Critically explain the way the role of the non-executive director in a single tier board has developed in recent years. To what extent is too much now expected from independent non-executive directors?
The roles of non-executive directors have been evolving much in the recent years. This is particularly obvious in the recent years, as several events of corporate scandals has been urging the changes, when the public and investors are becoming more concerns on the ethics dimensions of the management as well as the board of directors. Under such a scenario, non-executive directors are given more and more responsibilities, to ensure good and better corporate governance in corporations today. In this article, the changing roles of non-executive directors will be discussed. In the first part, the article will discuss about the importance of non-executives directors to the company. Then, the article will proceed to discuss the traditional roles of non-executive directors. Later, how the roles of non-executive directors had evolved over the years will also be outlined. Next, the question if too much is now expected from the independent non-executive directors will also be debated.
Non-executive directors can be of great importance to the performance and corporate governance of a firm. There are some evidences that high proportion of non-executive directors in the board structure may enhance corporate performance. Some studies of this kind include those performed by McKnight et. al. (2009), Mura et. al. (2007), Ameer et. al. (2010), and Shah et. al. (2008). Independent non-executive directors can also lower the risk of a company. For example, according to a study conducted by Abdullah (2006), he found that ownership of non-executive directors on a corporation increases their likelihood to monitor the board more tightly. Besides, if the independent board of directors able to exercise independence, the CEO is more likely to practice conservative financial reporting standard (Lara et. al., 2007). In short, independent non-executive directors are useful and valuable in contributing to the broad via their experiences and insights. They can add value to the formulation process of strategic directions for a firm in the future. Depending on the specific committee that they are serving, they are critical to ensure agency problems do not harm the shareholders wealth or interest, by acting independently and with integrity in several areas such as: strategy formulation, performance appraisal and evaluation, financial reporting and control, risk management, resources planning, appointment of key executives, board remuneration, as well as to ensure the relevant standards or code of conducts are being followed.
Generally, non-executive directors are employed to a board of a company to supervise the company as well as to carry out their duties on a part time basis. Traditionally, the duties and responsibilities of the non-executive directors are to attend some important board meetings, and in these meetings, to provide critical and intelligent advices, insights and suggestions to the board of directors as well as the management of the company. These non-executive directors are supposed to be experienced and knowledgeable (Bezemer et. al., 2007), and they are supposed to serve as good advisors to the management as well as the other executive or managing directors. They are largely expected to provide third party view, from an outsider perspective, so that the ideas may be fresh and independent (Abdullah, 2006). Not only is that, non-executive directors are also expected to assist the company by provision of business insights (from their experiences) as well as business or industry contacts/ network. In certain cases, the non-executive directors may also be hired to chair the different board, such as the Audit Committee Board, Pension Trustee Body, Directors Remuneration Committee and any other Committees that require an independent viewpoint, which is not associated to the Chief Executive, Managing Director or Chairman. Overall, the existence of non-executive directors can be summarized into two perspectives, first, to ensure independence of the broad (by serving as the effective counter to the executive directors), and secondly, to contribute to overall development and leadership for the firm.
One critically important role of non-executive directors in the past as well in today business landscape is to remain or serve as the independent party on the board, in leading, overseeing or guiding the firm operations and management-related issues. They are supposed to provide objective opinions, independent views and strive to protect the shareholders/ stakeholders’ rights as much as possible (Bezemer et. al., 2007). And depending on the board the independent non-executive directors are serving, they may be required to perform the tasks assigned to these boards (Aggarwal, 2010). For example, independent non-executive directors serving in remuneration committee is supposed to keep the compensation level and perquisites of management in check, to monitor and evaluate the performance of the management or chief executives, and to appoint relevant senior managers to run daily operations of the company (de Andres et. al., 2008). Those independent non-executive directors assigned under the audit and risk management committee may be required to oversee if the financial information provided by the management, to ensure that risk control and evaluation mechanism in the company is adequate, robust and up-to-date, and to the extent of ensuring viable succession planning is available in the board.
