Transcript Non-executive Directors

Non-executive Directors
Role in Corporate Governance
Who is a NED?
• A member of Board of Directors of a company
who has no executive responsibility in the
company.
• His presence is intended to improve the quality
of decision making at board level.
• He still has all the fiduciary and statutory
responsibilities.
Importance of NEDs
• Just as it has been assumed that Board of
Directors is key to good corporate governance, it
has also been taken for granted that presence of
INEDs is what makes a Board a balanced or
good board.
• This is a dangerous misconception.
Why have NEDs?
• To bring a range of skills and experience to the
deliberations of the Board.
• To act as a counter-balance to the influence of
one segment of the board over the others.
Sources of getting NEDs
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EDs in other companies
NEDs or chairmen of other companies
Professionals
Former civil servants
Public figures
Types of NEDs
• Nominees / representatives
• Independent (INEDs)
• In general context, NEDs are assumed to be
INEDs, unless otherwise stated. However, in
Pakistan INEDs are almost non-existent.
Higgs Report (2003)
NEDs can help in:
• Strategy formulation
• Performance evaluation
• Risk management
• Remuneration
through serving on relevant committees
How many NEDs?
Combined Code 2003 prescribes:
• At least half of the board, including chairman,
should be NEDs
• All or most NEDs should be INEDs.
• The Pak scene
NEDs on board committees
No legal restrictions, but:
• Audit Committee
• Nominations Committee
• Remuneration Committee
should have majority of NEDs
Independence of NEDs
• If an NED is not independent, he is of no real
use to the company.
• Using NEDs to simply comply with law or
practice is not healthy.
• Company should be prepared to put up with the
independence of NEDs.
• Independence is a shade of integrity.
Measures of Independence
• Relationship with EDs /CEO
• Immediate past association
• Material interest in the company:
▫ Income from the company
▫ Stake in the company’s profit/share price
• Inter-locking directorships
• Length of tenure
Protecting Independence
• It is a state of mind; rules cannot ensure
independence.
• Company must want to have independent NEDs.
• In the first place, Nom-Committee should be
fiercely independent.
• The Pakistani scene
The Senior INED
• Source of collecting gripes
▫ Internal
▫ External
• De facto Vice Chairman
• Should meet regularly with INEDs
Hermes Guidelines
Things INEDs should look at:
• Appointment process
• Skills and attitude required
• Perspective on the company
• Investment in the company
NEDs and
Institutional Investors
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Common source of appointment
Induction program
Liaison between the two
Maintaining independence
Criticism on INEDs
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Insufficient real knowledge
Insufficient time
Insufficient opportunity to meet all stakeholders
Influence of EDs
Reciprocal treatment
Law does not help INEDs
Tyson Report (2003)
• Advice
• Monitoring:
▫ Implementation of strategy
▫ Legal and ethical performance
▫ Validity and adequacy of financial statements
Essential Qualities
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Integrity / ethical standard
Sound judgment
Ability and willingness
Interpersonal skills