December 14, 2022

The evolving role of the Non-Executive Director

Thirty years ago a revolution in UK Corporate Governance took place as financial scandals and controversies exploded onto the front page, reaching a crescendo with the 1992 Cadbury Report.

For the first time the light was turned onto the role and responsibilities of Non-Executive Directors (NEDs) in an attempt to shift the balance of boardroom power and establish effectual independent judgement, ethics and best practice.

The findings and recommendations of this seminal report were that to mitigate risk and failures, NEDs must become more than a ‘box-ticking’ exercise, but rather an effective force within the boardroom, with this reflected in their time commitment, professionalism, influence, and selection.

Fast forward to 2022, and the myriad of unprecedented challenges businesses and boards face including the global pandemic fallout, increasing cybercrime, sustainability issues, the virtual world, and the war in Ukraine, means the role, relevance, and prominence of NEDs is once again front and centre.

With boards having to adapt and restructure against such a complex and competitive business environment to ensure long-term strategic success, and with ever-increasing reputational risk and exposure across all aspects of operations, never has the need for effective, professional, and agile NEDs been so apparent.

In this insight we look at the evolution of the role, examining what characteristics have remained, what has changed and what that means for businesses looking to appoint.

The historic role of a NED

“Nobody is quite sure what they are used for, but they add a touch of class.”

Some would say Lord Grade's quote supported the view of the time that a NED was a nice to have, somebody who would sit back and not challenge the status quo.

However, the financial scandals and associated governance failures of the late 20th Century including that of the Maxwell Corporation, and the resulting Cadbury, Greenbury, and Hampel reports looked to change this with the subsequent UK Corporate Governance Code 1998 emphasis on boards to ‘comply or explain’.

Further global unrest and scandal led to a reappraisal and tightening of corporate governance with the publishing of the Higgs Review in 2003. This highlighted, in its examination of the role and effectiveness of a NED, the need for an ‘independence of mind, willing and able to challenge and question executives.'

It clarified the role under the following headings: • Strategy – constructively challenge and contribute to the development of a company’s strategy • Performance – scrutinise and report on the performance of management • Risk – to be satisfied with the reliability of financial information and the adequacy of controls • People – have responsibility for determining appropriate remuneration, take a prime role in appointments and succession planning

NEDs in today’s business world

The business landscape and that of the wider world has changed dramatically since the publication of the Higgs Review. Who could have predicted the wide-ranging and fast paced changes around interconnectedness and technology, the advent of social media, a modern age pandemic, and the pressure and effects they would have upon businesses?

It is because of these and other far-reaching external influences that whilst many of the core characteristics of an effective NED remain the same, the new business world we find ourselves in and the challenges to navigate means there are now increasing expectations, responsibilities and demands associated with this role.

One of the biggest changes has been the increasing time commitment and expertise level required with the 2021 EY NED Barometer Survey stating that 78% say the role has become more time consuming.

As Carol Ann Searles, Partner at Carlyle explains: “Today’s Non-Executive Director must demonstrate they add value. Against a background of increasing regulatory control, corporate social responsibility and greater shareholder scrutiny, the days of showing up with one eye on governance are gone. Boards and stakeholders expect individuals to have an eye on the present and future. Ones who are comprehensively informed, fully engaged with company workings, and armed with specialist knowledge, to understand all business complexities and forge trustworthy and healthy relationships which can be constructively challenged for the benefit of the board and the organisation.”

In relation to expertise, there is a far greater emphasis now placed on NEDs staying relevant. Yes, they need to bring a depth of experience and breadth of knowledge specific to the industry but are they up to date with fast-moving industry trends, are they proactive in terms of new approaches, do they believe in their own CPD and performance evaluation?

If they stay abreast not just of changes that pertain to their industry, but also in the wider sense such as cyber security, technological advancements, and globalisation, they are in a far better position to ask critical questions, suggest changes, offer different perspectives, and help the business to adapt and become future proof.

Much of this of course reflects the need for boards collectively to become much more dynamic and effective in composition. This was driven in part by COVID-19 in which organisations had to react quickly and decisively with long-term repercussions for those who failed to adapt.

Courage, diligence, and tenacity to advise and guide, with a full grasp of the context in which those activities are undertaken and a balance between risk and reward, is a requirement of today’s NEDs.

For this transformation to occur it is critical therefore that boards look to appoint and retain those individuals who in their diversity of knowledge and thought fill skill gaps within the boardroom.

Whilst relevant and specialist experience is always a key quality of NEDs, candidates from a wider talent pool bring fresh ideas, are perhaps digital natives or offer a greater skillset around emerging technologies.

A recent survey into NEDs by the Quoted Companies Alliance shows that boards are reflecting inwardly and recognising skill gaps particularly when it comes to Cyber/IT and Environmental/Social impact.

As 2022 makes its way to a close, and the UK looks set to navigate a volatile economic landscape, boards will continue to remain under pressure to be effective socially, environmentally, and financially, as well as legally and morally sound.

For many, a careful and considered approach to NED appointments with a long-term view to deliver transformation, agility, and professionalism will pay dividends.