adminAllen Choruma
Vision 2030 Focus
CORPORATE governance has become topical in the wake of empirical evidence linking good business governance to sustainable development outcomes.
The role of non-executive directors has come under the spotlight as it has become the norm to have a majority of such executives on the board of every organisation, in line with international best practice.
The role of non-executive directors, whilst it has been welcomed as a good practice, it has, on the flip side, also attracted some debate and controversy in corporate governance.
Walter “Tiny” Rowland, the late former chief executive officer of Lonrho Corporation, once bluntly jested that non-executive directors are purely decorative, “lights on a Christmas tree”.
Tiny Rowland’s statement aroused a lot of debate on the role of non-executive directors in corporates.
Is this true that the directors are merely decorative on corporate boards? What prompts some people to label them “lights on a Christmas tree”?
What is a non-executive director?
Our law does not distinguish between an executive and non-executive director, it merely speaks of a director.
A director is defined as a person who holds such a position as defined in the Companies Act. But there is no statutory definition of a non-executive director.
Several definitions have been made, in various corporate governance codes, but I find the following definition in the BNET Business Directory as most comprehensive.
BNET defines a non-executive director as: “A part-time, non-salaried member of the board of directors involved in the planning, strategy and policy making of an organisation, but not its day-to-day operations.”
Why are non-executive directors necessary?
The question that needs to be addressed is: Are non-executive directors necessary?
According to BNET Business Directory the role of a non-executive director is as follows:
“The appointment of a non-executive director to a board is normally made in order to provide independence and balance to that board and to ensure that good corporate governance is practiced.”
Non-executive directors, therefore, have a critical role to play in corporate governance.
They are not for decoration, “lights on a Christmas Tree” as was jested by Tiny Rowland?
Non-executive directors are appointed for many reasons which include:
To meet regulatory requirements.
As a corporate governance best practice.
Specialist Knowledge.
Expertise.
Networking skill.
Political reasons.
Experience.
Independence.
Promote investor confidence.
Board diversity.
Prestige.
For decoration.
Why non-executive directors are construed as decorative?
These executives are often construed as “decorative directors” because some organisations place them on their boards for prestige.
They are not appointed because of their skill and experience, but because of what they represent and the benefits they bring to the organisation as well-known and connected people in society.
On the other hand, some non-executive directors are labelled as decorative because they are not engaging and do not involve themselves in organisational activities.
They are only seen at board meetings after which they literally disappear only to resurface at the next board meeting, if at all they attend.
Such directors give rise to connotations as “decorative non-executive directors” because they are disengaged from organisational activities notwithstanding the fact that they are directors.
Below are some reasons why non-executive directors are often labelled as decorative:
Low attendance of board meetings.
Inactive participation in board and committee meetings.
Little understanding of company core business.
Little contribution at meetings.
Lack of familiarity with company activities.
Inactive participation in developing strategies and policies of the company.
Non-engagement with fellow directors.
Lack of support to management in running the business.
Lack of time and commitment to the affairs of the company.
No positive contribution to the company.
The above characteristics have driven people to conclude that some non-executive directors are decorative as they do not add value to the board and company performance.
At times, one wonders if some of these senior managers are keen on their job or more so understand their fiduciary responsibilities.
One also questions the selection and appointment criteria for non-executive directors. Is it rigorous? Are they appointed on merit?
Role of the board
Non-executive directors need to understand their role and fiduciary duties to avoid being labelled as decorative “lights on a Christmas tree”.
As part of a board, the role of non-executive directors is critical in the good governance of an organisation.
Here are some of the functions of a board:
Focal point and custodian of corporate governance.
Leadership.
Strategic guidance.
Performance oversight.
Oversight over chief executive officer and management team.
Stewardship of organisational resources.
Compliance governance.
Ethics.
Stakeholder relationships.
Corporate social responsibility.
Non-executive directors, as part of the board, should take a professional governance approach if they are to be taken seriously.
A good and effective board composed of non-executive directors who understand their role evaluates its performance and that of the individual members of the board to ensure that they are adding value to the organisation they lead.
As board members, non-executive directors should ensure that there is a formal process for board evaluation.
Board evaluations are usually done by an external independent person to ensure objectivity and independence of the evaluation process. This is key in managing conflict of interest and avoidance of biased assessment.
Guidance for non-executive directors
If non-executive directors are not to be labelled “decorative” they need to understand their fiduciary duties and take a keen interest in company activities.
Here are some of the things non-executive directors should do, to be effective:
Put in more time and effort to the company (don’t just wait for board meetings).
Understand the company’s core purpose, its business model, its risks and opportunities, (do not just rely on reports).
Know the company business.
Visit company operations.
Know and interact with the executives and key management staff.
Know key stakeholders.
Understand the business strategy and help formulate it.
Know the key risks and opportunities to the business.
Understand the market in which company is operating in.
Attend company events or other industry events.
Request for information from CEO and top executives.
Insist on director induction and training.
Seek expert opinion on technical and complex matters.
Minimise the number of boards served.
Attend and participate in board and committee meetings.
Don’t accept appointment to a board if you don’t add value to it.
In conclusion, non-executive directors are not decorative “lights on a Christmas tree” but are a necessary element in the good governance of any organisation.
Allen Choruma can be contacted on e mail: [email protected]
Bongani Ndlovu
Online Reporter