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Is it fair for non-executive directors to owe the same duty of directors, such as duty of care, skill and face the same potential liability as executive directors? In Re Continental Assurance Co of London plc (unreport: 27 April 2002), Mr Justice Park said ‘…if the non-executive directors were liable to pay millions of pounds to the liquidators in this case, it is hard to imagine any well-advised person ever agreeing to accept appointment as a non-executive director of any company.’
Before trying to answer this question, in the first place, we have to discuss issues about (1) the definition of the non-executive director, (2) the qualification of the prospective non-executive directors, and (3) the role of the non-executive director in corporate governance framework.
(II.I) The Definition of the Non-executive Director
From the 1980s onwards there was a growing awareness of the role of non-executive directors and bodies such as PRO NED (then sponsored by the Bank of England, the CBI and the Institutional Shareholders’ Committee) had argued for increased use of non-executive directors. The culmination of work in this regard was initiated by Cadbury’s Committee in 1992, and supplemented by the Greenbury Review in 1995 and the Hampel Review in 1998.
There is no statutory definition of a non-executive director. Non-executive directors are however generally regarded as those directors who, unlike their executive colleagues, do not hold any executive or management position in the company in addition to their role as a member of the board.
(II.II) The Qualification of the Prospective Non-executive Directors
The appointment of a non-executive director is an important task. Recruitment of a non-executive needs to be taken seriously. As regards the this question, the Cadbury Report made the following observations:
4.10 The Committee believes that the calibre of the nonexecutive members of the board is of special importance in setting and maintaining standards of corporate governance…
4.12 An essential quality which non-executive directors should bring to the board’s deliberations is that of independence of judgement. We recommend that the majority of non-executives on a board should be independent of the company. This means that apart from their directors’ fees and shareholdings, they should be independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgement. It is for the board to decide in particular cases whether this definition is met. Information about the relevant interests of directors should be disclosed in the Directors’ Report.
So we can see as the candidates of non-executive directors, they should be (1) The non-executive directors have to be free from any relationship, which could materially interfere with the exercise of their independent judgement. But companies (especially small companies) may have difficulty in appointing independent non-executive directors. Empirical data indicates that the presence of significant numbers of ‘insider’ non-executive directors do not seem consistent with independent outsider judgements. There are three ways provided by the Modern Company Law Review- Developing the Framework. (a) the way of reducing the influence of executive directors on the selection of non-executive directors. It would be to require appointments to be made by a nomination committee of independent non-executive directors (This would be subject, as with all board appointments, to shareholder approval in due course.). Nevertheless, this would of course deprive the executives of any say in the choice of their non-executive directors’ colleagues. (b) the Combined Code provides that non-executive directors considered by the board to satisfy the requirement of independence should be identified as such in the annual report. It is arguable that whether non-executive directors are in fact independent is not sufficiently clear to outsiders. (c) a possible response would be to require non-executive directors to disclose specified links with the company (for example, previous employment with the company), together with any other matter that might compromise independence, at the time they stand for election or confirmation in office.
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