How the Role of the Non-Executive Director has Developed in Recent Years - Example

Title: How the role of the non-executive director in a single tier board has developed in recent years Student’s Name: Instructor’s Name: Course Name and Code: University: Date of Submission: How the role of the non-executive director in a single tier board has developed in recent years Introduction The role of the non-executive director in a single tier board has transformed significantly and contemporary companies are expecting more from non-executive directors than they used to before. A considerable number of changes are witnessed in the composition, role, job performance and diversity in the non-executive director composition. Non-executive directors are generally expected to be more involved or more engaged in the running of the business so as to determine whether the stakeholders’ expectations are being met. Non-executive directors are no longer regarded as the shadow figures whose role was to provide an external insight or provide wisdom and acumen to the board. Non-executive directors are not necessarily people with status or whose experience in business was considered superior but individuals who are willing to dedicate their time towards the accomplishment of the company’s objectives. This discussion seeks to explore the various changes in the role of the non-executive director in order to establish how the role has changed in a single-tier board over the years. Discussion Traditional role of non-executive director In order to effectively differentiate between the role of non-executive directors in the past and what is expected of them in the contemporary world, it would first be imperative to understand the role of the traditional executive director. Available literature indicates that the role of a non-executive director was rather simple in the past and that the main idea was to incorporate an experienced ‘outsider’ into the board discussions so as to offer more insight for the company and enhance decision making ability (Greenfield 2008; Treadwell 2006, p. 64). This is because boards were initially thought to be too introspective; which was considered dangerous and in the need to seek more experienced persons in order to enhance the decision making process. In most cases, boards sought experienced businessmen who were respected in their fields and therefore capable of bringing in valuable knowledge, wisdom, common sense and strategic acumen towards the board debates (Treadwell 2006, p. 64). Such directors provided a ‘helicopter’ view and were often considered a sign of potential excellence for the company. An individual who promised a link to the government was also highly preferred during the selection of non-executive directors. Treadwell (2006, p. 64) notes that the non-executive director would be required to spend minimal time in dealing with company issues (basically 15 days per annum) and would learn about the business over time and consequently contribute in board meetings where appropriate. The non-executive director was not expected to overtax himself with paper work but only to attend and contribute in the board meetings (Greenfield 2008). It is also notable that non-executive directors who were already sitting in another board were treated with ‘status’ and therefore preferred due to their experience and exposure (Tredwell 2006, p. 65). This played a significant role in defining the individual professionally, socially and personally and individuals with such statuses were therefore likely to be selected as the non-executive directors for companies. Changing role of non-executive director The role of the executive director has however changed vehemently and the ability to sit in the board is not merely defined by the individual’s status in the business world or government connections. The role of the non-executive director in the single tier board is not only more objective but is now considered more of a job as opposed to making technical appearance in board meetings to offer advice to the board (Mallin 2007, p. 130). According to Mallin, non-executive directors have a considerable number of roles that they are expected to fulfill. This has mostly been fuelled by the need for stakeholders to take more control over companies in the face of increased director malpractice and excessive business directors (Parkinson 1995, p. 195). The non-executive director is seen as a prime target for stakeholders to seek information about the company and thereby track its productivity. The non-executive director is actually being increasingly regarded as opposed to the executive director (Treadwell 2009, p. 65). Recent studies indicate that the non-executive director is considered by observers as an independent watchdog in boards. Treadwell (2009, p. 65) actually refers the non-executive director as the stakeholders’ champion who represents their cause within the company through acting as a check on the executive. The non-executive directors should ensure that the financial information presented by directors presents the true and fair view of the company’s financial position (Dunne & Morris 2008, p. 32). This signifies that that the shareholders and other stakeholders look up to the non-executive directors as their source of control in the board. This is unlike in the past where non-executive directors were expected to do less and were actually considered as a gift to the chairman and was associated with the formation of an ‘old boys network’ among the non-executive directors (Cowan & Russel-Jones, 2005, p. 31). The non-executive directors now have been given a daily functional responsibility to ensure successful management of the company and are not merely expected to attend board meetings to make contributions regarding different issues. Unlike in the past, the notion of part-timers is long gone and non-executive directors are expected to be on the lookout at all times to