A recent report found that non-executive directors (NEDs) in the banking sector have been drawn from ‘too narrow a talent pool’, and further suggests that they hold too many directorships at any one time. The implication is that these individuals are spread so thin that they fail to challenge and check senior executives. In other words, they fail in the key role of the NED.
This raises the question of whether executives, when making NED appointments, really understand the role of the non-executive, and what qualities the NED should bring to the boardroom.
The role of the non-executive director is that of a critical friend, to challenge and critique and to offer advice. All of this must be done with a tact and diplomacy that does not undermine the executive directors or tries to do their job for them. To undertake these roles effectively individuals need a wealth of experience that they can apply to the company in question. However, the application of this experience is crucial.
NEDs don’t get hands-on outside the boardroom. Rather, they are there to help executives think, reflect and challenge their overall direction and approach.
The actual role of the non-executive is usually split between the legal and constitutional issues facing the business, and influencing how the company should operate. The constitutional and legal role is the same in commercial businesses but different in the public sector, while the influencing role can be quite different depending on the which part of the life cycle the business is in, and the ownership of the organisation.
Who advises the NEDs?
Once executives understand the NEDs role, there is the matter of training and development of non-executives, or rather the lack thereof. The assumption is that executive experience on a main board or previous non-executive experience is sufficient. Yet the truth remains that there is little help available for non-executives to develop their abilities in the exercise of judgement, wisdom, and deciding what is material and what is not. One method of learning is through boards getting together outside their formal meetings to enable discussion of the affairs of the company beyond the board agenda.
There are a number of qualities that executives can expect from their NEDs. Firstly, it is important to ensure compliance with business governance. NEDs need to be able to understand control systems and risk management as well as be able to identify trends and inconsistencies in financial data.
At an interpersonal level, they need to have the wisdom and maturity necessary to provide an objective sounding board so that they advise rather than instruct. Additionally, they need to be able to challenge the board, ask probing questions and listen carefully. By working with integrity and providing honest feedback, a relationship of partnership and trust can be built.
Mark Goodridge is the CEO of business advisers ER Consultants