Non-Executive Directors

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In his review published in 2003, Derek Higgs described the role of a non-executive director as ‘custodian of the governance process.’

A non-executive director (NED) sits on the board of company just as a normal executive director would do so, however a non-executive director does not form part of the executive management team of the company. Essentially they are not an employee of the company or affiliated in any way other than their role as an independent NED. The distinction between a non-executive director and an executive director is illustrated in Equitable Life Assurance v Bowley [2003] in which Langley J commented

‘It is well known that the role of non-executive directors in corporate governance has been subject of debate in recent years…It is plainly arguable, I think, that a company may reasonably at least look to non-executive directors for independence of judgement and supervision of the executive management.’

Essentially, non-executive directors are non-stakeholders in a company or organisation, and do not have day-to-day management responsibility, thereby rendering them independent of the executive board. In the post-Enron era, this independence has become crucial for corporate governance, so much so that the Higgs report of 2003 commissioned to examine the role of non-executive directors recommended that a company's board should comprise at least 50% non-executive directors.

In 1992 the Cadbury Committee published a report to review the code of practice on corporate governance. The concept of corporate governance can be defined in a number of different ways because corporate governance potentially covers all activities that have a direct or indirect influence on the financial well being of a corporation. As a result, many different definitions have surfaced. The earliest definition of corporate governance came from the Economist Milton Friedman. According to Friedman, corporate governance is to conduct business in accordance with owner or shareholders' desires, which generally will be to make as much money as possible, while conforming to the basic rules of the society embodied in law and local customs. This definition is based on the economic concept of market value maximisation that underpins shareholder capitalism. Apparently, in the present day context, Friedman's definition is narrower in scope. Over a period of time the definition of Corporate Governance has been widened. It now encompasses the interests of not only the shareholders but also many stakeholders and workers as well. The year 2003 saw Derek Higgs and Sir Robert Smith produce reports aimed at examining the effectiveness of non-executive directors and the effectiveness of audit committees. It was the recommendations of the Higgs Report which led to the drafting of the Combined Code 2003 which replaced the previous Combined Code that was issued in 1998 by the Hampel Committee on Corporate Governance.

Higgs made a number of recommendations regarding the role of non-executive directors most which now form part of the Combined Code 2003 along with a minor revision by the Financial Reporting Council (FRC) in 2006. A further review of the Code has been prompted by changes in EU law, namely the implementation of Directive 2006/46/EC . The report was first published due embarrassing and very public collapse of the corporate governance process within major companies such Enron and WorldCom and thus highlighted the need for much clearer guidelines.

Non-executive Directors: The Combined Code 2006

The Combined Code on Corporate Governance 2006 supersedes the 2003 version however the changes made were not substantial. The purpose of the Code is to clearly define the standards of good practice in relation to companies and the composition of their boards of directors along with their ‘development, remuneration, accountability and audit and relations with shareholders.’

The Combined Code...
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