BusinessCorporate FinanceIn defense of NEDs

In defense of NEDs

NEDs - non executive directors - have been much in the news of late, usually under attack when companies fail or executives are perceived to have excessive remuneration.

The government has recently commissioned Derek Higgs to produce a report on the subject. It is perhaps no coincidence that Higgs is himself a distinguished corporate financier, with a long career at Warburgs, for NEDs are very often in the thick of their companies’ corporate finance deals.

It is sometimes forgotten that NEDs have identical responsibilities to their executive colleagues and this is keenly felt whenever a company undertakes a significant transaction, whether financing or M&A. The NEDs’ overall role is to question and probe the rationale and to ensure that shareholders as a whole are deriving maximum value and that their interests are fully protected.

NEDs really come into their own whenever conflicts of interest occur.

In such a situation, the requirement is not so much for non-executive as for independent directors, as some NEDs represent significant stakeholders and cannot be considered independent.

By way of example, I was an independent NED in a quoted company whose shares were more than 50% held by a single shareholder. The latter decided to sell its shares, thereby provoking an automatic full bid under the take-over code. The executives were intensely hostile to the company being sold over their heads. I and another independent NED sat in the middle and found that we had to play a key role.

On the one hand we had to persuade the executive directors that the controlling shareholder was entirely within its rights to sell and that the best thing they could do would be to co-operate and thereby obtain for themselves some measure of control over the process. On the other hand we had to persuade the shareholder that it needed the support of management to obtain the best possible price. The outcome, not achieved without some difficulty, was a limited auction in which both parties worked together to produce an excellent result for the shareholders.

In his parting address as retiring president of the Institute of Directors, Lord Young questioned the need for NEDs. In major transactions, they are often key to protecting and optimising the interests of the shareholders.

  • Richard Mead is an independent consultant and a member of the executive committee of the ICAEW Corporate Finance Faculty.

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