The role of non-executive directors (NEDs) has come under increasing scrutiny in recent years, with some questioning whether they are worth the money they are paid. Critics argue that NEDs are often chosen for their connections rather than their expertise, and that they may not be sufficiently engaged with the organisation’s operations to provide meaningful input. NEDs should however be appointed to provide independent oversight and guidance to the board of directors.
Supporters of the NED system argue that they provide important checks and balances to prevent the board from becoming too insular, bring independent views and perspectives and ensure that the organisation is being run in the best interests of all stakeholders.
So, which is it? Are NEDs really adding value or are they just coasting?
The answer is, of course, not black and white. There are certainly instances where NEDs have provided invaluable guidance and input, leading to improved performance and profitability. However, there are also instances where NEDs have been little more than figureheads, attending meetings but not really contributing anything of substance and this has led to some well-known governance failures such as the collapse of construction giant Carillion in 2018 and high-street retailer BHS in 2016.
Part of the problem lies in the way NEDs are selected and compensated. Many are appointed based on their connections rather than their expertise, and they may not have a deep understanding of the company’s operations or industry. Additionally, some companies pay NEDs exorbitant fees for relatively little work, which can lead to a lack of motivation to engage with the organisation’s operations. Another issue is that NEDs may not be held accountable for their actions (or lack thereof). Unlike executive directors, who can be fired if they do not meet performance targets, NEDs are not subject to the same level of scrutiny. This can create a culture where NEDs feel they can coast along without consequences.
So, what can be done to ensure that NEDs are adding value to the organisation?
One key factor is to appoint NEDs based on their expertise rather than their connections. This would ensure that they have a deep understanding of the organisation’s operations and industry and are better equipped to provide meaningful input. This is however a two-way street and before appointing a new NED there needs to be a two-way assessment of the value that they bring to the organisation.
Another suggestion is to tie NED compensation to performance targets. This would provide an incentive for NEDs to engage with the organisation’s operations and work to improve performance, but this could seriously erode the independence of NEDs and align them exclusively with increasing shareholder value over the views and needs of other stakeholders, in doing so there is also an increased risk of them becoming pseudo executives.
In conclusion, the role of NEDs can be a valuable one, but only if they are selected based on their expertise and held accountable for their actions. Organisations need to ensure that their NEDs are engaged and contributing meaningfully to the organisation’s success, rather than simply coasting. It all starts with the appointment of a NED and a clear assessment from both the NED and the organisation on the true level of value they bring. If you are interested to understand more about the areas a prospective NED should assess see our ‘9 key considerations before taking that non-executive director role’.
