What are the responsibilities of non-executive directors in Britain?

The following guide is modelled on UK law. It is part of a series on corporate governance guides and examines the various board member roles, particularly the roles and responsibilities of non-executive directors as defined in the UK Corporate Governance Code.

A summary of what the UK Corporate Governance Code believes the role of the board is as follows:

• provides entrepreneurial leadership;
• sets strategy;
• ensures the human and financial resources are available to achieve objectives;
• reviews management performance;
• sets the company’s values and standards;
• ensures that obligations to shareholders and other stakeholders are understood and met.

There are some matters that can only be decided by the board as stated in the Code. For example, the Code states that there should be a formal schedule of matters reserved for the board’s decision, as well as a high-level statement detailing which decisions are to be taken by the board, and which are delegated to management.

The chair leads the board, sets its agenda and ensures there is an effective working group at the helm of the business.

It is up to the chair to promote a culture of openness and debate while working effectively with shareholders (always bearing in mind the role of the independent directors).

Chairs must ensure all members of the board receive accurate, timely and clear information.

As per the Code, the roles of chair and chief executive cannot be held by the same person.

“There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision” – main principle A.2.

The chair should be independent and non-executive. Having an executive chairman will confuse those in the company as there may not be the clarity between their role of the executive chair and the CEO.

A chair’s responsibilities go beyond those described above and include ensuring that there is a good working relationship between the executive and non-executive directors and that there is sufficient time for discussion of strategic issues.

On the other hand, the CEO oversees the day to day management of the company. They also carry out the board’s decisions and policies.

Any public company combining the roles of Chair and CEO will have to bring to the shareholders’ attention and explain why this is the case as it is not good practice..

A practice also frowned upon by the Code is a chief executive becoming chair of his/her company.

A new CEO may have an impossible job if his predecessor remains chairman, constantly looking over his shoulder and potentially disagreeing with any departure from the old policies.

Some say a chair with so much experience with the company might have a lot to offer and be quite capable of establishing a good relationship with a new CEO.

In exceptional cases, the Code does acknowledge that the rule can be broken. Boards in breach of the Code must consult major shareholders in advance and justify their decisions both at the time and in the next annual report.

Banks, in particular, have argued that often only the incumbent CEO has the necessary experience and knowledge to succeed as chairman.

In the Code, non-executive directors clearly have a strong role. Their job description includes:

• reviewing and approving the strategic plan, with constructive challenges;
• monitoring of management’s performance in meeting agreed-on goals and objectives;
• ensuring the integrity of financial information and that controls and risk management strategies are robust and defendable;
• determining appropriate levels of remuneration for executive directors;
• appointing and removing executive directors, and succession planning.

The non-executive directors should have regular meetings with the chair, but without the executive team’s members. They should also meet the other non-executive directors at least once a year to assess the chair’s performance.

If the executive directors collectively have a stake in an important issue that goes to the board, the non-executives may have the final say. This situation commonly occurs when a management team or a private equity group with management involvement offers a bid for the company. The non-executive directors will decide alone whether or not to recommend the bid to shareholders, and the executives will have no role in the decision.

Under the Code, there is a distinction between non-executive members who are independent and individuals who are not.

For an individual to qualify as an INED, they must not only possess the necessary independence of character and judgment but also be free of any connections that could create a conflict of interest.

The Code makes it clear that someone cannot be considered independent if:

• the person has been an employee of the group in the last five years;
• they have a ‘material business relationship’ with the company or have had an indirect relationship with it as a partner, director, employee or shareholder of an adviser, major customer or supplier (this would include an audit partner moving onto the board after retirement);
• they receive remuneration from the company in addition to director’s fees or participate in the pension scheme;
• if they have close family ties to any of the company’s advisers, directors or senior employees;
• the members hold cross-directorships or are in contact with other directors through involvement in other organisations (this goes against the ‘old boys’ club’ selection strategy).
• they represent a significant shareholder;
• they have served on the board for more than nine years.

In the end, though, it’s up to the board to decide who ‘qualifies’ as an independent director. None of the above should be viewed as grounds for automatic exclusion.

An individual may be regarded to possess the integrity and character needed to remain unscathed by circumstances that, in theory, would threaten their independence.

A member of the board must explain which directors are independent and which aren’t when they appoint independent directors or when they report to shareholders each year.

If they decide that an individual may be classified independent, despite previous and/or current connections with the company, they need to explain why.