Non-executive directors more important than ever

The analogy that incoming Confederation of British Industry (CBI) president Sir Roger Carr chooses to illustrate the evolution of the non-executive director (NED) role is that of dogs: ranging from those chosen to look good to those selected to give the impression that they may rip your face off at any moment.

We have chosen the analogy of stick-on moustaches representing critical characteristics - the diplomat, the policeman, the teacher, the lion tamer - that any FD considering a jump into the NED world must have, and stick to when under pressure from a board that may oppose your view. After all, the chief responsibility of an NED is to represent the interests of shareholders and preserve the assets of the company against decisions within the executive team that may jeopardise either. This is why FDs make ever-more logical choices as NEDs.

Carr should know plenty about the corporate beauty parade and the proverbial ripping off of faces, having been a key player and public figurehead in the taking and explaining of controversial decisions while holding important non-executive roles. In his current role as non-executive chairman of Centrica, he presided over controversial gas price hikes during the UK’s coldest winter and its worst recession; he stood with pubco Mitchells & Butlers’ board in letting finance director Karim Naffah - not the chief executive - pay for its 2008 hedging losses with his job while he was its non-executive chairman.

FDs of all kinds can find becoming an NED is a mutually beneficial move - if they can make maximum use of their ability to challenge, constructively criticise, mentor in some cases and give informed, independently-minded advice on strategy without holding back for fear of upsetting the apple cart.

NEDs were not always expected to speak up. “When I started, the watchdog principle was very much about being a poodle - you were fashionable, welcome but you weren’t supposed to be very frightening,” CBI president-elect Carr told attendees at the 2009 Non-Executive Director Awards. “By the 1990s the dog of favour had changed into a Labrador, where you were hard working, worthy, honest, trustworthy and the chairman’s best friend.”

Carr thinks good NEDs today have the temperament of an Alsatian: “You have to be sharp, you are on guard, you are a policeman. You are reasonably approachable but everybody is a little scared [of you].” But that’s nothing. Carr thinks the NED of tomorrow must be akin to a Rottweiler: “One critical aspect in my opinion is the ability to challenge and debate strategy... and the non-executive must hold the executive accountable.”

So accountable are today’s NEDs that some worry about an oncoming drought of them. After post-recession revisions to the UK Corporate Governance Code and the impact of the Walker and Higgs reports, NEDs have had a light shone on their contribution, particularly those that were on the boards of the major UK banks in the run-up to their being bailed out. But audit firms too have had to go on an NED hiring spree as their conduct is under scrutiny.

“Certainly, the responsibility of the role has increased,” says Carr. “The sense of risk has increased. The other side of the coin is that because the responsibility and risks are greater, the sense of involvement and the importance of the contribution have increased immeasurably.”

Carr’s colleague at the CBI, Matthew Fell, director of competitive markets whose remit catches corporate governance issues, registers the tussle between the NED’s dual roles as trusted advisor and independent challenger.

“The regulatory changes around NEDs have focused on striking the balance between experience and independence - and there has been a big emphasis on moving back towards experience because of the sheer depth of knowledge you need to be able to ask the right questions that challenge the board,” he tells Financial Director. But NEDS still have to be kicking the tyres on corporate strategy.