The role of the non-executive director is changing

A new report sheds light on life in the boardroom and suggests the role of the non-executive director is changing. Organisations must attract and retain board members from as many talent pools as possible in order to maintain and develop the quality of their boards. Director training also needs more focus. 

MM&K, a firm that advises on executive remuneration, just released its latest report on ‘Life in the Boardroom‘. Based on a survey of hundreds of non-executive directors, the report sheds light on the reality of being a NED in 2021 and 2022. 

The report is based on a survey of non-executive directors across the UK. It gathers insights into their thoughts on boardroom policies and practices, all of which makes fascinating reading. 

The 2021-22 study results identified a growing concern about increased demands placed upon NEDs.

Non-executive directors are now expected to be ready to address societal shifts and plan an economic recovery, post-COVID and with the threat of a global war, to ensure the future of their businesses. 

NED responsibilities are also increasing in respect of regulations as well as business sustainability and the environment.

The “Life in the Boardroom” survey includes responses from 358 directors, representing 885 roles, of which 331 were chairs. 

The report is unique insofar as, in addition to data on fees and time commitments, the survey report includes insights and comments from NEDs on subjects that are of most interest or concern to them.

1. Demographics

• Only 7% of NEDs are under 50
• 80% are over 55

With the growing number of early-stage, technology-based companies, and the changing corporate landscape, it will be interesting to see how this will change as the NED role continues to evolve. Experience is a key quality NEDs bring to the boardroom. 

However, there is a case for introducing new blood with new ideas to promote change.

2. Board composition and diversity

• 30% of NEDs are women but only 8% of chairs are women
• Nearly 80% of those surveyed say they have the right level of diversity in their boardrooms

If a board has that level of female representation, questions may arise about whether it can be regarded as diverse and truly effective. In addition, why so few women rise to become board chairs is also of concern, raising questions about corporate culture.

For companies, talent management and management succession planning are important for building a pipeline of talent for future generations of executives and non-executive directors.

3. Appointment process

• Nearly half of NEDs and chairs are appointed by a personal contact
• 75% of those surveyed had a formal interview process for their roles
• Shareholders are not consulted in 30% of appointment cases

4. Time commitments and fees

• 60% say the role of the non-executive director has become more demanding
• Less than 10% receive additional fees as compensation
• Less than half think fees have not kept pace with the additional demands
• Most NEDs receive an annual cash payment for fees
• Fees for male NEDs are 27% higher, on average, than fees form women NEDs

Respondents typically attribute increased demands to increased regulation and time spent in Board meetings, which leave less time for other activities.

Participants in the survey expressed concern about the balance of risk and reward as their roles evolved. Organisations face a risk that emerging talent might be discouraged from taking up appointments as NEDs, thus decreasing the quality of boards.

5. Board development/evaluation

• Over half said their chair and board are evaluated annually
• Board evaluation is carried out externally in just 14% of cases
• More than a third say their is no board evaluation process and no induction or continuous director training 

These findings suggest that about half of boards mark their own homework when it comes to board evaluation – an indication that we may need a cultural shift to attract new talent, facilitate change where needed, and maintain high levels of board quality.

6. Covid

• Over 50% say Covid has brought about a greater focus on ESG
• 60% said their firms had put in place an ESG policy
• Three quarters said virtual meetings during Covid worked quite well

During the COVID pandemic, NEDs spent more time supporting executive management to make strategic business decisions. 

Participants cited regulation and compliance as principal reasons for increased demands on the role of the non-executive director. 

NEDs, who are working mothers, value the flexibility of working from home. However, they are concerned that as COVID diminishes, practices will revert to pre-pandemic norms, making it more difficult for them to become and achieve success as NEDs.

• The NED role is evolving and becoming more demanding.
• The pandemic may be partly to blame. However, there are growing concerns about the impact of regulation and the balance between risk and reward.
• To maintain and develop the quality of their boards, companies must attract and retain individuals from as many talent pools as possible.