The Debate: Are NEDs effective?

NEDs not necessarily effective

By Professor Victgor Dulewicz

Are NEDs important to the performance of companies? The supporting evidence isn’t strong. In our study on the impact of board composition, to be published in July, we found no relationship whatsoever between company financial performance and the proportion (33% and 50%) and tenure of NEDs.

None of the results provided support for the recommendations of the combined code and the Higgs review that, for FTSE350 companies, at least 50% of directors should be NEDs and that they should not serve for more than six years. In fact, executive directors were found to have a more positive influence. And in terms of sales turnover there was a significant negative relationship for the number and proportion of NEDs.

Whilst the need for NEDs has received wide acceptance since Cadbury, many directors and commentators seriously question whether the balance has tipped too far in their favour. Has the role become too focused on conformance at the expense of performance? Moreover, can one have a cohesive board team if half the members are acting as policemen, even if only for some of the time.

Another contentious proposal from Higgs was that the ‘gene pool’ of NEDs should be broadened to bring in new talent, particularly from the public sector. Many are strongly opposed to this proposal on the grounds that such people do not have the relevant knowledge and expertise. Many believe that the role of the NED in large private-sector companies is difficult enough as it is, even after a lifetime’s experience of working within them.

Since the new combined code was only introduced last July, it is too early to judge how effective it has been. It contains some very positive contributions on individual and group appraisal and development, all of which should be highly effective for improving the contributions of NEDs in particular. But we will await with interest reports on progress in these areas, which now have to be incorporated in companies’ annual reports as from last November.

  • Professor Victor Dulewicz is a director of the Centre for Board Effectiveness at Henley Management College.

SIDs – not SODs – are crucial
By David McWilliam

Amongst all the recent intelligent and earnest debate about the role of non-executive directors, one suggestion I recently heard was that they should be called ‘outside’ directors in the US style, rather than ‘independent’ as in the British model.

Apart from the senior non-exec’s preference for being referred to as SID rather than SOD, there are sound reasons for preferring the British name.

Non-executives should never be thought of as outsiders. They are a part of a single team, sharing the same duties and accountabilities with their executive colleagues. So it is a pity that so much of the recent discussion about their role has focused on their functions as guardians of governance or overseers of their company’s business.

These are duties shared by all directors. The only difference is that – because of their independence from management responsibilities and because they can generally stand back from detail – they can be more objective, are less likely to be biased by personal ambition and can bring further creativity to the board’s debates on strategy and direction.

As in any other team, the essential elements are to balance skills, value each other’s roles, styles and contributions, and cooperate with the direction of the team leader – the chairman.

The executives must ensure that they use their non-executive colleagues’ knowledge and experience by listening to and consulting with them.

The non-executives must acquire an adequate understanding of the business, commit enough time to do the job, and support and trust management; but never unquestioningly. This may not seem difficult when things are going well. But when they go badly, the non-executive need the determination to act quickly and decisively.

This might, for example, mean removing a chief executive who has lost his way. It is rare to see an executive sack himself: without the non-executives the company would probably fail.

So, in addition to their team role, ‘independent’ non-executives may also be the company’s last resort. They must be taken seriously.

  • David McWilliam is a senior consultant at the Institute of Directors.

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