One of the key responsibilities of a non-executive director is to hold management (including the executive directors) to account. That\u2019s done through oversight, including by challenge. Over the last few years, I\u2019ve picked up that \u2018challenge\u2019 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.<\/p>\n
Here are some points that I\u2019ve come across when looking at challenge by NEDs.<\/p>\n
1\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 What do we mean by \u2018challenge\u2019?<\/strong> \u2013 I think of challenge as not taking information, a report or a situation at face value and asking questions \u2013 probing \u2013 to find out more. It\u2019s 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\u2019ve heard from NEDs prefaced with This is probably a stupid question but \u2026<\/em> have been extremely insightful and many of them have been pivotal in getting to the nub of an issue.) It\u2019s about disagreeing, where there\u2019s a difference in view. It\u2019s about being willing to take a stand where that seems the right thing to do. It means not toeing a party line because that\u2019s seen as the way things are done.<\/p>\n 2\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Challenge isn\u2019t about<\/strong> \u2013 being rude, arguing for the sake of it or picking a fight. But challenge isn\u2019t bad manners; it\u2019s an essential part of being a NED.<\/p>\n 3\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 What if there aren\u2019t any NEDs?<\/strong> \u2013 many smaller firms (particularly non-banks) don\u2019t have any NEDs \u2013 at least, not any independent NEDs (INEDs) \u2013 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.<\/p>\n 4\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 The role of the Board Chair in relation to challenge<\/strong> \u2013 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 \u2013 and steer \u2013 from the Chair and so there\u2019s an important role to play here in creating a culture of welcoming challenge. Where a NED isn\u2019t 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.<\/p>\n 5\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 All NEDs should challenge<\/strong> \u2013 I\u2019ve worked with boards where one INED has been tacitly acknowledged as the person with \u2018permission\u2019 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 \u2018permission\u2019 to carry on. All NEDs should provide challenge. Leaving it to one director isn\u2019t an option. (The idea that a director needs \u2018permission\u2019 to ask difficult questions is a point for consideration but is outside the scope of this note.)<\/p>\n 6\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 SMF senior managers and NED challenge<\/strong> \u2013 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.<\/p>\n 7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 To return to regulators and challenge<\/strong> \u2013 I\u2019ve seen a number of cases where regulators have queried whether a firm should keep a NED on the board because of the NED\u2019s 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.<\/p>\n <\/p>\n 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.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":" One of the key responsibilities of a non-executive director is to hold management (including the executive directors) to account. That\u2019s done through oversight, including by challenge. Over the last few years, I\u2019ve picked up that \u2018challenge\u2019 is getting a bad rap and a NED who challenges management can be seen as difficult, not being a […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[163],"tags":[88,100,164,102,165],"class_list":["post-475","post","type-post","status-publish","format-standard","hentry","category-governance-reframed","tag-boards","tag-challenge","tag-neds","tag-non-executive-directors","tag-senior-managers"],"_links":{"self":[{"href":"https:\/\/ruthfinch.com\/website\/wp-json\/wp\/v2\/posts\/475","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/ruthfinch.com\/website\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/ruthfinch.com\/website\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/ruthfinch.com\/website\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/ruthfinch.com\/website\/wp-json\/wp\/v2\/comments?post=475"}],"version-history":[{"count":2,"href":"https:\/\/ruthfinch.com\/website\/wp-json\/wp\/v2\/posts\/475\/revisions"}],"predecessor-version":[{"id":478,"href":"https:\/\/ruthfinch.com\/website\/wp-json\/wp\/v2\/posts\/475\/revisions\/478"}],"wp:attachment":[{"href":"https:\/\/ruthfinch.com\/website\/wp-json\/wp\/v2\/media?parent=475"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/ruthfinch.com\/website\/wp-json\/wp\/v2\/categories?post=475"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/ruthfinch.com\/website\/wp-json\/wp\/v2\/tags?post=475"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}