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NED Challenges

The role and responsibilities of non-executive directors have certainly been held up to scrutiny in the current downturn, not least by our national media. This speculation will almost certainly impact the way boards are structured and how companies are governed in the future but what will it mean for NEDs going forward? Will increased liability stifle innovation and growth? How much risk should NEDs be responsible for? And, with so much focus on reining in executive remuneration packages, how will non-executives be rewarded? 

In the current climate, the need for effective, experienced non-executives has never been greater. The value of these individuals to organisations will become evident as the recession progresses and, ultimately, when the upturn begins. NEDs have a responsibility to keep executives on the right track and ensure they are focusing on the future. As Ian Harley, Non-executive Director for British Energy plc and Remploy Ltd, explains, "the focus will be very much on survival strategies so the real challenge for NEDs will be not to let the executive hunker down too much, or do long-term harm to the business by simply pursuing short-term savings. The fastest out of the blocks as the recession wanes will be the winner."   

In the short-term, NEDs have a key role to play in helping organisations address the challenges of the current climate. As Martin Pilgrim, who holds various NEDships in the not for profit sector and was recently appointed Chair of the England Council of the Prince's Trust, says, "As cash gets harder to find the formal role of the NED becomes more difficult. Governance in the voluntary sector is as important as in the private sector and NEDs, be they called trustees, directors, board members, are as responsible in law as the directors of any other concern. Audit changes mean that organisations need to be more careful about satisfying the 'going concern' criterion. Charities, for example, will be required to demonstrate more clearly that they provide a public benefit."    

NEDs will also play an integral role in changing attitudes to risk, as John Allkins, Non-executive Director for Intec explains, "NEDs will be under more pressure, not only because of the public failures in governance, but because so many companies will have serious financial problems and will need to recapitalise. This should change the attitude to risk and ensure that it really is a whole board agenda, as opposed to a concern for the chair of the audit committee which so often happens. This should mean more involvement with all levels of company management and guaranteed access to information, not just data, to help NEDs create their own views on company risk."

It was agreed at a recent Criticaleye breakfast event for non-executives that risk should be accepted but only where the right access to information and rewards were in place. There was also the question of how many NED roles one individual should have and while this is clearly dependent on many factors, Dipesh Shah, who sits on a number of boards including Thames Water, Lloyds of London, Babcock International Group and JKX Oil and Gas plc, warns about NEDs taking on too many roles in the current climate: "Given the increasing demands on NEDs from shareholders, they can not afford to spread themselves too thinly. Furthermore they need to satisfy themselves that they fully understand the business and can truly add value to it." 

Where NEDs do add value, rewards should be proportionate, as Ian Harley explains, "reward should reflect market forces, time spent and effort or experience applied. Unfortunately the man on the street, and indeed the press, find it hard to accept six-figure salaries and share based incentives for what they see as a one day a month, part-time job."

In the longer term, NED roles could become even more challenging. "I think there will be even more pressure on NEDs, post recession, to be a brake on the organisations growth aspirations. This will increase the 'them and us' tension between NEDs and executives as well as potentially slowing recovery," says Ian Harley.

NED Challenges Insights

Our Inspiring Non-Executive Director breakfasts are open to all NEDs in the Criticaleye Community. Event write-ups for these breakfasts are also available, click here to read the latest one. Other insights of interest to this topic include the papers What Makes An Exceptional Non-Executive Director and Concerns That Still Keep Non-Executives Awake At Night.

Matthew Blagg, CEO, Criticaleye

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