ensure that the company directors are performing their role effectively and that required standards are maintained (Treadwell 2006, p. 65). They are therefore expected to answer questions to the stakeholders in case of malpractice. Times have changed and it is no longer feasible to say that the non-executive directors are not expected to have as much knowledge about the company as the executive directors or be less accountable than other directors (Greenfield 2008). As individuals who are expected to continually follow up on what the executive directors are doing and be accountable for enhancing the company’s ethical management, board composition and remuneration policy, the non-executive directors must be in a position to fully understand the operations of the firm in order to provide full information to stakeholders (Mallin 2007, p. 132). Having a part-timer non-executive director therefore makes little sense in the contemporary world despite having a lot of experience. A full time executive would however take the time to examine the directors’ operations (Dunne & Morris 2001, p. 23). This is because he or she would be able to identify the strategies agreed by the board and thus seek to identify whether the executive is implementing the set strategies. The previous findings indicate that non-executive directors are no longer shadow directors and that there is so much expected from them. They are expected to have adequate knowledge on business and strategy implementation in order to effectively establish whether the directors are implementing the company’s objectives (Goold & Campbell 1990, p. 118). Stakeholders’ expectations have also increased and they expect to be represented by well learned individuals. Accordingly, there is need for effective recruitment and training for non-executive directors hence the reason why the experience and education backgrounds play a significant role in the process of filling non-executive director positions (Mallin 2007, p. 130). More emphasis is placed on the recruitment process of non-executive directors and companies are more likely to recruit individuals with a significant level of knowledge and experience in the business world (Colaco & Nitkin 2011, p. 124). This way, stakeholders are in a position to trust these non-executive directors in protecting their interests within the firm and thus protect their interests. The role of the non-executive directors has changed in that there is increased need for commitment towards meeting the stakeholders’ expectations. Cowan and Russell-Jones (2005, p. 37) notes that times have changed and companies are more inclined towards the selection of non-executive directors who have many non-executive directors’ positions. This is because non-executive directors are not expected to be mere figures in the committee but they are expected to be highly involved in assessing the performance of the company. It is believed that many positions are likely to overwhelm the non-executive director to an extent of being ineffective and thus delivering less value to the stakeholders. Changes in customer expectations remain one of the most notable influences on the role of non-executive directors (Clarke & Rama 2008, p. 91). This can be derived from the fact that customers are expecting companies to not only deliver them with high quality products but also ensure that other needs such as community involvement are considered highly imperative for companies to undertake (Clarke 2004, p. 74). These also impact significantly on the image of the company to a significant level. According to Alvarez and Marsal (2011) therefore, non-executive directors must not only concentrate on the financials but also on the “intangibles” so as to determine the customers’ views regarding the business. The main objective of the non-executive director at this juncture is to explore any indicators of customer dissatisfaction. The information identified should then be used in improving the performance of the company through making improvements on the identified challenges. Non-executive directors must also ensure that staff satisfaction and motivation is maintained at a favorable level in order to promote efficiency and consequently enhance performance at the company (Alvarez & Marsal, 2011). This is a function that was not initially considered as a role of the non-executive directors such that it represents a change from the traditional setup to the current role of directors. An important role that non-executive directors are now required to perform is to determine the remuneration of the directors and also undertake the role of ensuring that non-performing executive directors are removed (Mallin 2007, p. 132). These are sensitive matters that involve the direct control of the company and the role of the non-executive director can therefore be said to have changed vehemently. It is an indication that non-executive directors are increasingly becoming part of the company as they are responsible for performing roles that are considered to be particularly sensitive and which influence the functioning of the firm to a significant level. Diversity in company boards has received increased attention as the workforce continues to be composed of diversified individuals. Similarly, there is an increased level of inclusion of female directors in boards. This is unlike in the past where the men would mostly occupy such positions while women were often left out. According to Brummelhuis (2010), the representation of women in UK boards still needs to be improved and that a significant level of talent and skills remains unutilized as women are sidelined during the selection of non-executive directors. Furthermore, companies with strong female representation in the board have been known to perform better as women are given an opportunity to utilize their potential (Dunne & Morris 2008, p. 18). Women have been known to understand customers better and