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Becoming a non-executive director.

Introduction

This checklist is written for those who have been invited to become a non-executive director (NED) for the first time. In the past, NEDs were only found in very large organisations. Now there is a greater recognition of their role, with many on the boards of NHS trusts, and still more joining small and medium sized firms.

Much of this greater recognition followed the publication, in 1992, of the Cadbury Report. This report led to a code of practice, the Combined Code, revised in 1998, which that places great emphasis on the role of the NED in the area of corporate governance. Although the report strictly applies only to those companies listed on the Stock Exchange, any organisation may follow it as a code of good practice.

The Combined Code recommends that there should be a strong and independent non-executive element in the composition of any board, and that there should also be a sufficient balance of executive directors and NEDs to prevent undue influence being exerted by a small number of directors.

The main legal responsibilities and duties of all directors, including NEDs, are embodied in the Companies Act 1985. (See Related Checklists for further details of the appointment of directors and their rights and duties).

National Occupational Standards for Management and Leadership

This checklist has relevance to the following standards: B: Providing direction, units 3, 4, 7, 8

Definition

Non-executive directors (NEDs) are part-time, non-salaried directors. They are normally appointed because they offer knowledge, experience, independence and balance to a board. NEDs can offer a fresh viewpoint because of their relative distance from the business, and they help ensure that the performance of fellow directors and the board meets business standards (for example those stated in the Cadbury Report). They normally restrict their involvement in the organisation to attendance at board meetings, activities related to senior management (concerning appointments, remuneration and succession issues), and legal or auditing duties. It has been said that the only reason for the existence of NEDs is to contribute towards improving board performance. In the UK unitary board structure NEDs have the same legal duties, responsibilities and potential liabilities as executive directors.

Action checklist

1. Find out why the organisation wants you

It is gratifying to be asked to become a NED, but consider who is asking and why. Some NEDs are invited on to the board by the Chair alone--many are invited by the full board. Does the invitation stem from an interested in your special skills, your experience, your connections or your name? How did they find you? Were you recommended? By whom?

2. Carry out basic research

Obtain copies of recent articles about the company, financial details and the latest annual report, and review this information. Consider whether:

* you are in sympathy with the organisation's corporate aims, objectives, culture and strategy?

* it has clear social, ethical and environmentally friendly policies?

* it is a reputable and sound organisation?

* you would invest in it yourself?

* you have a contribution to make? If so, what might it be?

Make discreet enquiries of those who might be "in the know".

3. Examine relevant codes of practice and ensure you understand the ethical and legal responsibilities of becoming a NED

Because in law there is no distinction between an executive and non-executive director, it is essential that you fully understand:

* the statutory requirements of directors

* what will happen if the organisation becomes insolvent

* what constitutes negligence

* your personal responsibilities and liabilities.

4. Investigate the normal roles and responsibilities of a NED

NEDs have particularly important roles to play in:

* assisting executive directors in their legal duties (especially in relation to audit and accounting procedures)

* determining the pay and related benefits awarded to executive directors and senior managers

* assisting in both new appointments and succession planning for senior positions

* development of corporate strategy.

Establish whether you will be expected to make a specific contribution to one or more of these areas, and ensure you understand both the level of responsibility and the time involved.

5. Meet the chair and other directors and assess the relationship between management and board

Are they people with whom you can work? How many other NEDs are there? How is policy usually made, and where does power really lie in the organisation? Try to gain a feel for how the executive directors view NEDs--do they expect NEDs to rubber-stamp all board decisions, or do they seem to welcome constructive comments?

It is possible that, from time to time, you may disagree with the rest of the board, for example, on an ethical or environmental issue, and you may feel uncomfortable, particularly if no one else shares your opinion on that matter. However, it is precisely for a strong, independent view that NEDs are valued.

6. Avoid conflicts of interest in your employment

Where relevant, discuss with your current employer how they feel about you becoming a NED. It is essential that there is no conflict, or possibility of conflict, of business interests or confidential information. Declare any interests you may have both to your current organisation and the organisation inviting you to become a NED.

7. Establish the level of commitment required

Although NEDs are part-time, they are committed to their boards and organisations all year. This commitment should be demonstrated by:

* attending board meetings, or commenting on matters if attendance is impossible

* keeping yourself informed about the organisation and its industry sector

* attending meetings, conferences, visits and exhibitions to present a positive interest in the organisation.

8. Find out how much you will be paid

Compensation for time and energy must be expected, as must recompense for out of pocket expenses. However, the level of remuneration must not be so great to endanger the independence of the individual concerned. Some organisations expect employees who have become NEDs of other organisations to pass on any payment.

9. Find out whether an induction or training programme is offered

For a NED to become an effective member of the board it is essential that an early introduction to both employees and the organisation is made. The type of induction programme and the amount of information made available to new NEDs will vary from organisation to organization--if an organisation offers nothing, then you should seriously question its commitment to NEDs.

10. Agree on a term of service

It is sensible to agree on a specific term, renewable only if all parties are in agreement.

Managers becoming a non-executive director should avoid:

Neglecting to learn about:

* ethical responsibilities

* personal responsibilities and liabilities

* statutory requirements

* what happens if the company becomes insolvent

* what constitutes negligence

* breaches of standards of care.

Additional resources

Books

Becoming a director: learn the basics and become an effective and

successful director, Victor Hughes

Oxford: How to Books, 2004

The role of the non executive director in the small to medium sized

business, John Smithson

Basingstoke: Palgrave MacMillan, 2004

Tyson report on the recruitment and development of non executive

directors, Laura Tyson

London Business School, London, 2003

Tolley's non executive directors handbook, Glynis D Morris and Patrick Dunne

Croydon: Butterworths Tolley, 2003

The combined code on corporate governance, Financial Reporting Council London: 2003

Review of the role and effectiveness of non executive directors, Derek Higgs London: Department of Trade and Industry, 2003

This is a selection of books available for loan to members from the Management Information Centre. More information at: www.managers.org.uk/mic

Related checklists

Directors' rights (186) Directors' duties (187) Directors' appointment (188)

Organisations

Institute of Directors, 116 Pall Mall, London, SW1Y 5ED Tel: 020 7839 1233 www.iod.com

PRO NED, Devonshire House, Mayfair Place, London, W1X 5FH Tel: 020 7493 4567

PRO-NED: the Promotion of Non-Executive Directors is the recognised authority on best practice and guidance for Boards of Directors and corporate governance.
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Publication:Chartered Management Institute: Checklists: Personal Effectiveness and Development
Geographic Code:4EUUK
Date:Jun 1, 2006
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