One of the key responsibilities of a non-executive director is to hold management (including the executive directors) to account. That’s done through oversight, including by challenge. Over the last few years, I’ve picked up that ‘challenge’ is getting a bad rap and a NED who challenges management can be seen as difficult, not being a team player. But regulators expect to see challenge by NEDs.
Here are some points that I’ve come across when looking at challenge by NEDs.
1 What do we mean by ‘challenge’? – I think of challenge as not taking information, a report or a situation at face value and asking questions – probing – to find out more. It’s about asking follow-up questions, seeking more information and not being afraid to ask what might be seen as a stupid question. (To put this in context, pretty much all of the questions I’ve heard from NEDs prefaced with This is probably a stupid question but … have been extremely insightful and many of them have been pivotal in getting to the nub of an issue.) It’s about disagreeing, where there’s a difference in view. It’s about being willing to take a stand where that seems the right thing to do. It means not toeing a party line because that’s seen as the way things are done.
2 Challenge isn’t about – being rude, arguing for the sake of it or picking a fight. But challenge isn’t bad manners; it’s an essential part of being a NED.
3 What if there aren’t any NEDs? – many smaller firms (particularly non-banks) don’t have any NEDs – at least, not any independent NEDs (INEDs) – who would usually provide challenge. The risk is that management, in the form of executive directors, mark their own homework. As a firm gets larger and becomes more significant in its market, regulators will expect to see challenge coming from some quarter, ideally in the form of INEDs. This is particularly relevant to PRA-authorised firms and FCA enhanced scope firms.
4 The role of the Board Chair in relation to challenge – the Chair of the Board should consider the level of challenge being provided by NEDs (particularly INEDs) and promote a culture where challenge is thoroughly acceptable and actively encouraged. Boards usually take their tone – and steer – from the Chair and so there’s an important role to play here in creating a culture of welcoming challenge. Where a NED isn’t providing challenge (which could be through not knowing how to present that or feeling uncomfortable about raising or pursuing a point), this could be addressed in the annual performance review of directors and in learning and development plans.
5 All NEDs should challenge – I’ve worked with boards where one INED has been tacitly acknowledged as the person with ‘permission’ to ask the difficult questions (i.e. to provide challenge); other NEDs have sometimes asked follow-up questions but have generally left the INED with ‘permission’ to carry on. All NEDs should provide challenge. Leaving it to one director isn’t an option. (The idea that a director needs ‘permission’ to ask difficult questions is a point for consideration but is outside the scope of this note.)
6 SMF senior managers and NED challenge – in order to meet the standards required under the senior managers regime, SMF senior managers will need to consider where challenge is needed and be clear and intentional when providing that challenge. This is particularly relevant under the conduct rules, including the senior manager conduct rules.
7 To return to regulators and challenge – I’ve seen a number of cases where regulators have queried whether a firm should keep a NED on the board because of the NED’s lack of engagement, including lack of challenge. And if a firm experiences a regulatory problem or needs to implement a wind down plan, expect regulators to review what the NEDs did to identify the problem, address it and hold management to account. In other words, what challenge they provided.
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.