interact with stakeholders in a better manner while providing fresh perspectives broad experience and new ideas that lead to more effective decision making (Brummelhuis 2010). This suggests that women are becoming more appreciated in boards and their presence has definitely transformed the role of non-executive directors in the past few years. The UK government is actually working towards enhancing gender equality on listed companies’ boards. Lord Davies of Abersoch was given the role of leading a review on the government’s behalf to identify obstacles that are likely to hinder women from holding senior positions in companies. These findings will then be used to develop a business strategy to improve the role of women in businesses (Brummelhuis 2010). Critical evaluation The findings illustrated above indicate that the level of involvement of non-executive directors in the running of the organization has changed dramatically in the recent past and that stakeholders are increasingly demanding more from non-executive directors. The fact that non-executive directors now play the role of watchdogs for stakeholders as opposed to individuals who were meant to provide advice to the board in the traditional role denotes a significant improvement in the functions of the non-executive directors (Monks & Minow 2004, p. 104). Notably, it is almost impossible for the non-executive directors to assume a part-time role because they are actually expected to ‘police’ the executive directors on behalf of the stakeholders (Sheikh & Rees 1995, p. 212). This denotes that they must constantly follow up on the executive in order to establish whether they are working towards meeting the firm’s objective; which may not be performed on an entirely part-time basis. This is unlike in the past where directors were only expected to commit a few days to attend board meetings and give their views and contributions regarding various aspects of the business, thus making them appear like ‘shadow’ board members. The role played by non-executive directors often insinuates the need for considerable independence because they are expected to watch the actions of the directors. Accordingly, they must act without any influence with these directors because this could jeopardize their objectivity and lead to inaccurate reports. Stakeholders expect the non-executive directors to provide them with an unbiased report of the company’s financial records and implementation of strategies and they should therefore be as independent as possible. How independent then can non-executive directors really be? This is a question that has been raised due to the increased involvement of non-executive directors in the functioning of the company. It is notable that there is increased interaction between the non-executive directors with the company directors as well as the employees of the company as they seek to establish how the company is being run as a representative of the shareholders (Stiles & Taylor 2001, p. 87). Unfortunately however, such interaction could impede on the non-executive director’s ability to be objective and thus impact on his independence. To a significant extent, a significant responsibility is now placed on non-executive directors. This could in certain circumstances translate into too much being expected from independent non-executive directors. According to Stiles and Taylor (147) for example, stakeholders expect non-executive directors to be answerable for all malpractice that occurs in the company through being able to recognize all the activities that are performed by the executive. It is however unreasonable for stakeholders to hold too much expectations from non-executive directors, given that they do not have absolute control over the actions of the executive (Parkinson 1995, p. 119). This is because they may not be full-time directors and they may not even be able to follow every single process that occurs within the organization. The executive could play elusive and the non-executive director may not be able to unearth all the mischief that occurs within the organization despite being the stakeholders’ watchdog. The high expectations leave room for victimization of the non-executive directors and this may impact on their work. It can also be considered overwhelming that the non-executive directors are vested with so many roles within the organization. Not only are they required to man the operations of the executive but they are also expected to check on company performance, company image among customers, employee welfare and other matters that affect the company (Stiles & Taylor, p. 97-108). Such overwhelming responsibilities could lead to inefficiency. Conclusion This discussion undoubtedly establishes that the role of the non-executive director in a single tier board has evolved significantly over time. It is notable that unlike the traditional role where non-executive directors only acted as guides in the board meetings, non-executive directors are now more committed towards meeting shareholder expectations through checking the directors’ activities. The independence of the non-executive directors could however be compromised by the increased interaction with directors and employees hence the need for non-executive directors to maintain their objectivity. This discussion also establishes that to a certain extent, the current role of non executive directors can be considered overwhelming especially where stakeholders expect them to keep watch of everything that goes on in the company, which is practically impossible. Reference List Alvarez & Marsal, 2011, Action matters: Practical steps for spotting trouble as a new board member. Retrieved on April 14, 2011 from http://www.alvarezandmarsal.com/en/about/action_matters/Non-ExecBoard.aspx Brummelhuis, S 2010, What is the changing role of the non-executive board director in today’s world? 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