Part 5

Who are the NEDS

NEDS• 'Non-Executive Director' A

member of a company's board of directors who is not part of the executive team.

NEDS•A non-executive director

(NED) typically does not engage in the day-to-day management of the organization.

NEDS

•Non executive directors are either independent or non independent.

NEDS•A key principle of good

corporate governance is that there should be a sufficient number of independent NEDs on the board.

NEDS•The concept of independence is an important one for corporate governance.

NEDS• to create a suitable

balance of power and prevent the dominance of the board by one individual or by a small number of individuals.

NEDS•Responsibilities are given

to independent directors by the Combined Code, and the external auditors should be independent.

NEDS•Responsibilities are given

to independent directors by the Combined Code, and the external auditors should be independent.

NEDS• In the United States of

America, the New York Exchange listing requirements define an independent NED as one with:

NEDS•Has not been employed by the company presently in the past 3 years,

NEDS

•Does not have a family member who has been or is presently employed by the company.

NEDS

•Is not a partner in business.

NEDS

•Has not been and is not employed as an executive of another entity.

NEDS• In South Africa, the King II (2004) report defines an independent NED as:

NEDS

•Does not report, nor was nominated by a significant shareholder.

NEDS

•Was not employed by the company for 3 financial years prior to appointment.

NEDS• Is not an immediate family

member of a person, who is or was in the past 3 years employed by the company as an executive director.

NEDS•Is not a professional advisor to the company.

NEDS

•Is not a professional advisor to the company.

NEDS

•Is not a significant supplier or a customer of the company.

NEDS•He has no significant contractual relationship with the company.

Independence•Phan (2006) defines

independence as consisting of “...the feeling of freedom to express personal views in the boardroom,,,

Independence•and the freedom from undue influence by top management or the controlling shareholders.”

Numbers of neds• In principle, the NEDs

provide a counterweight to the CEO and chairman of the board, and so contribute to a balance of power practice.

Numbers•The Cadbury recommends that the majority of them should be independent.

•  •  

Numbers

•The Higgs Report provides that at least ½ of the board, including the chairman should be independent.

Duties

•All directors are subject to the following fiduciary duties•Exercise honest judgements,

Duties•Act in good faith at all times,•To act in the best interests of the company,

Duties•Exercise diligence, care and skill and•Exercise prudence.

Statutory duties•Directors have a duty to keep accounting records which are:

Statutory duties•Sufficient to show and explain the company’s transactions,

Statutory duties

•Such as to disclose with reasonable accuracy, at any time, the financial position of the company (Article 102 CJL), and

Statutory duties

• In accordance with a set of generally accepted accounting principles which must be stated.

•  

Statutory duties• If the company is one

which is required to be audited the accounts show a “true and fair view of the profit or loss of the company

Statutory duties• for the period of the state of

the company’s affairs at the end of the period” ... [and which] “shall be approved by the directors...” (Article 104 CJL).

Function of NEDS

•Non-executive directors are appointed to bring five key qualities to the board of directors, namely:

Function of NEDS

•Independence,•Impartiality,•Experience,

Function of NEDS•Specialist knowledge (Jersey Financial Services Commission (“JFSC”) requirement), and

Function OF NEDS•Personal qualities.•Contributing to the strategic direction of the company.

Quality of NEDS

•WHAT MAKES A GOOD NON-EXECUTIVE DIRECTOR?

Quality•Contributing to the strategic direction of the company,

Quality•Efficiently solving problems that arise,•Communicating with third parties,

Quality

•Ensuring all the audit requirements are satisfied,

Quality•Remuneration of the executive directors,•Appointing the board of directors.

Criticism of NEDS

• Insufficient knowledge,• Insufficient time spent with the company,

Criticism of NEDS

•Overriding influence of executive directors.

THE HIGGS REPORT

•THE HIGGS REPORT ??????

Higgs Report•The report proposed that NEDs should take an active role in the governance of their company,

Higgs Report•and should become more far more accountable for their performance.

Higgs Report•Their role should be clarified in the Combined Code, and should have four board elements:

Higgs Report• Strategy. To contribute to the

development of the company’s strategy and constructively challenge views of the executive directors within a “spirit of partnership and mutual respect.”

Higgs Report•Performance. To monitor

the performance of executive management in meeting their agreed goals and objectives.

Higgs Report• Risk. To satisfy themselves

that the financial information produced by the company is accurate and that the financial controls and systems of risk management are robust.

Higgs Report• People. To have responsibility

for setting the remuneration of executive directors and to have a prime role in both the nomination and removal of senior management and in succession planning.

Question 1•Evaluate the strategies that NEDs can use to uphold the efficiency of the board

NEDS EFFECTIVENESS

•To be effective, a non-executive director needs to;

NEDS •Build a recognition by executives of their contribution in order to promote openness and trust

NEDS•Be well-informed about the company and the external environment in which it operates,

NEDS•Have a strong command of issues relevant to the business,

NEDS

•Insist on a comprehensive, formal and tailored induction,

Effectiveness•Continually develop and

refresh their knowledge and skills to ensure that their contribution to the board remains informed and relevant.

Combined Code•The Combined Code describes an effective non-executive director as one who;

Combined Code•Upholds the highest ethical standards of integrity and probity,

Combined Code•Supports executives in their leadership of the business while monitoring their conduct,

Combined Code•Questions intelligently, debates constructively, challenges rigorously and decides dispassionately,

Combined Code

•Listens sensitively to the views of others, inside and outside the board,

Combined Code•Gains the trust and respect of other board members,

Combined Code•Promote the highest

standards of corporate governance and seeks compliance with the provision of the Combined Code wherever possible.

Question 2•DISCUSS THE SITUATIONS

IN WHICH NON-EXECUTIVE DIRECTORS ARE LIKELY NOT TO BE INDEPENDENT.

Answer1. Material business relationship with company in last 3 years.

Answer•Employee in last 5 years•Close family ties with directors.

Answer•Receives other remuneration from company besides director’s fee.

Answer•Served on board for more than 9 years•Significant shareholder

Answer

•Joint directorship in other companies.

Question 3

•Critically analyse Myners report on the criticism of NEDS.

Answer

• Paul Myners (2002) condemned the NEDs for being ineffective. Some NEDs held too many positions in public companies, more than they could possibly serve effectively.

Answer•The NED nurtured the mentality of “you scratch my back and I will scratch yours.”

Answer• A NED might tacitly undertake

not to ask difficult questions or take a stand against executives on the board, provided that the NEDs of his own company act in the same way.

Conclusion•Let us meet in part 6.