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Home / ... / Powers & Duties of the Non-Executive Director

Ronan Murphy, Head of Assurance & Business Advisory Services in PricewaterhouseCoopers, outlines the importance of having strong governance arrangements in place in companies and highlights the value non-executive directors can being to these arrangements.

The last number of years has seen significant reform of the corporate governance landscape. During the same period the high profile corporate failures in the US and Europe highlighted the importance of good governance and the consequences that can occur when governance breaks down. These reforms and failures have raised public, political and investor appreciation of the topic. They have also introduced a greater awareness in all corporate entities – whether in the public, private or state sector – of the need for an enhanced, robust and continual focus on governance, risk management and compliance arrangements.

All of these reforms have emphasised that fundamental to good governance is the need for companies to be headed by an effective board of directors which is collectively responsible for the success of the company. The board’s role is to provide entrepreneurial leadership to the company within a framework of prudent and effective controls, enabling risk to be assessed and managed. The board should set the company’s strategic aims; ensuring necessary financial and human resources are in place for the company to meet its objectives; and reviewing management performance. The board should set the company’s values and standards, ensuring that its obligations to shareholders and others are understood and met. The board has collective supervisory responsibility, primarily to the company itself and the shareholders, but also to other stakeholders, including employees, lenders, customers, suppliers, the investment community and the public at large.

To discharge these responsibilities effectively, best practice suggests that the majority of the board should be independent non-executive directors. But what is the role of the non-executive director and what benefits do they bring to a company and its stakeholders?

NON- EXECUTIVE DIRECTORS - THE BENEFITS

The key role for every non-executive director is to bring an independent, objective and external perspective to the board. They should challenge constructively and help develop proposals on strategy. They should scrutinise the performance of management in meeting agreed goals and objectives. They should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible. The fundamental contribution that non-executive directors make to a company is that they bring a fresh and wider view to board discussion and decision-making. Some of the benefits that this wider perspective can bring to a board’s discussions and decision-making processes include:

- Seeing issues in their totality – because of their managerial responsibilities, executive directors may not be best equipped to give proper weight to the differing aspects faced by the board. Non-executive directors can usually view matters from a broader perspective. - Giving the external view – As non-executive directors are not involved in the daily running of the company, they can bring a wider judgement to bear on matters before the board. This is particularly useful in the context of strategic planning, or when events of a special importance to the company’s future, such as mergers, acquisitions and large capital projects are involved. - Independent viewpoint on conflicts of interest – non-executive directors can help to ensure that the correct balance is struck between the various interests and stakeholders of a company. This role assumes particular importance when the executive directors’ interests may conflict with those of shareholders (for example, where directors have interests in transactions entered into by the company; on dividend policy; or where a take-over bid is received). - Advising on public statements of the company – non-executives can make an important contribution to the correct content, style and format of public documents and statements issued by companies. For example by reviewing the Annual Report and Accounts, Preliminary Announcements or other circulars and statements prior to their release, non-executive directors help to ensure proper compliance with prevailing reporting rules, standards and regulations as well as ensuring that the messages delivered are reasonable. - Minority interests – where there are large minority shareholders, non-executive directors will see that their interests are not ignored or prejudiced while always ensuring that they act in the interests of the company as a whole.

KEY RESPONSIBILITIES

The Institute of Directors in the UK sees the non-executive director’s role as one which “provides a creative contribution to the board by providing objective criticism. Non-executive directors are expected to focus on board matters and not stray into ‘executive direction’ thus providing an independent view of the company that is removed from day-to-day running. Non-executive directors, are appointed to bring the following to the board:

- Independence; - Impartiality; - Wide experience; - Special knowledge; - Personality qualities.”

General guidance stresses the need for non-executive directors to be fully informed about the company, and insist on a comprehensive, formal and tailored induction to the company on appointment.

