Non-executive directors – NEDs – are directors of a company who don’t have management responsibilities[1] and they play a critical part in holding management (including the executive directors) to account.
A brief digression, first, on the different types of NEDs.
- Independent non-executive directors – often referred to as INEDs – have no interest in or connection with the company except for the non-executive directorship. This is more than not having a conflict of interest. It’s about independence on the part of the NED.
- Shareholder-appointed NEDs are, as the name suggests, appointed by the parent – perhaps, at the instigation of the ultimate parent company in the group. Shareholder-appointed NEDs might have an executive role at the parent or another company within the group – perhaps, as an executive director – or they might be INEDs on the parent company’s board. Generally, they won’t be independent directors for the purposes of the subsidiary company’s board because of their connection with the parent.
- Investor NEDs are similar to shareholder-appointed NEDs but, rather than being appointed by the parent company, they’re appointed by a significant investor, providing a voice for the investor on the board and a line of sight into the company and its oversight. They’re generally found in start-ups and early-stage companies. Investor directors aren’t considered to be INEDs because of the connection with the investor with the right to appoint them.
Not all regulated firms have NEDs but banks, insurers and the larger firms (including enhanced scope firms under SMCR) will have some NEDs. For banks in particular, regulators will expect to see a majority of INEDs on the board and will scrutinise their independence.
With those points in mind, I’m setting out my views on what makes a NED of a regulated firm effective.
1 The crucial importance of oversight and challenge – overseeing management and holding management to account are key responsibilities of a NED and providing effective challenge is at the heart of that. There’s a separate note about boards, NEDs and challenge but I’ve made this the first point in the list for a reason. A NED – and particularly an INED – who doesn’t review management, probe and provide meaningful challenge is unlikely to be performing the role effectively.
2 Know the business and know the regulatory landscape – NEDs don’t need to know the business as well as management or regulation as well as the Compliance and other functions. However, a NED should have good and up-to-date knowledge of the business and a sound understanding of the current regulatory landscape and regulators’ expectations.
3 Devoting sufficient time to the role – this has become less of a concern in recent years but there have been cases of NEDs taking on too many appointments or other commitments and not having enough time for their role as NED. This might still arise where:
- The NED is a director of companies based in other jurisdictions and needs to attend board meetings in another country. Delays to travel plans and meetings called at short notice can result in a NED cutting it fine or even missing board meetings at the regulated firm.
- Although firms – and regulators – track other directorships, a NED might have trustee or other appointments outside the financial services sector that impinge on availability. These can include positions where there’s no remuneration.
- Some NEDs still have executive roles at other organisations and commitments there can impact availability at the regulated firm, even with careful planning.
- A crisis at the regulated firm can require directors to be available for meetings outside the usual board schedule, with additional reading and points to consider too.
4 Learning and development (L&D) is a key part of the role – NEDs should expect to carry out firm-prescribed L&D and self-identified L&D activity. This will be driven by ongoing competency assessment and any points arising from the annual director performance review, but should also reflect the firm’s strategy and risks, challenges, opportunities and initiatives arising from that.
5 NEDs need to have a good working knowledge of all topics and be able to contribute to board discussions – I’ve been at board meetings where it’s clear that one or two NEDs are taking a back seat on a topic (e.g. the ICAAP; IT) because that isn’t their strength and they know that other people on the board have deeper knowledge. Not being an expert is fine; taking a back seat isn’t fine at all. NEDs will need to get up to speed on any topics where they’re less comfortable or have less experience.
6 Be willing to challenge the Chair – this one might sound strange but there are times when NEDs need to challenge the Chair. This could be the case where the Chair cuts off discussion, doesn’t get through all agenda items (particularly if that happens on a regular basis), favours particular directors’ views or gives them more time to speak at board meetings – or there might be other circumstances in which the Chair isn’t acting appropriately. This should be rare but it does happen. Primary responsibility is with the senior independent director (SID) to sit down with the Chair and seek to resolve any issues but many firms with NEDs don’t have a SID. In those circumstances, another NED (preferably, an INED) will need to step up.
7 It helps to be personable – it’s an obvious point, but NEDs need to work with other directors so the board, as a whole, can be effective. That involves being a team player but also striking the right balance to provide appropriate and effective challenge.
This note is intended to provide general information about current and expected topics and perspectives that might be of interest. It does not provide or constitute, or purport to provide or constitute, advice relevant to any particular circumstances. Legal or other professional advice relevant to any particular circumstances should always be sought.
[1] I’ve come across financial institutions that refer to NEDs as ‘the directors’ (with executive directors being referred to as ‘management’) and I’ve also come across cases where executive directors are referred to as ‘the directors’, with non-executive directors being referred to as ‘non-execs’ or ‘NEDs’, distinct from ‘the directors’. Neither of these is correct and, to be clear, directors of a company can be executive directors (with management responsibilities) or non-executive directors (with no management responsibilities).