Strategy & Operations » Governance » Non-executive directors are like doctors on call

We are rapidly approaching a point at which corporate culture will smother the value of non-executive directors (NEDs). The last 10 years has seen their inexorable rise, not as the rubber-stampers of the past, but as independent inquiring minds coming at corporate governance affairs from a tangential trajectory.

On paper, and through numerous regulatory initiatives, this sounds fine. A sharp mind allied to firmness of independent action should be a match for any failings on the corporate governance side. Posit any problems in the corporate governance world these days and there will invariably be only one answer: a call for the audit committee and the NEDs. It has been startling to follow the House of Lords Economic Affairs Committee grinding through weeks of hearings into what should be done about the audit market, only to hear over and over again that audit committees will provide whatever magic bullet is required. When asked if there was one single solution, even Lord Myners, who is usually granted the status of God in these matters, responded that there wasn’t – but strengthening the role of audit committees would go a considerable way towards producing one.

That is the theory. But the anecdotal evidence points in another direction. Non-executive directors take up a position. They agree their remuneration, which is not usually vast. They throw themselves into a process of visiting locations around the world and familiarising themselves with the intricacies of the risk management processes, trying to understand the corporate culture. And at some point, they have a chat with some lawyers.

Then their diary starts to fill up. It is an entirely voluntary procedure not explicitly inflicted by the company itself. But just as directors have an audit committee in place to enable them to sleep peacefully at night – as the cliché goes – the same happens to NEDs. The more they are extolled as the people who will save the company from risk-induced disaster, the more it is the NEDs who lose sleep.

So gradually, their responsibilities grow and the days required lengthen. The most recent survey from PwC confirms this. Every year, the average number of days NEDs officially devote to their role is on an upward curve. It was 20 days a year in 2009 and 24 days a year in 2010. In the troubled world of financial services, perpetually under fire over issues such as remuneration, it is already much more.

In part, this is a result of regulatory overload: every problem is said to demand a regulatory response. This leads only to much more work with lawyers to ensure that every avenue has been covered and everyone’s back has been minded. And in part it is simply that life has become more and more complex. With audit committees in particular seen as the answer to everyone’s problems, the sheer scale of the bureaucracy required to sign off every possible doubt has grown exponentially.

But there is also another problem. And this one is the biggest of them all. It is the way corporate culture engulfs everything it touches. Meetings, and all that is involved in them, are not just a structure to provide the means of taking decisions or advancing strategy in a corporate context. They are also – and the scope of this is largely ignored – seen as the glue that holds together the corporate culture. Meetings are seen as indispensable. Meetings are where corporate managers bond as teams. Meetings cannot be missed.

All of this sucks time out of anyone’s diary. And as meetings gain importance, NEDs feel obliged to attend every one. After all, they are the essence of the way a company conducts itself. That is the heart of whether or not corporate governance works. But it is killing the concept of the independent NED.

Read about FDs becoming NEDs here