Non-Executive Directors in the Corporate Governance Process - Essay Example

NED’s authority is derived from the UK Corporate Governance Code that defines the legal framework of its inclusion in the boards of companies while the Companies Act of 2006 which took effect in October of 2009 and was preceded by similar corporate governance initiatives such as the Cadbury Report of 1992 which first raised the idea of instituting corporate governance in board rooms defining it as “the system by which companies are directed and controlled”.  The Organisation for Economic Co-operation and Development however provided a more extensive explanation to make it more relevant in today’s reality defining it as "Corporate governance is one key element in improving economic efficiency and growth as well as enhancing investor confidence. Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders”(CIMA).

In general, the duties and responsibilities of NEDs as defined in the UK Corporate Governance Code are concerned mainly with a watchdog and overseeing capacity without any line of responsibility or managerial powers just like the regular Director.  Its main duty concerns not with the day to to day operation of the business nor is consumed by the profit generation effort of the company but is rather more concerned with the ethical practice of the company.  It can also do mentoring and guidance on the board on how to operate ethically as a business while still in keeping with the strategic objectives of the organization to remain relevant in the market and be profitable.

NEDs may not have the managerial responsibility and the power associated with them but it does mean that their stature is diminished in the board.  In law, there is no distinction between executive directors and non-executive directors in their standing in the company as enunciated in the Companies Act of 2006 (ICAEW 2013).   They are also required in the Board of Directors of Company’s as mandated by the UK Corporate Governance Code stating that “The board should include an appropriate combination of executive and non-executive directors (and, in particular, independent non-executive directors) such that no individual or small group of individuals can dominate the board’s decision making (2010: 12

Their difference lies in the duties and responsibilities that they perform whereby the non-executive directors desist from getting involved in the regular operation of the business but rather facilitate the board as it crafts the strategic direction of the company.  NEDs also act as an entrepreneurial mentor, being one of its qualifications to be extensive in addition to its sterling background whose presence in the company’s board of directors can provide leadership and experience for companies to realize their full potential (Mew 2012). 

The absence of managerial power or line of authority or any portfolio of NED’s in a company has a purpose.  This ensures that they will have no conflict of interest in the company when they perform their duties and responsibilities.  This provides greater latitude for NEDs to be objective and independent as they dispense their overseeing and advisory roles.  To reinforce this objectivity and independence, NEDs are in fact not even employees of the company as their tenure is not bound by a contract of employment but rather by letter of appointment.  They also work as part times to ensure that they do not meddle in the operation of the business and only attend a few board meetings in a year.  This nature of NED’s manner of dispensing its duties and responsibilities is not a coincidence but again mandated by the UK Corporate Governance Code compelling business organization’s Board of Directors that “The board should determine whether the director is independent in character and judgment and whether there are relationships or circumstances which are likely to affect, or could appear to affect, the director’s judgement” (2010:16).

This independence will enable the NEDs, together with an independent director to evaluate the performance of the chairman of the board objectively and ensure that the reporting of the companies with regard to its operation and financial statement adhered to ethical business practice.  This will also ensure that the company has applied the UK Corporate Governance Code in evaluating its performance and preparing its reports for its various shareholders (FSA Handbook).  And to safeguard further that NEDs can dispense these duties and responsibilities with objectivity and insulate them from the lure of excessive remuneration that could affect their independence and objectivity, their remuneration will not include any performance-related elements (UK Corporate Governance Code 2010:17) such as bonuses and perks which caused the downfall of Enron in the US.  They are also not allowed to have any shares of stocks during their tenure as NED and will only be possible after a year when NEDs tenure has ended where approval has been sought in advance. 

In sum, NEDs serve as independent monitoring entities in corporations to ensure that they will adhere to the highest ethical practice in the operation of their business as well as in its evaluation and reporting of financial information and business operation.  They also serve as independent advisors as they assess the Chairman of the Board with its performance (without the presence of other executive directors except for an independent director) and this independence is reinforced by the structure of pay (no performance-related incentives), relationship (appointed not hired and therefore not an employee subject to the directives of the management).  In effect, Non-executive Directors are the regulatory agencies' watchdog on the help of the UK’s corporate world to ensure that the business practice of companies in the UK is in accordance with the highest ethical standard that will guard the public’s trust in them.