‘What is a non-executive director (NED) worth, what risks do they face and why do large, complex organisations continue to fail?’
These are just some of the questions being asked by Andrew Kakabadse, Professor of Governance & Leadership and Nada Kakabadse, Professor of Policy, Governance & Ethics, of Henley Business School as part of their ongoing research into business leadership
Andrew explains further: “The value of a non-executive director is linked to the risks they are responsible for and questions how much they should be paid?
“These questions are increasingly being asked by leaders at a time when the corporate scandals and failures of the past 40 years have clearly spotlighted an over-attentiveness to compliance and damaging neglect of organisational stewardship by the board and its directors.
“Countless company collapses and missteps, ranging from Texaco, Polly Peck and One.Tel, through to Dick Smith, Theranos and FTX have all placed the blame on individuals, teams, markets, institutional mismanagement, or a combination of all these issues.
However, the underlying fact remains – effective stewardship is critical and NEDs are right, smack in the middle of how strategic delivery will either succeed or fail.
Nada adds to the ongoing Kakabadse research findings, commenting: “On the point of whether NEDs are fairly compensated for their contribution, it’s important to consider what actual obligations they must fulfil, and the liabilities they need to address.
“The average NED’s actions should demonstrate:
- Skill and care, particularly towards internal and external stakeholders
- Acting in good faith and in the best interests of the company and its shareholders
- Disclosing any conflicts of interest
- Not using the board position for personal gain
- Not abusing authority, or misusing company property or information
- Maintaining confidentiality.
“In addition, NEDs must follow specific statutory compliance obligations, which include:
- Employee discrimination, harassment laws and regulations
- Health and safety regulations
- Environmental regulations
- Data protection regulations
- Accounting standards and the presentation of accurate accounts
- Rules relating to raising investments and the borrowing of money
- Standards linked to the ownership of shares in the company
- Competition law.
She continues: “NEDs also have contractual duties, shareholders’ agreements, personal guarantees, and covenants under leases to attend to.
“All of this and more has resulted in widespread recognition that the compliance demands facing boards are now overwhelming.
“Ever since the reforms triggered by the ‘Cadbury Committee's Code of Best Practices on corporate performance,’ compliance has become synonymous with governance.”
“Scrutiny of major corporate and third sector collapses has surfaced one key truth,” add Andrew. “Each board director has sufficient insight into the troubles of the enterprise to the point where they could have predicted its demise at least five years in advance.
“Despite this advance knowledge, each organisation was allowed to collapse.
“There is an unremitting requirement to pay each NED the value needed to address the challenges that are being faced. This is a vast improvement on the current practice of analysing the outcome of a ‘how was such a state of affairs allowed to occur’ incident after the fact, followed by proportioning blame.
“NED remuneration should account for compliance duties, but equally it must address the effort and capability for stewarding through the various tensions that are inherent in any complex organisation. The end message is to pay NEDs their full value – they’re worth it.”
A version of this story originally appeared in Governance + Compliance magazine.
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