News and Insights

Responsibilities of non-executive directors

The issue of the responsibilities of non-executive directors (NEDs) was thrown back into the spotlight this month, following the Chairman of the BBC Trust advising the Commons Public Affairs Committee she was unaware of any evidence that the Swiss arm of HSBC bank was assisting its wealthy clients in avoiding tax, despite serving as a NED on its board during the period of allegations.

The role of non-executive directors was once described by Lord Grade as being “a bit like the bidet in your bathroom: nobody is quite sure what they are for, but they add a touch of class.” You may be inclined to agree with this statement following Rona Fairhead’s admissions, but is this perception of NEDs really fair?

Not always, but what has been proved obvious is that a good working knowledge and understanding of a Company’s affairs, operations and any risks potential or otherwise, is vital when acting as a NED.

NEDs share the same statutory obligation as their executive co-directors to promote the success of the company for the benefit of its members as a whole. They are subject to the same legal duties, responsibilities and potential liabilities as their executive counterparts, despite not being involved in the day to day running and decision making of the company. NEDs play an important part in ensuring a company is run well, whilst not playing an active role in the administration of the company.

Probably the most valuable contribution a NED can make is to challenge the proposals and decisions of the board. A good NED will ask simple questions about the company, which assists the executive board to focus on important matters and raise standards, for example, in relation to corporate governance. Since the financial crisis, tough corporate governance rules have increased the reliance on NEDs’ expertise in this area. A perceptive NED will lead on areas such as independent management of the company and in doing so bring a degree of objectivity to the board’s deliberations and monitoring of executive management.

A further important issue is a NED’s ability to identify risks posed to the company, both internally and externally. Once identified that risk should be highlighted or, if necessary, challenged, in order for it to be appropriately addressed by the board or otherwise.

NEDs should bring a breadth of business acumen to a company, often having specialised in certain areas which they can share with their executive colleagues. When presented with a company’s business proposals as formulated by the executive board, NEDs can assist in evaluating them or challenging proposals which they consider unrealistic.

In effect, they should provide the board with a commercial reality check. This is why the interview with the Commons Public Affairs Committee proved such a bruising experience: how could a diligent NED have been unaware of an important area of her company’s business activities?