Non-Executive Director's Handbook

Patrick Dunne, Glynis D Morris

• Publisher: CIMA Publishing
• Year: 2009
• ISBN:
  9781856179775
• Edition: 2
• Topic: Business
• Subtopic: Accounting
• Index: Business

The Non-executive Directors Handbook is an indispensable guide that deals with the changing role and responsibilities of the Non-Executive Director in companies today. It recognises the increasing importance of the position, the growing pressures on Non-Executive Directors and the need for full compliance with the latest legislation and regulation in order to avoid heavy fines and penalties. This book provides practical information and guidance on all aspects of the role. Written specially for and about non-executive directors the book incorporates useful checklists and summaries.

Updated material includes: corporate strategy; risk management; ethics (Global Reporting Initiatives (GRI)); governance (covers current version of the Combined Code); how to improve a company's efficiency and effectiveness; International Standards on Auditing (ISAs); and updates for recent developments of the impact of Sarbanes-Oxley Act.

• Best-practice guidelines on all the duties and responsibilities of non-executive directors
• Full coverage of corporate strategy, risk management, ethics (especially in line with Global Reporting Initiative [GRI] guidelines), and governance
• Shows how to improve a company's efficiency and effectiveness

Chapter 1 The Appointment Process for Non-executives

1.1 Introduction

At a Glance

• The role of non-executive director must be clear and agreed before inviting candidates to apply.
• The new non-executive needs to be prepared for the workload that awaits them, and should consider any training and development opportunities available.
• The board should follow a standard process for recruiting a non-executive, and be rigorous in their assessment.
• Hiring a non-executive should be followed up by a thorough induction and review process.

The appointment process of any new board member must be considered in the context of the board as a whole and take into account the specifics of the particular organisation involved. It also needs to be considered from the perspectives of the company, the non-executive, other board members and shareholders.

From the company's point of view the process is usually:

• agreement of the role;
• commitment to a selection and appointment process and
• execution of that process up to and including the induction of the new board member.

From the prospective non-executive's perspective the process is:

• response to an approach from a company or a company's adviser;
• initial familiarisation and agreement to take part in the selection process;
• if selected, detailed due diligence;
• formal appointment and
• induction.

For shareholders in public companies who aren't on the board the process has traditionally been very straightforward and limited to formally agreeing to the resolution to appoint the person.

In order to comply with the Combined Code the boards of listed companies must ensure that the process is ‘formal and transparent’. However the reality has been that shareholders, other than those who are directors, have had little or no input to the appointment process, other than in situations of crisis. Indeed, research conducted for the Higgs Review (see Chapter 6 ) led to the view that ‘a high degree of informality surrounds the process of appointing non-executive directors. Almost half of the non-executive directors surveyed for the Review were recruited to their role through personal contacts or friendships. Only 4% had a formal interview, and 1% had obtained their job through answering an advertisement’.

Quite the opposite is true for private equity and venture capital businesses where the investors traditionally play an active role in the directors. In other private companies the key shareholders are normally involved as described above for the company.

At this stage matters will be kept simple by considering the issues with regard to a single appointment in a public company and going through the process comprehensively from the company's point of view.

Issues relating to multiple appointments at the same time are dealt with in Paragraph 1.3.3 . Private companies can easily adapt the process described omitting the obvious steps which a public company must take simply because it is listed. Looking at the process from the company's point of view is beneficial to the non-executive, especially if they also sit on a nominations committee, but some issues for prospective non-executives and candidates for specific appointments have also been added at the end.

If there is an effective nominations committee (see Chapter 16 ) then it is this group which is likely to be delegated to undertake or lead all of the above tasks. The remainder of the board then simply needs to endorse or refine their recommendations and support the process.

If there isn't a nominations committee of the board then it is well worth considering forming one on a temporary basis for the particular appointment. The principles of a good nominations committee are easily adapted to small companies.

1.2 Agreeing the Role

If the role of the board is clear then defining the role of the non-executive becomes a relatively straightforward task. A good place to start, if the basic description of the role of the board are accepted as being:

• Right strategy:
  • To ensure that there is the right strategy for the ownership as well as the business, that it is being implemented and monitored and that there is a good process for formulating and adapting it.
• Right resources:
  • To ensure that the organisation has the right resources in place to meet the agreed strategy for the business and its ownership. The most important of these resources relate to people and money.
• Right governance:
  • To ensure appropriate corporate governance.

is to consider what role it is intended that the non-executive should play in each of the above. The Higgs Review came up with a broadly similar definition which was incorporated into Section A of the Combined Code.

The Role of the Board

The board is collectively responsible for promoting the success of the company by directing and supervising the company's affairs.

The board's role is to provide entrepreneurial leadership of the company within a framework of prudent and effective controls which enable risk to be assessed and managed.

The board should set the company's strategic aims, ensure that the necessary financial and human resources are in place for the company to meet its objectives, and review management performance.

The board should set the company's values and standards and ensure that its obligations to its shareholders and others are understood and met.

They will need to fit the strategy for the business, the strategy for the ownership and of course with the board you have or are in the process of building.

They will also need to share or be able to work with the board's belief in whom they are working for. Reference is made in, Chapter 3 to Prof. Jay Lorsch's book Pawns and Potentates which has a very good description of the range of beliefs that directors have on this subject. For example, some believe absolutely in shareholder primacy whilst others subscribe to the model which is very common in continental Europe, that is, co-determination.

In practice the non-executive role is a complex one in which different aspects come to the fore at different times. The chart below is a summary of what one highly experienced non-exe...

Table of contents

• Cover
• Title Page
• Copyright
• Table of Contents
• Foreword
• About the Authors
• Disclaimer
• Preface
• Chapter 1: The Appointment Process for Non-executives
• Chapter 2: Audit Matters
• Chapter 3: Board Structure and Practice
• Chapter 4: Meetings
• Chapter 5: Corporate Ethics
• Chapter 6: Corporate Governance
• Chapter 7: Corporate Strategy
• Chapter 8: Directors’ Duties and Liabilities
• Chapter 9: Directors’ Remuneration and Benefits
• Chapter 10: Financial Reporting
• Chapter 11: Fraud and Illegal Acts
• Chapter 12: Going Concern
• Chapter 13: Insurance
• Chapter 14: Internal Control
• Chapter 15: Investor Relations
• Chapter 16: Nominations Committees
• Chapter 17: Pension Arrangements for Employees
• Chapter 18: Remuneration Committee
• Chapter 19: Risk Management
• Chapter 20: Training and Development
• Appendices
• Table of Statutes
• Table of Statutory Instruments
• Index