Professional Documents
Culture Documents
Directors – Role in
Corporate
Governance
Muhammad Saeed Babar Reg.# MM073003
Non Executive Directors – Role in
Corporate Governance
Who is a NED?
A non-executive director (NED) is a member of the board of directors without
executive responsibilities in the company. He is included in the BOD to bring outside
knowledge, breadth of experience and impartiality in the decision making process.
He has all the same fiduciary and statutory responsibilities that other executive
directors have towards the company and other stakeholders.
Importance of NED
An NED is supposed to be an independent director and as it has been assumed that
good board is a pre-requisite to good corporate governance, in the same fashion, it
has been taken for granted that representation of an INED on the board makes a
board balanced or good. But this is a dangerous misconception. Mere presence of
an NED does not make a board good or bad; it is his independence or his fair
opinion on a particular issue without any influence of whatsoever that makes his
presence truly important for a board to be good.
Types of NED
Following are the different types that are common in corporate world
Role of NEDs
Higgs report of 2003 looked at the role of NEDs and it is as follows:
4. People – NEDs are responsible for deciding the level of remuneration for
executive directors, and should have a prime role in appointing directors and
in succession planning.
1. Except for smaller companies, at least half of the board, excluding the
chairman, should NEDs.
1. A nominations committee
2. An audit committee
3. A remuneration committee
Independence of NEDs
Non-executive directors are either independent or non-independent. A NED is not
independent if his or her opinions are likely to be influenced by someone else, in
particular, by the senior executive management of the company or by major
shareholder. Independent non-executive directors are supposed to bring an
independent view to the deliberations of the board. If a non-executive director is
likely, for one reason or another, to take sides with the CEO, he or she is unlikely to
bring the much needed balance of power to the board. Inducting NEDs to the board
just to comply with the law is not a healthy practice. Companies should actively
seek to avail the benefits of NEDs in order to improve the decision making by the
board.
Measurement of Independence
The independence of a non-executive director could be compromised, if the
individual concerned:
Criticism on INED
Insufficient Knowledge
The quality of decision making depends largely on the quality of information
available to the decision makers. It is the responsibility of the chairman to supply
timely information in a form and of a quality appropriate to enable NEDs to
discharge their duties. However, the senior executives in a company control the
information systems and so control the flow of information to the board. It is quite
imaginable that the CEO or other EDs might have blocked the critical information
from the board or it is presented in a distorted manner. The lack of this aspect of
insider knowledge of EDs about business operations and having to rely on the
integrity of the supplied information restricts the scope for NEDs to make a
meaningful contribution to board decisions.
Insufficient Time
NEDs often have executive positions in other companies and organizations, where
most of their working time is spent. As a general rule, NEDs don’t have an office at
the company HO and may spend one or two days a month on the company’s
business. A further criticism of NEDs is that some individuals hold too many NED
positions, so they can’t possibly give sufficient time to any of the companies
concerned.