In the recent decades, the public has been witnessing how unethical behaviors of chief executives in a company can bring harm to the shareholders and the society as a whole. It is largely found that the executives cannot be trusted. In many instances, some of the executives are likely to engage in several unethical behaviors such as: avoidance of responsibility, selfish planning to benefit oneself (and to win at all costs), rewards oneself even they are not competence enough, providing oneself excessive rewards (Schiehll et. al., 2009), to take excessive risk to earn form the their stock options program (i.e., they share the upside, but not the downside with the shareholders) and many others (Bezemer et. al., 2007). Several crises had arises due to improper or lack of strong control upon the selfish and largely highly irresponsible executives in large corporations. In the aftermath of these crises, the roles of independent non-executives directors are becoming more important, critical and vital to ensure the stability, success and ethical conducts of the executives running the company. The changes of the roles as well as the expected duties of independent non-executives directors can be researched from the evolving contents of the Combined Code. For example, according to Pass (2008), in 2003, the Combined Code related to corporate governance was introduced in UK. Under the newly revised Combined Code, greater prominence is given to the role of non-executive directors in the corporate governance structure of an organization. Emphasis is placed on ensuring those non-executives director are more independent (as well as their roles in affecting better decision making in the board level). Then, in 2006, the contents in the Combined Code are being edited further (to enhance the corporate governance standard in a firm). Then again, according to the Combined Code on Corporate Governance in 2008, it is argued that the best practices of corporate governance are to have larger proportion of the board members to be comprised from independent non-executive directors. The code further demands the independent non-executive directors to get more involved in the managerial problems. It is explicitly stated that their function is to evaluate the strategy, key personnel appointment, and ensuring compliances of standards or code of conducts. In the context of strategic formulation, the independent non-executive directors are expected to constructively challenge and assist in development of proposals on matters related to corporate strategy. Not only is that, it is also argued that the independent non-executive directors have the duty to scrutinize the performance of management in meeting agreed missions and schedules, as well as to monitor the reporting of the performance (McKnight et. al., 2009).
However, the technicality of the Combined Code will not be discussed in-depth in this article, as the article will concentrate more on the discussion on the changing roles of independent non-executives directors in the recent years. Thus, in the next section, the new and more contemporary roles of independent non-executives directors in the aftermath of the financial crises in 2008 will be discussed.
As the public no longer trust the executives, the independent non-executive directors are being burdened with more duties and responsibilities. Today, they are expected to become the champions of the shareholders as well as the stakeholders. They are to take the shareholders as well as the stakeholder interests well, by acting as the policemen or ‘watchdog’ to ensure ethical and proper behaviors of the executives. They are now expected to make contribution, not merely in compliance to the minimum requirements of good corporate governance practices or policies, and to spend more time in the overseeing the company that they are being employed. They are expected to put in more efforts, become more involved in the corporate development as well. In contrast to merely monitoring or mentoring the chief executive or the managing directors, the independent non-executive directors are also expected to monitoring the property, brand name, finances, investment, operations and many other aspects of the firm (Zattoni et. al., 2010). Not only is that, they are also expected to know not only the executives directors, but also the other key executives, key staffs, such as the warehouse managers, the sales managers or any other people that is critical for them to understand the business in greater depth. To purely relying on summaries, paper works, a few short meeting sessions, or briefing from the chief executives is no longer enough, as all these are mainly ineffective or insufficient to safeguard shareholder’s money (Schiehll et. al., 2009). Thus, in short, independent non-executive directors are highly relied upon, to act independently and apparently to ensure that there will be no corporate governance issues to occur in the company they are serving (Aggarwal, 2010). To a certain extent, they may be even held liable, if they are found negligence, or not able to prevent unfortunate corporate crisis from happening. Those high expectations are truly a huge burden for the non-executive directors. These will be further articulated in next section.
Becoming an independent non-executive director is never an easy job, can often, can be a stressful one as they are now burden with high expectations. They have the respective fiduciaries duties to be fulfilled. One of the big burdens upon them is that they may be held liable in case of corporate scandals. In fact, there is no distinction on the liability they may need to shoulders compared to those executive directors. This can be unreasonable as it is surely easily understood that the independent non-executive directors to have less knowledge on the corporate operations if compared to those executives. Thus, it is not relevant to make them exposed to the same degree of liabilities as those shouldered upon the executives directors (Mura, 2007). Besides, the public is generally expecting that as long as there are independent non-executive directors in a company, no corporate governance issues will happen. Nothing can be further than the truth. In fact, independent non-executive directors may have their limitations in ensuring a truly effective, well-control, and properly managed corporate governance system (Zattoni et. al., 2010). They are not involve from day to day operations, and not hired to spent full time in the corporations. Considering that some corporate fraud may not even be easily discovered by the insiders, it is simply to unrealistic to expect that the existence of independent non-executive directors can solve all the problems and prevent any kind of corporate fraud from happening. Then, the independent non-executive directors may be judge in hindsight as well. For example, after an independent non-executive director left the company for several months, and all of a sudden, a corporate scandal is discovered, they will be heavily suspected as well. This will place more burdens to them. In the hard times, they are easily the target to be blamed by the public, as people are simply finding someone to blame upon. However, the corporate activities can be complex and independent non-executive directors largely have the same limitations as usually human beings, and yet they are expected to prevent any corporate governance issues from happening, even after they left from the board.
