Part 5 Part 5 Who are the NEDS NEDS 'Non-Executive Director' A member of a company's board of directors who is not part of the executive team. NEDS A non-executive director (NED) typically does not engage in the day-to-day management of the organization. NEDS Non executive directors are either independent or non independent. NEDS A key principle of good corporate governance is that there should be a sufficient number of independent NEDs on the board. NEDS The concept of independence is an important one for corporate governance. NEDS to create a suitable balance of power and prevent the dominance of the board by one individual or by a small number of individuals. NEDS Responsibilities are given to independent directors by the Combined Code, and the external auditors should be independent. NEDS Responsibilities are given to independent directors by the Combined Code, and the external auditors should be independent. NEDS In the United States of America, the New York Exchange listing requirements define an independent NED as one with: NEDS Has not been employed by the company presently in the past 3 years, NEDS Does not have a family member who has been or is presently employed by the company. NEDS Is not a partner in business. NEDS Has not been and is not employed as an executive of another entity. NEDS In South Africa, the King II (2004) report defines an independent NED as: NEDS Does not report, nor was nominated by a significant shareholder. NEDS Was not employed by the company for 3 financial years prior to appointment. NEDS Is not an immediate family member of a person, who is or was in the past 3 years employed by the company as an executive director. NEDS Is not a professional advisor to the company. NEDS Is not a professional advisor to the company. NEDS Is not a significant supplier or a customer of the company. NEDS He has no significant contractual relationship with the company. Independence Phan (2006) defines independence as consisting of â...the feeling of freedom to express personal views in the boardroom,,, Independence and the freedom from undue influence by top management or the controlling shareholders.â Numbers of neds In principle, the NEDs provide a counterweight to the CEO and chairman of the board, and so contribute to a balance of power practice. Numbers The Cadbury recommends that the majority of them should be independent.   Numbers The Higgs Report provides that at least ½ of the board, including the chairman should be independent. Duties All directors are subject to the following fiduciary duties Exercise honest judgements, Duties Act in good faith at all times, To act in the best interests of the company, Duties Exercise diligence, care and skill and Exercise prudence. Statutory duties Directors have a duty to keep accounting records which are: Statutory duties Sufficient to show and explain the companyâs transactions, Statutory duties Such as to disclose with reasonable accuracy, at any time, the financial position of the company (Article 102 CJL), and Statutory duties In accordance with a set of generally accepted accounting principles which must be stated.  Statutory duties If the company is one which is required to be audited the accounts show a âtrue and fair view of the profit or loss of the company Statutory duties for the period of the state of the companyâs affairs at the end of the periodâ ... [and which] âshall be approved by the directors...â (Article 104 CJL). Function of NEDS Non-executive directors are appointed to bring five key qualities to the board of directors, namely: Function of NEDS Independence, Impartiality, Experience, Function of NEDS Specialist knowledge (Jersey Financial Services Commission (âJFSCâ) requirement), and Function OF NEDS Personal qualities. Contributing to the strategic direction of the company. Quality of NEDS WHAT MAKES A GOOD NON-EXECUTIVE DIRECTOR? Quality Contributing to the strategic direction of the company, Quality Efficiently solving problems that arise, Communicating with third parties, Quality Ensuring all the audit requirements are satisfied, Quality Remuneration of the executive directors, Appointing the board of directors. Criticism of NEDS Insufficient knowledge, Insufficient time spent with the company, Criticism of NEDS Overriding influence of executive directors. THE HIGGS REPORT THE HIGGS REPORT ?????? Higgs Report The report proposed that NEDs should take an active role in the governance of their company, Higgs Report and should become more far more accountable for their performance. Higgs Report Their role should be clarified in the Combined Code, and should have four board elements: Higgs Report Strategy. To contribute to the development of the companyâs strategy and constructively challenge views of the executive directors within a âspirit of partnership and mutual respect.â Higgs Report Performance. To monitor the performance of executive management in meeting their agreed goals and objectives. Higgs Report Risk. To satisfy themselves that the financial information produced by the company is accurate and that the financial controls and systems of risk management are robust. Higgs Report People. To have responsibility for setting the remuneration of executive directors and to have a prime role in both the nomination and removal of senior management and in succession planning. Question 1 Evaluate the strategies that NEDs can use to uphold the efficiency of the board NEDS EFFECTIVENESS To be effective, a non-executive director needs to; NEDS Build a recognition by executives of their contribution in order to promote openness and trust NEDS Be well-informed about the company and the external environment in which it operates, NEDS Have a strong command of issues relevant to the business, NEDS Insist on a comprehensive, formal and tailored induction, Effectiveness Continually develop and refresh their knowledge and skills to ensure that their contribution to the board remains informed and relevant. Combined Code The Combined Code describes an effective non-executive director as one who; Combined Code Upholds the highest ethical standards of integrity and probity, Combined Code Supports executives in their leadership of the business while monitoring their conduct, Combined Code Questions intelligently, debates constructively, challenges rigorously and decides dispassionately, Combined Code Listens sensitively to the views of others, inside and outside the board, Combined Code Gains the trust and respect of other board members, Combined Code Promote the highest standards of corporate governance and seeks compliance with the provision of the Combined Code wherever possible. Question 2 DISCUSS THE SITUATIONS IN WHICH NON-EXECUTIVE DIRECTORS ARE LIKELY NOT TO BE INDEPENDENT. Answer 1. Material business relationship with company in last 3 years. Answer Employee in last 5 years Close family ties with directors. Answer Receives other remuneration from company besides directorâs fee. Answer Served on board for more than 9 years Significant shareholder Answer Joint directorship in other companies. Question 3 Critically analyse Myners report on the criticism of NEDS. Answer Paul Myners (2002) condemned the NEDs for being ineffective. Some NEDs held too many positions in public companies, more than they could possibly serve effectively. Answer The NED nurtured the mentality of âyou scratch my back and I will scratch yours.â Answer A NED might tacitly undertake not to ask difficult questions or take a stand against executives on the board, provided that the NEDs of his own company act in the same way. Conclusion Let us meet in part 6.