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Is NEDs’ lesser knowledge of daily business vital to their effectively challenging executives?

07 November 2017

Is NEDs’ lesser knowledge of daily business vital to their effectively challenging executives? - Read more

Our community discusses whether non-executive directors have an edge if they lack knowledge

Researchers have recently argued that to properly scrutinise board decisions non-executive directors (NEDs) must lack knowledge about the daily workings of the business they oversee.

With that in mind, we asked the Governance and Compliance/Core community whether they agreed. Almost half (49%) said yes, a third (32%) were unsure, and 19% said no.

‘Having the distance from operations enables NEDs to have an approach that does not assume or take anything for granted and therefore ask more probing questions,’ one respondent said.

Others said that industry knowledge was a plus, or that ignorance could be a hindrance. ‘NEDs require some expertise in the industry in which they operate in order to properly challenge the executive directors,’ said one person.

Another added: ‘No question is a stupid question, but a meeting spent solely responding to a director’s complete lack of understanding of the business would be counter-productive and cause frustration.’

Asked whether NEDs are given enough information to carry out their role effectively, 54% said yes, 11% said no, and the remaining 35% were unsure.

‘They usually have too much information to perform their role in the time given, and it seems this is expected to increase,’ one person said. While another said: ‘Good quality information does not mean lots of it. The best papers are not long, but focused and clear as to what is required.

Another added: ‘It is so dependent on the NED. Sometimes it is not so much the information provided as the way the NED uses it to inform his or her questions.’

Commenting on the education sector, one respondent warned: ‘A canny CEO could potentially, disguise issues from a board if trustees are not familiar with practices in education and academies.’

Views differed on what information NEDs need to carry out their job, with one person saying they required ‘the underlying processes and reasons taken by the executives in reaching decisions’.
Another said: ‘NEDs need a thorough knowledge of the business they oversee and need to have access to executive-level employees and the level below.’

Document structure was also mentioned. ‘Board papers need to link to pursuance of board strategy and risks,’ one person said. ‘Too often board papers are just a collection of things that management have been working on.’

For some people context was important, with one respondent commenting: ‘When considering a transaction that is not business as usual, NEDs require more detailed information about the rationale, pros and cons, and risk management.’

Several raised the question of information bias: ‘It’s not so much what information do they need, but do they trust that management are not loading the dice with the information presented,’ one person said.

A third respondent added: ‘What is important is the information they are provided with must be balanced and include the negatives as well as the positives, with the executives avoiding bias towards their preferred route.’

‘Overload usually happens when there is a lack of trust and confidence, resulting in NEDs requesting more information for assurance purposes, and executive directors determined to “show and tell” to demonstrate how much effort is being put in,’ one respondent said.

Another complained: ‘Unfortunately it is all too often the case that NEDS are provided with information on a one-size-fits-all basis, yet by the very nature of having a diverse board each individual’s understanding and capacity is different.’

For company secretaries, this will remain difficult. As one person asked: ‘Is it not part of a company secretary’s job to interface the executives and non-executives, making sure that each is content with the value added by the other?’

Conducted in association with The Core Partnership

If you are a company secretary or governance professional at a leading UK business, and you would like to take part in or comment on future surveys, email team@core-partnership.co.uk

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