than the executives, a non-executive will have far less knowledge of the internal workings of the company. However, he will be able to bring to the board an awareness of the external context.

Non-executive directors tend not to be involved with day-to-day management. This suggests someone who is not encumbered with specific management responsibility. Non-executive directors are part of the board and, whilst day-to-day management is an executive responsibility, ultimate responsibility for the management of the company is shared with the non-executives. It is more likely that non-executives would be involved in day-to-day management of smaller companies. In these companies a non-executive director usually means a director “without portfolio”, or not responsible for any one part of the business more than another but he may interfere where necessary.

The non-executive’s role is that of acting as watchdog and whistle blower, ensuring adherence to good practice, respect for the interests of other stakeholders and adherence to the process of boardroom discipline. The role of policeman is associated with that of the non-executive. The non-executives are the custodians of the governance process.

The policing role implies an influence on strategy. The non-executive is unlikely to exercise entrepreneurial qualities, but he will be expected to challenge the thinking of the board of directors and bring commercial skills and experience to the decision making process.

Although non-executives are often held out by executives as providers of “advice”, the non-executive’s role is much bigger than an advisor. He is a director and shares the legal duties and responsibilities of the executive directors. A non-executive is part of the board, not outside it. He shares a collective responsibility.

As far as corporate governance is concerned, non-executives are usually associated with independence.

What is meant by an Independent Non-Executive Director?

The following characteristics are indicative of a state of independence:

·          The individual has not been employed by the company recently and is accordingly not predisposed for or against some parts of the business;

·          The individual is not a retained professional advisor and accordingly not influenced either by his fee or by judgments taken by another organization in which he has an interest;

·          The individual is not a supplier or customer of the company, and thus not likely to influence the company towards or away from one contract or another;

·          The individual does not have a family connection with someone in the business;

·          The individual’s directorship is for a fixed term and accordingly he is less likely to be motivated by self-preservation when taking decisions;

·          The individual does not depend so heavily on his remuneration from the company as to make resignation difficult. The ability and willingness to resign is the ultimate test of independence.

What matters is independence of mind. Independence in this sense is a personal attribute. Independence of mind is priceless.

Almost all non-executive positions are part-time. At times of crises, or times when the non-executives are under particular pressure, the role of non-executives may well seem full time. However, part-time is the expectation.

What does a non-executive director do?

Until recently, non-executives appeared to be relatively inactive but things have changed. Non-executive directors are aware of having duties they might not have paid attention to previously. Arguably, they are the eyes and ears of the shareholders and accordingly have a responsibility for managing and monitoring controls that ensure the directors perform their duties of ensuring the implementation of effective financial. Operational and compliance controls.

A non-executive has a role in the listed business and also in the owner-managed business.

An experienced non-executive will help an inexperienced management team ensure that shareholder issues and operational issues are discussed separately. The non-executive may be relied on to ensure that the board pays attention to the interests of minority shareholders who do not have board representation.

The presence of a competent non-executive will give comfort to potential suppliers and bankers. The non-executive has a useful role to play as referee and judge in regard to the issue of whether the remuneration of executives is fair and appropriate. The non-executive can help ensure that such decisions are sensibly thought through. A non-executive can also help ensure that the dividend policy is sensible. A non-executive has a key role to play when the board reviews its own performance.

Of particular importance to a company are issues relating to growth and the transformation that growth demands. A non-executive, arguing from an independent standpoint, is well placed to counsel the business on changes that are needed. The non-executive in the smaller, growing business may find himself playing the role of team coach.

A non-executive does not exercise influence just through the directors. Freedom to roam within the business is critically important for an effective non-executive. The non-executive should be well connected to the people that matter to the business. A non-executive should hear what needs to be heard, and then convert it, credibly, convincingly and persuasively, into what needs to be said.

Attorneys are by virtue of their experience, expertise and qualifications appropriate people to be appointed as non-executive directors.

Attorneys, by virtue of,  inter alia, their legal training, professional knowledge, experience, expertise, ability to be objective, ability to guide the board directors in regard to corporate governance, are adequately qualified to accept appointments as non-executive directors in both the listed companies and the smaller non-listed companies.

Comments by editor

The days are gone of arriving for a board meeting and immediately taking off for a bush resort for the weekend. Both executive and non-executive directors share a common responsibility to the company, although non-executives have the distinct disadvantage of potentially not having regular insight into the day-to-day activities of the business. However, non-executive directors must remember that they have the right and obligation to ensure that they are as informed as possible to be able to be in a position to make informed decisions in the boardroom.

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