The role and effectiveness of non executive directors in UK corporate governance structure- methodology qualitative or quantitative
A non-executive director of a firm does not participate in the day-to-day management of the company. But they are usually involved in planning and policy making and are sometimes included to lend prestige to the firm due to his or her standing in the community. Non-executive directors are expected to monitor and challenge the performance of the executive directors and the management and to take a determined stand in the interests of the organization and its stakeholders. They are held equally liable as the executive directors under some statutory requirements such as tax laws. (Business Dictionary) Other names for non-executive directors include external director, independent director or outside director.
To determine the role and effectiveness of non-executive directors in the UK corporate governance structure, one should examine the role of the non-executive director in a specific industry. To serve our purposes, we shall examine this role in technology companies.
The Information and Telecommunications, Media and Technology Non-Executive Association (ITNEA) are a UK association for non-executive directors (NEDs) and non-executive Chairmen of listed IT, Telecommunication, and related media companies. Sometimes they are referred to as telecommunication, media and technology (TMT) or information and computing (ICT) companies. There are currently over 500 members, holding over 1000 directorships between them which range from private start-ups to FTSE 100 companies in all sectors, both in the UK and globally. To qualify for membership, the person must hold a non-executive directorship of Chairmanship of a quoted technology company (or an executive directorship of such where the person has or wants a non-executive role as well). (Wikipedia) ITNEA recently (in 2000) produced a study on the different ways a non-executive director can make a positive contribution to their companies, over and above the minimum requirements of corporate governance. This paper has been edited and updated since but they noted that although some matters are still relevant there are others which changed. ITNEA noted that there is an increase in NED time and developing governance issues and the proportion of the board filled by NED’s has increased in the larger organizations.
First the characteristics of technology companies were appraised:
· Rapid growth (relative to most other listed companies).
· Young companies, both in the corporate sense and also in the age of the employees.
· Shortage of supply of well experienced candidates for the executive director roles, especially in relation to e-business.
· The above often lead to relatively young senior executives and / or executives with limited experience in businesses of their current scale or mode of operation.
· Rapid change and expansion into new products, services, contract situations and geographic markets.
· Global competition for successful executives, leading to major difficulties of retention. (ITNEA)
One or more of these issues are partially addressed by the selection of non-executives who have a specialized knowledge ore experience with the particular concern(s).
The importance placed on non-execs is on effective monitoring and being able to act as mentors and as active participants in developing strategies and policies with the executive team. Shareholders in both the public and private sectors are looking for this sort of informed and relevant background experience to enable mentoring, support and monitoring from pertinent possibly focused knowledge rather than just from general business experience. The increasing trend towards a professional approach to recruiting non-executive directors is also placing great stress on these abilities which requires a positive commitment from the would-be director to put in the time and effort needed to help companies in this way. (ITNEA)
Contribution by non-executives at board meetings is not enough. They need to put in more time and involvement if they are to contribute fully to the organization’s development. In a market moving as rapidly as the technology sector, a once-a-month checkpoint with some words of wisdom in the Board meeting is not a great deal of help to the executive management. (ITNEA)
To be more effective to the company, non-executives’ must put more time to understand the company and not just numbers alone. Executive managers need to be alert to the need to share information with the non-executives otherwise there will be a communication breakdown. This simply includes just cc’ing the non-exec on an email for instance.
According to the study by ITNEA, non-executive directors should use the extra time to:
· Understand the issues of the business beyond that which can be absorbed in monthly (or less frequent) board meetings and their papers.
· Know the business, the executives, key staff and customers, to understand beyond board paper summaries.
· Help the executive team to see the company as outsiders may see it (the City, customers etc).
· Understand the competitive threats and opportunities of the sector and the company.
· Attend trade fairs or other industry events.
· Observe, analyze and think about issues before feeding back. (ITNEA)
This is all about developing understanding in order to contribute positively and fully beyond the formalities of the boardroom. Non-executives are a resource to be used. The board should determine with the non-executives the level of commitment they will have to expend, as this of course changes over time. Hence, to assess the role and effectiveness of non-executives in other industries, perhaps following this study (but adjusting it accordingly so it fits the intended industry) conducted by ITNEA would provide the answers.
References:
BuisnessDictionary.com Non-executive director. Retrieved 12 May, 2011 from http://www.businessdictionary.com/definition/non-executive-director.html
ITNEA Discussion Paper. The Professional Non Executive Director in Technology Companies. Retrieved 12 May, 2011 from http://www.itnea.net/the_role.htm
Wikipedia. ITNEA. Retrieved on 12 May, 2011 from http://en.wikipedia.org/wiki/ITNEA
Credit:ivythesis.typepad.com
0 comments:
Post a Comment