To conclude, we have discussed the changing roles of independent non-executive director. It is shown that independent non-executive director can be highly valuable for a corporation, in setting the strategy, minimizing the agency risks, as well as to safeguard investors’ interests from unethical executives. It is also highlighted that empirical evidences are available in supporting the notion that existence of strong proportion of independent non-executive director indeed can enhance a firm’s performance. The traditional roles of the independent non-executive director are also discussed. Then, it is argued that due to the several series of corporate crises caused by unethical key executives in corporate world today, the roles and expectations upon the independent non-executive director has been changing. Today, the expectations on the independent non-executive director are high. There are many unrealistic expectations upon independent non-executive director. To simply relying upon independent non-executive director to ensure good corporate governance of a firm is highly taxing upon the independent non-executive director. The public should also be given the burden to act as the necessary ‘watchdog’ to prevent corporate scandals. Apart from that, the insiders, i.e., the employees in any corporation have a role to play to cross check on the key executives behaviors, attitudes and shall responsible to disclose wrong doings of these irresponsible executives before the entire scandals become ‘too big to fail’ or had already exerted huge negative and detrimental impacts to the society.
Abdullah, S. N. (2006). Board structure and ownership in Malaysia: the case of distressed listed companies. Corporate Governance, 6(5), 582-594.
Aggarwal, R. (2010). Independent directors: time to introspect, suspect, respect – an Indian perspective. Journal of Indian Business Research, 2(2), 123-132.
Ameer, R., Ramli, F., & Zakaria, H. (2010). A new perspective on board composition and firm performance in an emerging market. Corporate Governance, 10(5), 647-661.
Bezemer, P., Maassen, G., Van den Bosch, F., & Volberda, H. (2007). Investigating the Development of the Internal and External Service Tasks of Non-executive Directors: the case of the Netherlands (1997 – 2005). Corporate Governance: An International Review, 15(6), 1119.
Brigham, E. F., & Houston, J. F. (2004). Fundamentals of financial management, 10th edition. International Thomson Publishing.
de Andres, P., & Vallelado, E. (2008). Corporate governance in banking: The role of the board of directors. Journal of Banking & Finance, 32(12), 2570.
Hamill, P. A., McGregor, P., & Rasaratnam, S. (2006). A temporal analysis of non-executive director appointments to UK firms: 1990-2000. Managerial Finance, 32(6), 537.
Lara, J. M. G., Osma, B. G., & Penalva, F. (2007). Board of Directors’ Characteristics and Conditional Accounting Conservatism: Spanish Evidence. European Accounting Review, 16(4), 727-755.
McKnight, P., Milonas, N., Travlos, N., & Weir, C. (2009). The Cadbury Code Reforms and Corporate Performance. IUP Journal of Corporate Governance, 8(1), 22-42.
Mura, R. (2007). Firm Performance: Do Non-Executive Directors Have Minds of their Own? Evidence from UK Panel Data. Financial Management, 36(3), 81-112.
Pass, C. (2008). Non-executive directors and the UK’s new combined code on corporate governance. Business Strategy Series, 9(6), 291-296.
Schiehll, E., & Bellavance, F. (2009). Boards of Directors, CEO Ownership, and the Use of Non-Financial Performance Measures in the CEO Bonus Plan. Corporate Governance : An International Review, 17(1), 90-106.
Shah, S., Shah, S., & Zafar, N. (2008). Non Executive Directors and Performance of Firms: Empirical Evidence from an Emerging Market. The Business Review, Cambridge, 10(2), 207-212.
Zattoni, A., & Cuomo, F. (2010). How Independent, Competent and Incentivized Should Non-executive Directors Be? An Empirical Investigation of Good Governance Codes. British Journal of Management, 21(1), 63.