The Role of Non-executive Directors

ACCA P3考试：The Role of Non-executive Directors

1. Non-executive directors

Non-executive directors ("NEDs") should be independent of influences from company executives. Directors have a legal duty to act in the best interest of a company but that does not mean they will always do so in an objective way.

2. Threats to independence may occur where a director:

was a former employee of the company within the last five years;

was paid additional money (apart from the director's fee) by the company;

has very close ties with the company's other directors;

has had a material business relationship with the company in the past three years;

has been a member of the board for more than 10 years;

is a major shareholder;

holds too many non-executive directorships in various companies and might not be able to devote enough time to the tasks in hand.

3. NEDs have four main roles:

3.1. Strategy: "As part of their role as members of a unitary board, NEDs should constructively challenge and help develop proposals on strategy".

The strategy role recognises that NEDs are full members of the board and thus have the right and responsibility to contribute to the strategic success of the organisation for the benefit of shareholders. The enterprise must have a clear strategic direction and NEDs should contribute considerable life and business experience to ensure sound strategic planning. In this role they may challenge any aspect of strategy and offer advice or input to help develop successful strategies.

3.2. Scrutiny: "They should scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance …".

In the scrutinising performance role, NEDs are required to hold executive colleagues to account for decisions taken and company performance achieved. NEDs represent the shareholders' interests against the possibility that agency issues arise that could reduce shareholder value.

3.3. Risk: "They should satisfy themselves on the integrity of financial information and that financial and risk management controls are robust and defensible".

The risk role involves NEDs ensuring that the company has an adequate system of internal controls and systems of risk management in place. This is often informed by prescribed codes (e.g. the Turnbull guidelines or the COSO framework) but some industries (e.g. chemicals) have other systems in place, some of which fall under ISO standards. In this role, NEDs should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible.

3.4. People: Boards should consider assigning a sufficient number of non-executive board members capable of exercising independent judgement to tasks where there is potential for conflict of interest. Examples of such key responsibilities are financial reporting, nomination and executive and board remuneration.

The people role involves NEDs overseeing a range of responsibilities with regard to the management of the executive members of the board. This typically involves issues on appointments and remuneration, but might also involve contractual or disciplinary issues and succession planning. Increasingly, companies are using an appointed NED as a confidential channel through which the concerns of whistle-blowers may be reported.