The position of non-executive director - Essay Example

?Non-Executive Director Legally speaking, there is no distinction made between the responsibilities of a non-executive director and an affiliated director. According the UK company law, however, both have distinct roles while fulfilling their responsibilities. The affiliated director is an employee of a company and is given an executive position and authority to involve in the day to day business operations of the company; on the other hand, the non-executive director is not an employee of the company; consequently, he or she does not possess an executive position or executive authority similar to the executive position or executive authority extended to the affiliated director. In addition to that, the affiliated director receives salary or remuneration for his or her services performed for the company; on the other hand, the non-executive director charges fees for providing his services for the board. Functions of non-executive director Fundamentally, the functions of the non-executive directors are to provide a creative contribution to the board with the provision of objective criticism (Curnow and Reuvid, 2003). Also, the non-executive directors are required to ponder over the board matters and avoid straying into the executive direction, which is the role of the affiliated directors. And, at the same time, the affiliated directors involve and carry out the executive decisions for the company on day to day basis in contrast to the function of the non-executive director. Tricker (1994) elaborates two functions of the non-executive directors, which he referred as ‘performance’ and ‘conformance’; the objectives of the performance can be entertained if the non-executive directors contribute towards the overall performance of the company through their skills and expertise that they have developed throughout their life; and, for the objective of conformance can be manifested by critically supervising or monitoring the aggregate performance of the board. Also, their functions also include the advisory role. Soon after the debacle of Enron, WorldCom and other giant companies in the United States of America, the need for an effective role of board was heavily felt. The role of executive directors became more dubious, and the need for the more active and stronger role for the non-executive directors received much attention. Consequently, the Sarbanes-Oxley 2002, in the United States, and Higgs Review of Non-Executive Directors in 2003, in the United Kingdom, revitalized the role of the non-executive director and gave more clarity to the participation and contribution of the non-executive director. Dispersed and concentrated ownership Particularly, in the United States and the United Kingdom, the dispersed ownership, which is also identified with the term “outsider systems” (Maher and Andersson, 1999), is featured with relatively high turnover along with widely dispersed share ownership; in the dispersed ownership, a more equitable distribution of information and a considerable emphasis is given to the protection of the shareholders rights and, especially, those of minority investors. On the other hand, concentrated ownership, also known as insider systems, have features such as the presence of ownership concentration or concentration of voting power in a few hands along with a multiplicity of corporate holdings and inter-firm relationships. The specific examples, denoting the concept of concentrated ownership, include familial control, banks, holding companies and other non-financial institutions. Both types of ownerships offer different sorts of advantages. The dispersed ownership provides the benefits such as extended liquidity of stock; as a result, the investors can easily avail the better risk diversification possibilities; and, at the same time, the corporate governance framework in the dispersed ownership encourages the use of public capital markets (OECD, 1999); on the other hand, the problems such as supervision and monitoring of management, which remains to be a point of high tension in the dispersed ownership, reduce their intensity due to the presence of concentrated ownership. As a result, the cost factor is substantially reduced in the concentrated ownership. Non-executive Director’s role for Dispersed and Concentrated Ownership The role of the non-executive director may not remain the same for the dispersed ownership and concentrated ownership. For example, the non-executive director, in the dispersed ownership, may put more focus over the conformance; in which, whether the implementation of company laws and other regulatory requirements, in its true spirit have been carried out in accordance to the rules and regulations incorporated in the company laws and the international accounting standards. And, this becomes more important for the dispersed ownership; the collective attainment of corporate objectives remains a top priority for the shareholders, directors and the management of a company. In addition to that, efficient monitoring, from non-executive directors that free from managerial influence is capable to enhance the quality of financial information provided to the use of financial statement (Higgs Report, 2003), may also serve the objectives of the dispersed ownership. On the other hand, the companies under the label of concentrated ownership may expect that the role of non-executive director should assist them in their business and financial “performance”. in the concentrated ownership, there exists less division of work among the employees working in the concentrated ownership, and a majority of the work is put over the shoulders of one or two employees in comparison with the dispersed ownership, in which the same work is properly distributed and performed appropriately by the employees; and, at the same time, in the concentrated ownership, rights, duties and authority remain mostly occupied in the hands of a few people. As a result, impact of such concentration does not properly enable the owners to show business performance as they should be. Consequently, the non-executive director may advice them towards incorporating improvements in order to bring higher level of performance in their businesses. Usefulness of Non-executive Director The deliverance of non-executive directors considerably relies on a number of factors. For example, integrity, qualification, experience, expertise (Pass, 2008), interpersonal and communicative skills at the personal level are nothing less than an obligatory requirement. Undoubtedly, they are hired not on the basis of mere qualification or with the purpose of filling a vacate chair at the board; but, are hired to not only to possess such credentials but also to demonstrate them while dispensing their duties and responsibilities. However, certain external factors influence over the usefulness of the non-executive directors such as organizational culture, the board size and so on. For example, in the bureaucratic organizational culture, a non-executive director may face hindrances over the exercise of the independence attached to his or her work; not just because he or she does want to but the manifestations of the bureaucracy within that organizational culture discourage him or her to discharge his responsibilities. References Curnow, B, and Reuvid, J (eds.) 2003, The International Guide to Management Consultancy: The Evolution, Practice and Structure of Management Consultancy Worldwide, 2nd edn, Kogan Page, London. Higgs Report, (2003), Good practice suggestions from the Higgs Report, Financial Reporting Council, London. Maher, M, Andersson, T, (1999), Corporate Governance: Effects on Firm Performance and Economic Growth, Organization for Economic Co-operation and Development, Paris. Pass, C, 2008, ‘Non-executive directors and the UK’s new combined code on corporate governance,’ Business Strategy Series, 9(6), pp.291-296. Tricker, RI, (1994), International Corporate Governance, Prentice Hall, New York Read More