COMPANIES: NON-EXECUTIVE DIRECTORS
Study Unit
COMPANIES: NON-EXECUTIVE DIRECTORS ~21 min
(A) THE ROLE OF NON-EXECUTIVE DIRECTORS In the UK, it is increasingly common, particularly in larger companies, for the board to be made up of both executive and non-executive directors, the (1) ..... often being referred to by the abbreviation ‘NEDs’. For those companies which do (2) ..... to appoint NEDs, selecting professionals who have the necessary specialist skills and knowledge to (3) ..... the company towards success is vital, because their role is to ensure the effective running of the board, even to the (4) ..... of challenging the performance of a company’s CEO. In other words, the executive directors are responsible for the day-to-day management of the business, but the non-executive directors are responsible for (5) ..... their performance and generally (6) ..... the operations of the company. Their duties also include reviewing the company’s finances and deciding upon (7) ..... levels of remuneration for executive directors. There is no (8) ..... in UK company law between the different categories of director, which means that the duties and liabilities of both executive and non-executive directors are the same.
(B) DIFFICULTIES IN APPOINTING NON-EXECUTIVE DIRECTORS Below is an extract from an article published in The Financial Times which examines the role and recruitment of non-executive directors. It is entitled, “How to help non-executive directors see through a chief’s charms”.
An effective board needs a non-executive director team with the skills, knowledge and experience to understand every aspect of the business, including its people, and especially the chief executive. NEDs need courage and social skills if they are to challenge executives. Most failures have their roots in board weakness.
The Ivey Business School “Leadership on Trial” research group, forged in the aftermath of the banking crisis, provides insights for boards into the role of character in leadership. Two stand out. The notion that competencies determine what leaders can do, whereas character determines what they will do, is obvious. Less so is the conclusion on seemingly paradoxical traits. A leader with balanced characteristics - confidence with humility, drive with patience, candour with compassion - will be a better leader than one with unalloyed self-confidence, aggression or bluntness: and they will be less risky, too.
One of NEDs’ most important responsibilities is to select chief executives and the non- executive teams that should support and challenge them. Research from the London School of Economics, “Headhunter methods for CEO selection” by Max Steuer and colleagues, suggests that outsourcing the recruitment of a chief executive to headhunters is a sign of widespread, fundamental board weakness.
Reputability’s research note, “Designing better boards”, confirms the weakness. It found FTSE 100 NED teams overwhelmed by board and financial experience and starved of NEDs with a deep understanding of people. A tiny proportion professed proficiency in fields such as social sciences, anthropology, psychology or HR, skills needed to evaluate character, behaviour and competence.
This makes it no surprise that so many boards seek seeming safety by outsourcing board appointments and pay to headhunters and consultants. The truth is that delegating any task without know-how is risky. The LSE report vividly illustrates the danger. In contrast, it seems no coincidence that at Weir - which recently devised a compensation structure beyond long-term incentive plans - Clare Chapman, an HR professional, chairs the remuneration committee.
Beyond recruitment and pay, it takes skill, know-how, self-awareness and effort to overcome deep- rooted biases and behaviours. Charm blinds us. We believe our own PR. Self-serving bias, the halo effect and overconfidence lead us to see ourselves, and those we have appointed, as better than we are. Social silences lead us to ignore subjects considered impolite, dull or taboo. NEDs who get past such issues need courage as well as social skills to overcome the social norms that shepherd us towards conformity.
Complete A opposite using the words in the box below.
(a) overseeing (c) steer (e) elect (g) scrutinising (b) extent (d) distinction (f) latter (h) appropriate
Read B opposite then answer the following questions.
1. What does the author of this article think is a major cause of bad, possibly fatal, business decisions on the part of large companies? (a) most companies don’t appoint NEDs and chief executives therefore have too much power (b) some boards have non-executive directors who don’t have the collective ability combined with the necessary bravery to confront other directors about their decisions (c) the majority of boards are weak due to the personalities of the board members 2. What is the first insight that the “Leadership on Trial” research group provided on the part that a director’s character will play in his or her role as a leader of a company? (a) a director will usually choose to do what he or she can do successfully or efficiently (b) a director will hardly ever choose to do what he or she can do successfully or efficiently (c) regardless of what a director can do successfully or efficiently he or she may act otherwise 3. What does the author of this article say about how risky a director’s character may be to the success of a company? (a) that the least risky directors are able to utilise apparently contradictory personality traits (b) that the riskiest directors are modest, patient and compassionate (c) that the least risky directors are absolutely self-confident, aggressive and speak very frankly 4. What was a major conclusion of Max Steuer’s “Headhunter methods for CEO selection” research about how companies select a chief executive? (a) subcontracting the selection of a CEO to people who identify and approach suitable candidates is indicative of a board which has some very basic flaws (b) subcontracting the selection of a CEO to people who identify and approach suitable candidates already employed elsewhere to fill the position is the sign of a strong board (c) subcontracting the selection of a CEO is a very common practice 5. ‘The halo effect’ is the idea that if we first see a person in a very positive way it becomes difficult to see that person in a negative way later on. What does the author of the article say that NEDs need to watch out for in themselves and in other directors in addition to the halo effect? (a) opinions that a public relations (PR) company have published about that director (b) behaviour that is not impartial because it is to the advantage of the director to behave that way (c) directors that are rude, boring and unwilling to discuss socially unacceptable subjects DISCUSSION POINTS • Do boards in your country have both executive and non-executive directors? Do you think it’s a good idea to have NEDs?
• If a company does choose to have NEDs, bearing in mind the contents of this article, do you think that large companies would be more successful with more female than male NEDs as part of the corporate team?
Speaking & Writing for this topic
Two short tasks scored against TOEFL rubrics. The prompt is generated for this topic — use the vocabulary you have just studied.