The Impossible Task of The Non-Executive Director

Practically, we see a few problems around the board room table when it comes to adding value to the bottom line that exceeds the resources (both financial and time) spent on non-executives directors. The first, and overriding issue is that the Companies’ Act (except for Chapter 3, where the members of the Audit Committee are described) does not distinguish between a non-executive and executive director in terms of accountability. More on this later in this article, as it has a definite influence on the behaviour of the non-executive director.
 
Providing strategic insight presupposes deep insight into the industry and the organisation and sometimes creates a potential issue, as knowledge of an industry usually indicates or flows from having worked or currently working in the industry. This brings up the issue of independence and objectivity; helping a competitor or potential competitor may make you an excellent mentor, but may harm your current business interests.
 
Where a wise mentor will certainly add value are in areas like the environment, human resources, and marketing. Here a case could be made that less deep insight is needed into an industry and organisation for the non-executive director. Someone with deep philanthropic roots and knowledge, for example, will add immeasurable value to any modern organisation. Again, though, this person is expected under the Companies’ Act and by the shareholders to be accountable and responsible for all actions the organisation undertakes. Is it fair to expect a person spending 60 to 100 hours per year on an organisation to have the same level of insight and knowledge as someone spending all their professional time in that organisation? Would a person be willing to see a lifetime of good works being undone by one possible corporate scandal of which he or she cannot be expected to be aware?
 
We think not.
 
So, what happens in practice? Typically, one of two things.
 
A non-executive director gets too involved in the management of the organisation while attempting to manage their risk and exposure. This obviously adds value, as the non-executive is typically an experienced person. What it also does, however, is add one extra layer of monitoring or oversight which could quickly become cumbersome and rigid as it sucks up resources from the executive team, who are expected and have been appointed to manage the operational aspects of the organisation. Take an example of audit committee members poring over audited financial statements in an attempt to add value. The financial statements were prepared by an experienced financial person or team and were audited by an experienced team of specialist external auditors according to very strict external guidelines. In these cases (like this example), financial and intellectual capital (non-executive time, i.e., money spent) are expended, but is a commensurate level of wealth created for the shareholders?
 
Option two is fortunately rarely seen. This is where the non-executive director does not get involved in the management of the organisation, but also does not (due to time pressures from their day job) or cannot (possibly due to them not understanding the industry) add any strategic value. Financial capital is expended in this instance, with virtually no wealth created and, in some instances, even eroded.
 
The ideal non-executive is not an easy person to find. They need to understand the industry without being involved as a potential competitor and to understand the organisation and its inner workings without getting involved in the day-to-day operations. They need to have a big picture mind-set and understand how and when to delegate. They need to understand people, and how to motivate them. They need to understand and be experienced in acting as a buffer between shareholders and executives. They need to be able to answer and demand answers to the hard questions without demotivating. In other words, they need to utilise virtually all of the six capitals and maximise the wealth creation. This is a very tall order.
 
And even if you start with this wise sage, the necessary tools need to be in place to allow them to maximise their input. The most fundamental of these tools is reporting to the non-executives, allowing them to fulfil their mandate without falling into the detail. And the most important of these, we believe, is a tool that allows feedback on the attainment of strategic and operational objectives that flow into operational risks. Put another way, feedback on the management of key risks to an appropriate level by the executives. This allows the non-executive directors the freedom to focus on areas where they can and must add the most value, which is strategy.