03 September 2018 by Chris Hodge
Greater attention on the role of executive directors will help board effectiveness
Commentators concerned about the future of the unitary board tend to point to the increased regulatory burden placed on boards. This requires them to spend more and more time on compliance, at the expense of strategy and overseeing the operational performance of the company.
While there undoubtedly has been an increase in regulatory and public expectations of the boards’ supervisory responsibilities in recent years, that does not necessarily lead inexorably to the two-tier board structure common in continental Europe. In this, a non-executive ‘supervisory board’ monitors the performance of an executive ‘management board’.
One could argue exactly the opposite; that the more regulators expect boards to be ‘hands on’ and put greater distance between board members and management, the more counter-productive if could be. Better to have the non-executive directors (NEDs) and executive directors in the room together, sharing information and insights.
“Are the attributes and behaviours expected of an executive director in any way different from those looked for in ‘normal’ senior managers?”
Assuming, that is, that the executive directors are actually in the room. The perceived decline in the number of executive directors is another trend that worries some supporters of the unitary board, who believe their absence means that boards are already becoming ‘de facto’ supervisory boards.
Such data, as is available, suggests that there has not actually been a significant change in the average number of executive directors on the boards of listed companies over the past ten years or so; but if you look further back it is the case that there used to be many more of them.
How much this matters perhaps depends on what you think the role of an executive director should involve. How, if at all, does it differ from what is expected of the same individual in their day job as a member of the senior management team? Are the attributes and behaviours expected of an executive director in any way different from those looked for in ‘normal’ senior managers?
An enormous amount of effort has gone into defining the expected role, characteristics and competencies of NEDs, and the CEO has also received a reasonable amount of attention. By comparison, the responsibilities and effectiveness of other executive directors are neglected topics.
A search of the new edition of the UK Corporate Governance Code finds that, excluding the section on remuneration, there are only four references to executive directors: there needs to be some; but they should not be allowed to take on too many external appointments; NEDs should have a prime role in appointing and removing them; and NEDs should meet with the chair without them.
Other than that, the code defines the role of executive directors only by the things that they are not allowed to do – sit on board committees, for example. It seems that they are there to be kept under surveillance, rather than to make a positive contribution.
The FRC’s updated Guidance on Board Effectiveness says a bit more on the subject of executive directors, although not much. It states, for example, that ‘executive directors should welcome constructive challenge from non-executive directors as an essential aspect of good governance, and encourage their non-executive colleagues to test proposals in the light of their wider experience outside the company.’
“Duties extend to the whole of the business, and not just that part of it covered by their individual executive roles”
The general impression gained from reading the code and guidance is that the main purpose of having executive directors on the board is so that the NEDs can advise and supervise them. Both of those activities are extremely important, but you do not need to turn senior managers into executive directors – or have a unitary board – for them to happen.
There is more to the role of executive directors than simply doing their day job in a way that is visible to the board, or at least there should be. The FRC hints at this as well in the new guidance, when it says that: ‘Executive directors have the same duties as other members of a unitary board. These duties extend to the whole of the business, and not just that part of it covered by their individual executive roles. Nor should executive directors see themselves only as members of the chief executive’s team when engaged in board business.’
This quote helpfully distinguishes between the responsibilities of an executive director and those of ‘their individual executive role’, although without defining what they are.
More effort is needed on the part of all of us interested in board effectiveness, but perhaps particularly those who champion the unitary board, to articulate what the specific positive contribution that executive board members can make as directors rather than as managers and identify the attributes and behaviours needed to do so.
Having done that, we can then start working out how to select and develop those managers that have the potential to become executive directors capable of enhancing the effectiveness of the board.