Singled out: Non-executive directors

Being a non-executive is about to change drastically. No longer will it be the cushy, well-paid, social event it may once have been.

Big institutional investors, government, pressure groups and regulators – they all want the non-execs on audit committees to put in more time, take more responsibility and be more accountable. They’ll need to be more qualified, more astute and much, much more aware of the risks involved.

If someone is going to be the safeguard against events such as the WorldCom and Enron scandals – it’s going to be the poor non-exec on the audit committee.

Non-execs have become somewhat beleaguered since Lord Wakeham, former non executive chairman at Enron, became the focus of investigations by the US authorities.

As a result audit committees, invariably chaired by a non-executive, have found themselves under the microscope as both the US financial watchdog, the Securities and Exchange Commission, and the Department of Trade & Industry and the Treasury in the UK, scrutinise their role and propose changes to shore up corporate governance.

But this week saw another vital group wade into the debate – investors.

In fact one of the country’s largest fund managers Schroders Investment Management has written a discussion paper and sent it to 20 other fund managers looking for their views on the arrangements, role and responsibilities of company audit committees in the UK.

The move is clearly designed to allow the big investors to put their stamp on whatever reforms do take place to audit committees. Schroders intends to produce a final document that will be presented to regulators and government leaving them in no doubt about what the institutions want.

But what do they want? Among the proposals in the Schroders paper are that executives will not have automatic right to attend audit committee meetings and be made up solely of ‘independent non executive directors’.

Audit committee members should have unrestricted rights to documents, information and employees of the company executive. And Schroders also broadly hint that audit committees should be meeting more frequently with agendas covering financial results and internal controls.

More importantly, Schroders would like to see the key responsibility of engaging the auditor moved to the audit committee. The committee should also ‘provide assurance that auditor independence is being clearly maintained’.

The internal audit function should also report directly to the audit committee which will also review key accounting policies.

Much of this is in tune with recommendations made elsewhere, but the fact it is big investors – perhaps the group with most influence on company policy – will send a clear message that companies need to change their corporate governance arrangements.

But can the non-execs cope? David Bishop, who runs the Non-Executive Director’s Forum for KPMG, believes the new responsibilities for NEDs could be onerous. ‘Their role will be enhanced to a significant extent, but they are going to be under the cost if they don’t deliver,’ he says.

That added pressure could well be the cue for a mass exodus away from what has traditionally been seen as a fairly relaxed way of topping up the pension fund.

The answer of course, may be that NEDs, especially those bound for audit committees, will have to be much more professional in the future. They will certainly need to know their financials much better, and know the accounts inside out.

Such demands could of course mean that many existing non-executives will rule themselves out of continuing. There’s no doubt that many non-execs posts are prestige appointments, but the reforms on the way could change all that.

Not least because government could legislate to expand non-executives’ responsibilities. Of course the Higgs review of NEDs is still to be published but already the interim report on standards in accounting and auditing, signals the needs for changes in company law to ‘underpin’ the ‘role and responsibilities’ of the non execs on the audit committee.

Given that the report says audit committees should be clear about acting on behalf of shareholders it all adds up to a heavy burden in the future that may well turn out to be less attractive than the role currently is.

According to Bishop, the attractions of becoming a non-exec, whether it be on an audit committee or in some other function, will depend on how the NED’s liability is capped. This is as yet an unknown quantity.

The example of Lord Wakeham being pursued by shareholders of Enron will no doubt strike terror into the hearts of many a non-exec, but if there are clear indications the NED’s liability is firmly limited in some way, an exodus may be avoided.

That said, in many ways the position of non-execs could become much more attractive for one group in industry – senior accountants. Indeed, all those partners in large firms looking for early retirement and an escape from the constant pressures of practice may well look upon two or three non-executive directorships as a comfortable way of topping up the pension fund.

The fact is, former audit partners are possibly the people most likely to be comfortable under the newly imposed rigours of the job.

In June this year Baroness Hogg, chairman of the giant investment company 3I, told a shipload of FDs at the annual Finance Directors Forum that there was never a better time to be a non exec. ‘It’s the right time to look for a non-executive director’s position. Boards want to improve their financial power,’ she said.

Boards may want to, but as sure as the annual report follows the interims, they’ll very soon be made to do it.

Related reading