January 24, 2013 How can a Non-Executive Director protect themself?
As with many other parts of the World, the UK has seen an increased focus on the role of non-executive directors (NEDs) as part of a strong corporate governance regime. The main example of this is undoubtedly the emphasis that the UK Corporate Governance Code places on the role and importance of NEDs.
However, this continued raising of the importance of NEDs brings with it certain responsibilities and, dare I mention it, liabilities. Gone are the days where a NED could turn up to a monthly meeting, expecting to receive a nice lunch, nod along with the executive and walk away with a good fee.
The UK Companies Act 2006 does not distinguish between an executive director and a non-executive director; it is a purely a distinction that the corporate governance world places on directors. As a result, all directors owe the same duties to a company, whether they are the CEO or a non-executive director. It is therefore vitally important that NEDs perform their role adequately.
The Institute of Chartered Secretaries and Administrators (ICSA) has recently published some updated guidance on the liability of non-executive directors and how best to avoid it. In some ways, this is a rather negative approach as the best way to avoid liability is to ensure that you perform your role properly for the company, however it is a timely reminder of some of the common pitfalls and consequences.
Probably the most important piece of advice is to ensure that you have adequate resources to perform your role. This means that you should have the time to dedicate to the role in order to review the papers properly, undertake any training/inductions that may be required and to attend board and committee meetings. You also need to ensure that you receive adequate management information and training in order to perform your role. These are the kinds of things that should be set out at the beginning of the engagement so that all parties understand what will be expected of you.
Once in the role, a NED should make sure that they:
- take responsibility for their own on-going training and continuous development;
- are prepared to provide independent oversight and constructive challenge to the board;
- receive high quality management information;
- take their decisions objectively and solely in the best interests of the company;
- have independent advice available to them if needed; and
- avoid conflicts of interest.