Imagine walking up to a front door and peering through the peephole into somebody else’s house. How would you know what it looks like inside? Being a non-executive director is like squinting through the peephole to someone else’s house.
Like houses, enterprises come in all shapes and sizes – large global listed companies, new wave start-ups, charities and social enterprises – the list is endless. Except for very small businesses, these enterprises will usually have at least one NED and, in some cases, NEDs will comprise a majority or even the whole board.
Context changes a NED’s role
Just as the size, layout and content of a house impact on the people who live there, the variety of purpose, scope and scale of enterprises determine the environment for everyone within it. Boards are not separate entities with their own cultures, and NEDs function in diverse ways to meet the needs of the enterprise and board.
According to an OECD report into board effectiveness, NEDs of listed companies often feel that they spend most of their allotted time on matters of legal and regulatory compliance. These directors have much to lose when something goes awry.
By contrast, NEDs of small and medium-sized enterprises are expected to bring their skills into longer term strategy, visioning and business development to support the owner/managers who are focused with day-to-day running of the business.
Another dimension which impacts a NED’s role is their status - voluntary or remunerated - and whether they represent an interest or are in some other way connected with the enterprise. The distinction between connected NEDs and independent NEDs (sometimes referred to as “outside directors”) is sometimes a fine one.
Bob Tricker, in the fourth edition of his book Corporate Governance, says that independence in this context is not a label but a state of mind. Meanwhile, Patrick Dunne, in his book Boards, suggests that it is possible to be objective and independent of mind, even if you have an interest in the outcome.
Whether we choose the term NED, independent or outside director, or something else, these dimensions impact on NEDs in contrasting ways which over time have given rise to different expectations of their purpose and role.
The job of NEDs on boards is to bring an alternative perspective to that of the executive directors, which is not to say that this is always a contrarian perspective. In smaller companies where targets tend to be shorter term, the purpose of the NED perspective might be to take a longer view which otherwise is lacking on the board.
In larger companies, the NED perspective is more often focused on compliance. As with the relationship between the Chair and CEO, which relies on getting the balance right, the ideal NED perspective aims to maintain a balance which ensures that different views are discussed and debated in the boardroom.
When to get involved outside the boardroom
From time-to-time NEDs need to find a way to go beyond the boardroom. To achieve this, they need the right combination of skills and attributes, in particular:
- The ability not only to ask the right question, but to pick the right moment to ask it.
- A willingness to raise a challenge and persevere until everyone in the boardroom has clarity.
- Always retaining curiosity.
- Using influence judiciously in and outside the boardroom.
What NEDs should avoid doing is to break down the company door to see what is happening and taking control of the wheel. I have witnessed examples of interventions by NEDs, even those that were well intentioned, misfire which resulted in exposing weaknesses in the organisation’s governance and sowing the seeds of mistrust between the executive directors and NEDs. The damage that such missteps cause can take years to rectify.
Non-executive directors are often unwilling to get their hands dirty for fear they might be charged with interfering in management’s domain. At the same time, having a “peephole” perspective risks the NEDs exposing their ignorance which will undermine their credibility. By themselves, these objections or constraints should not deter NEDs from getting their heads under the car bonnet from time to time.
There are always other options to fall back on, such as calling in the internal auditors or external consultants if the board feels it is unsighted about something significant.
10 rules for NEDs venturing into management and process-level issues
- Listen before you speak.
- Ask pertinent questions in a non-threatening manner.
- Get as wide a perspective as possible.
- Don’t call yourself an expert on the subject in question – even if you are.
- Don’t go round the executives in pursuit of answers or information.
- Don’t take charge; leave your position of authority outside the room.
- Don’t fly solo – keep your NED colleagues in the loop.
- Treat the exercise as a privileged opportunity to get behind the peephole.
- Show staff respect; recognise their expertise.
- Remember to say thank you to staff and ensure they get feedback (often overlooked).
Patrick Dunne writes that the more NEDs are seen as helping the management achieve their plans, the greater their influence. This, of course, needs to be tempered by the board’s responsibility to hold management to account, a responsibility that rests with the whole board. As NEDs roles on boards have become more prominent, investors and regulators have started to pay more attention to their appointments, and expectations of their influence in the boardroom will increase in future.
More on exploring governance
If you would like to know more about what makes the difference between good and great in the boardroom, David will be writing a series of articles for ICAEW’s Corporate Governance Community in the coming months. He will introduce his Ten Steps to Become a High Performing Board©, as well as revealing the key competencies needed to be an effective board member.
Other articles in this series
More on exploring governance
If you would like to know more about what makes the difference between good and great in the boardroom, David Levenson will be writing a series of articles for ICAEW’s Corporate Governance Community in the coming months. He will introduce his Ten Steps to Become a High Performing Board©, as well as revealing the key competencies needed to be an effective board member.
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