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It’s clear to see non-executive directors play a central role in corporate governance in UK companies, which is frequently described as two principal components: monitoring executive activity and contributing to the development of strategy.
(1) The strategic role. Non-executive directors perform the strategic functions mainly for their advice and expertise (whether in the business itself, or in wider matters, such as international markets, technology or public affairs), or contacts. They often play a valuable role in evaluating and developing strategy from a dispassionate or lateral viewpoint. Especially in the smaller companies, the non-executive director can add enormous value. An experienced independent voice can help a small or growing company to avoid pitfalls and to make better decisions that enable that company to prosper and succeed.
(2) The monitoring role, which concerns of the context of governance, is monitoring the company’s management, that is, assessing performance and if necessary, seeking their removal from office. It is sometimes argued that the provisions of the Combined Code do not go far enough to achieve such monitoring. A survey report published by BDO Binder Hamlyn in 1995 reveals that their monitoring role is perceive generally to be the most important role for non-executive directors.
There is some evidence that non-executive directors are fully aware of their strategic role but less so of the importance of the monitoring one, although such awareness appears to be increasing. It is sometimes argued that the provisions of the Combined Code do not go far enough to achieve such monitoring. Some have linked this to the issue of NED independence.
The way to strengthen the monitoring role is argued involves (1) insure the candidates of non-executive directors’ independence which has been considered earlier (in The Qualification of the Prospective Non-executive Directors). (2) the Cadbury Report observed, all boards will require a minimum of three non-executive directors, one of whom may be the chairman of the company provided he or she is not also its executive head. And in the Company Law Review, still requiring an increase in the proportion of non-executive directors on boards. In the Review of the role and effectiveness of non-executive directors Consultation Paper, Derek Higgs said ‘I recommend that the Code should provide that at least half of the members of the board, excluding the chairman, should be independent non-executive directors.’ (3) Non-executive directors should play a key role through their involvement in Board Committees. (the Audit Committee, the Remuneration Committee, and the Nomination Committee )
Conclusion
It is clear to see that the role played by non-executive is generously different with executive directors, although which has no legal definition. But in the real word, like other directors of a company, non-executive directors have to comply with the duties of directors which have been established by common law and case law, such as the duty to exercise care, skill and diligence and face the same potential liability as executive directors.
The time non-executive directors devoted to the company’s affairs is likely to be significantly less than executive directors, and the detailed knowledge and experience of a company’s affairs, which could reasonably be expected of a non-executive director will generally be less than for an executive director. So many recommendors suggested that consideration should be given to proportional liability and capping liability by way of contract, or to some form of business judgment defence.
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