Executive And Non Executive Directors PdfBy Fantina B. In and pdf 18.04.2021 at 22:30 7 min read
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- Barriers of Independent Non Executive Directors
- The Higgs Report: Review of the role and effectiveness of non-executive directors
- The Non-Executive Directors' Handbook, 5th edition
- Review of the role and effectiveness of non-executive directors
Many questions came into mind like: i who is Executive or non- executive Director? Although there is no legal distinction between the powers and duties of executive directors and non-executive directors, the two play different roles on a board of directors. Before commencement of Companies Act, it was very difficult to understand the difference between term executive and non-executive Director.
Barriers of Independent Non Executive Directors
The review was initiated as part of a systematic re-appraisal of the adequacy of corporate governance arrangements in the wake of recent corporate failures, most notably in the United States. It follows the existing framework of corporate governance which began with the publication of the Cadbury report followed by the Greenbury and Hampel reports, all of which were combined to form the Combined Code.
The review sets out significant changes to the Combined Code and also makes a number of non Code recommendations. It concentrates on corporate governance arrangements for UK listed companies. As a result, Higgs recognises that a number of his recommendations may be relevant to AIM and other companies and organisations. Half of the Board, excluding the chairman, should be "independent" non-executive directors. The current position under the Combined Code recommends that not less than one third of the directors should be non-executive.
The issue of independence is at the heart of any debate on nonexecutives. It is suggested that a definition of "independent" be included in the Combined Code. A director will not be independent if he:. Those non-executive directors deemed to be independent would have to be listed as independent by the Board in its annual report. The Higgs review does not propose to introduce a legal distinction between the duties and responsibilities of executive directors and non-executive directors; however, a clarification of the role of a nonexecutive director was viewed as being useful and it has therefore been proposed that a description of the role be included in the Combined Code.
Under the proposals, non-executive directors would be required to meet as a group, on their own, at least once a year and the annual report should contain a statement as to whether or not this has happened.
The review further suggests that, prior to appointment, potential non-executive directors should carry out due diligence on the Board and company to satisfy themselves that they have the knowledge, experience and time to make a positive contribution to the Board.
A suggested checklist has been proposed so that nonexecutives can assess this. The review proposes that each company should have a senior independent director endorsing a provision already in the Combined Code.
There should be a nomination committee. By comparison, the current position under the Combined Code is that unless a board is small, there should be a nomination committee.
Under the Combined Code the nomination committee should be made up of a majority of non-executive directors but the review refines this by requiring the majority to be made up of "independent" non-executive directors.
Further, the committee should be chaired by an "independent" non-executive director. As far as the appointment of non-executive directors is concerned, the review emphasises the desirability of using a wider pool from which to choose non-executive directors.
It coyly notes that "a high level of informality" surrounds the process of appointing non-executive directors at present. This was widely criticised in responses to the consultation and Higgs notes that it can "lead to an overly familiar atmosphere in the boardroom". To address this, the review suggests that a greater use of formal recruitment processes should be employed and that the nomination committee should consider the skills, knowledge, experience of the candidate and role which is required of him before making appointment recommendations to the Board.
Importantly, the Board should also set out to shareholders why an individual should be appointed as a nonexecutive director. It is suggested that non-executive directors should always be appointed on written appointment terms not a novel suggestion and a specimen letter of appointment is appended to the review.
A non-executive director should also be obliged to confirm that he has time available to undertake his role. Lack of time commitment was one of the main criticisms made of non-executive directors. One area which has caused controversy is the recommendation that a limit be placed on how many non-executive appointments an executive director can hold.
The report states that a full time executive director should not take on more than one nonexecutive directorship nor become chairman of a major company defined as a FTSE company. Furthermore, no individual should be chairman of more than one major company. It is suggested that this best practice be incorporated in the Combined Code. Significantly, the review does not limit the number of non-executive directorships that an individual as opposed to a full executive director may hold over all.
The report does not consider this area in great detail. Payment on the basis of fixed fees i. Granting options to non-executive directors, however, is disapproved of due to the "risk of undesirable focus on share price rather than the underlying company performance". This is a new concept but is part of the overall theme that non-executive directors should be appointed on a more "scientific" basis and non-executive directorships should not be undertaken lightly.
The suggestion is that all new non-executive directors should undergo an induction programme and a suggested checklist is appended to the review. It is suggested that updates on legal, regulatory and other obligations would be helpful as well as "revisiting the effective behaviour of a director such as influencing skills, conflict resolution, chairing skills and board dynamics".
The role and responsibilities of the chairman are considered in some detail, the salient point made being the endorsement of the separation of the roles of chairman and chief executive, as well as the corresponding suggested changes to the Combined Code.
The response from major companies who are likely to be affected by the proposals has not been altogether favourable. It has been estimated that companies would collectively have to find up to 1, new non-executives to comply with the recommendations, which is too demanding to meet.
Chairman, particularly, are unhappy with an enhanced role for the senior independent director in relation to dealings with major shareholders.
One less happy consequence is that we may see a marked difference in the level of detail and prescriptiveness creeping into the Combined Code. Until now, it has been refreshingly short and succinct. The content of this article does not constitute legal advice and should not be relied on in that way.
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The Higgs Report: Review of the role and effectiveness of non-executive directors
The Non-Executive Directors' Handbook, 5th edition
Argues that there is universal agreement on the need for outsiders to be involved in company direction and that shareholders are not able to provide the necessary checks and balances to supervise board activities. Clarke, T. Report bugs here. Please share your general feedback. You can join in the discussion by joining the community or logging in here.
Definition and Terminology I. Multinational Comparison II. Intermediate Comparison B. Functions II.
Review of the role and effectiveness of non-executive directors
Clare Thompson is the current SID. The Non-Executive Directors provide an independent view on the running of our business, governance and boardroom best practice. Role of the Non-Executive Director.
The Non-executive Directors Handbook is an indispensable guide that deals with the changing role and responsibilities of the Non-Executive Director in companies today. It recognises the increasing importance of the position, the growing pressures on Non-Executive Directors and the need for full compliance with the latest legislation and regulation in order to avoid heavy fines and penalties. This book provides practical information and guidance on all aspects of the role. Written specially for and about non-executive directors the book incorporates useful checklists and summaries.
An important aspect of current governance practice is theutilisation of non-executive directors to monitor the behaviourof senior management. The purpose of this paper is to provide aninitial insight on the determinants of non-executiverepresentation on the boards of large UK companies. The studyadopts an agency theory perspective, focusing specifically on theimpact of company size and ownership on non-executiverepresentation. I find that larger companies, where monitoringvia ownership is expected to be less efficient, utilise higherlevels of non-executive representation. I also find thatnon-executive representation is positively associated with theownership of external blockholders. Overall, the findings suggest that companies utilise boards withstronger monitoring potential when size and ownershipcharacteristics suggest that alternative governance mechanismsmay be unable to ensure managers pursue shareholders' interests.
non-executive directors. This paper presents an empirical study of the. involvement of non-executives in large UK. companies, assesses the.
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