To function effectively and add real tangible value to the board of directors they serve on a non-executive director should: - Uphold the highest ethical standards of integrity and probity - Support executives in their leadership of the business whilst monitoring their conduct - Question intelligently, debate constructively, challenge rigorously and decide dispassionately - Listen sensitively to the views of others - Gain the trust of other members of the board; and - Promote the highest standards of corporate governance wherever possible.

The chairman of the board should hold meetings with the non-executive directors without the executives present. Led by the senior independent director the non-executive directors should meet without the chairman present at least annually, to appraise the chairman’s performance and on such other occasions as are deemed appropriate.

Where directors have concerns which cannot be resolved, they should ensure that their concerns are recorded in the board minutes.

POWERS AND DUTIES

Irish company law does not distinguish between the powers and duties of executive and non-executive directors. Non-executive directors are required to show the same duty of care and fiduciary duty to a company as an executive director. A non-executive director will be subject to the same liability as any other director in relation to compensating their company for loss arising from breaches by directors of their duties. They will also be subjected to the same rules in relation to restriction and disqualification. As a result of this, it is important to ensure that non-executive directors have the same access to information within the company as other directors.

Furthermore, there is no concise statement in law of directors’ powers and duties generally. Directors’ duties are established in common law and by virtue of legislative requirements. Directors’ responsibilities are set out in the Companies Acts 1963 to 2005, in other Acts of the Oireachtas, in case law, and (where relevant) in the requirements of The Stock Exchange. Corporate governance developments, such as the Combined Code of Corporate Governance, have resulted in greater clarification of the duties. However, in accepting the role, every person appointed as a company director (executive or non-executive) should, on or before appointment, become familiar with the legal responsibilities and obligations they face.

The fundamental requirements, imposed by common law on all directors, whether executive or non-executive, are: - Care and skill: Directors are expected to exercise reasonable care and diligence in carrying out their duties and to demonstrate the degree of skill that may reasonably be expected from people with their knowledge and experience; and - Good faith: Directors must act honestly in what they believe to be the best intentions of the company as a whole, avoiding conflicts of interest. If potential conflicts arise, they should be declared. They should not seek to make a personal gain or profit from the company and must not use inside information as a basis for dealing in shares or for engaging in transactions that give personal benefits or advantages. Non-executive directors by necessity rely on information supplied by officers and employees of the company. However, it is important that this reliance is not placed blindly. They must be careful in depending on the support of others and should not unquestioningly accept the information and explanations supplied. A key characteristic of a good non-executive director is the intuition to challenge information presented or seek the full facts on a situation. The main legislative provisions concerning directors are set out in sections 174 to 199 of the Companies Act, 1963, Parts III, IV (Chapter 1 only) and VII of the Companies Act, 1990, sections 43 to 45 of the Company Law (Amendment) (No. 2) Act, 1999, Parts 4 and 9 of the Company Law Enforcement Act, 2001, and the Companies (Auditing & Accounting) Act 2003.

Section 45 of the Companies (Auditing and Accounting) Act 2003 introduced a requirement for the directors of certain companies to prepare two statements concerning the company’s compliance with certain legal obligations. This has been the subject of intensive debate and the government has agreed to make the requirements less prescriptive and pending amending legislation the relevant provisions have not yet been brought into force.

It is envisaged that all directors, whether executive or non-executive, will share responsibility for securing the company’s compliance with its legal obligations and for preparing the Compliance Statement when the amending legislative provisions come into force.

Non-Executive Directors – Real Contributions to Corporate Success A non-executive director can bring important benefits to any corporate entity, whether large or small. It is essential that the non-executive director operates as part of the overall board and not in isolation from the executive management. Non-executive directors make valuable contributions in determining corporate strategy and can provide guidance on achieving strategic goals and the allocation of corporate resources to support strategic plans.

Companies who are not currently tapping into the non-executive director knowledge and experience base should strongly consider doing so. By playing a proactive role and introducing the wider perspective that they bring, non-executive directors can significantly improve a company’s corporate governance arrangements and its overall success.

Ronan Murphy, Head of Assurance & Business Advisory Services, PricewaterhouseCoopers. Email: ronan.murphy@ie.pwc.com