What do companies want from their non-executive directors?

Tim Ward, chief executive of the Quoted Companies Alliance
Tim Ward, chief executive of the Quoted Companies Alliance
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Recently we asked questions about non-executive directors (NEDs) in two surveys​ ​conducted by the pollsters, YouGov.

The question of what companies expect from their NEDs threw up some interesting​ ​results.

One area where they currently add value is in bringing broader business experience,​ ​providing checks and balances, improving a company’s approach to corporate​ ​governance and providing a longer-term perspective to the business.

Providing valuable contacts with other organisations and raising investor and media​ ​profiles were seen as being less important in the boardroom at this time.

Companies also told us that they’d like to see NED’s contributing more toward long-term vision and planning, along with putting their broader business experience and​ ​valuable contacts with other organisations to use.

One of the qualifying requirements of a NED is to be independent and 94​ per cent​ of the​ ​companies thought that in general NEDs are sufficiently independent from

management to provide an autonomous and critical voice to the running of​ ​companies. Interestingly we asked the same question of their advisers where just​ ​66​ per cent​ thought that NEDs provided the requisite level of independence.

So we can see what companies expect from their NEDs, but what do their investors​ ​think?

In conjunction with corporate brokers, Peel Hunt, YouGov asked 11 top mid​ ​and small cap investors what they thought about NEDs and the results show that​ ​investors see many good and bad NEDs.

For instance one investor said: ​"​There’s enormous variance here. Absolutely​ ​enormous. I have come across many, excellent non-execs and many poor non-execs,​ ​and yes, it’s a real challenge to find good non-execs for small companies.

​"​I don’t​ ​think it’s that challenging to find bad non-execs for small companies.​"​

Others recognised the inherent difficulties of the role, in particular stepping up when​ ​things go wrong. There is some acceptance that remuneration nowhere near​ ​matches the cost of the service they provide if a firm had to buy it in, but they think​ ​that too many NEDs just turn up for the cash.

They also have the pressure of lacking​ ​time to double check what is really happening at their firm or a lack of experience to​ ​know what they should be asking.

Another investor said: ​"​It’s a thankless task, you don’t get much credit for​ ​it but there’s massive disparity and how do we improve the quality of non-execs?

​"​It’s important that we have people who are independent and could provide suitable​ ​challenge to the executive directors, can help support them on difficult decisions, and

are willing to make difficult decisions themselves.​"

​The challenge of attracting good NEDs who bring wider business experience, long-term vision and a good understanding of what investors want is a big one and one​ ​that needs to be addressed. Board evaluation and selection is gradually being​ ​professionalised rather than being conducted in the golf club but this needs to be​ ​accelerated.

Our QCA/YouGov Sentiment survey showed that the mean salary of a NED in our​ ​sector is just short of £40,000 for around 15 hours a month. Not bad at one level,​ ​but a NED is putting his or her personal reputation at risk and 15 hours a month can​ ​suddenly turn into a near full-time job if things go wrong. And that’s the time when​ ​investors rely on NEDs and start making serious judgments about their​ ​performance. If it is negative then this will undoubtedly affect a NED​'​s ability to gain​ ​future directorships.

It is an incredibly important role, adding so much value, but it is not a sinecure​ ​where you can turn up and take the cash. It’s becoming much less a lifestyle​ ​decision following retirement.

The sooner companies listen to investors on this​ ​subject, the better their own performance will be.