Part 5

Who are
the NEDS

NEDS
'Non-Executive
Director' A member of
a company's board of
directors who is not
part of the executive
team.

NEDS
A non-executive
director (NED)
typically does not
engage in the dayto-day
management of the

NEDS
Non executive
directors are
either
independent or
non independent.

NEDS
A key principle of
good corporate
governance is that
there should be a
sufficient number
of independent

NEDS
The concept of
independence is
an important one
for corporate
governance.

NEDS
to create a suitable
balance of power
and prevent the
dominance of the
board by one
individual or by a

NEDS
Responsibilities are
given to independent
directors by the
Combined Code, and
the external auditors
should be independent.

NEDS
Responsibilities are
given to independent
directors by the
Combined Code, and
the external auditors
should be independent.

NEDS
In the United
States of America,
the New York
Exchange listing
requirements
define an

NEDS
Has not been
employed by the
company
presently in the
past 3 years,

NEDS
Does not have a
family member
who has been or
is presently
employed by the

NEDS

Is not a
partner in
business.

NEDS
Has not been and
is not employed
as an executive
of another entity.

NEDS
In South Africa,
the King II (2004)
report defines an
independent NED
as:

NEDS
Does not report,
nor was
nominated by a
significant
shareholder.

NEDS
Was not employed
by the company
for 3 financial
years prior to
appointment.

NEDS
Is not an
immediate family
member of a
person, who is or
was in the past 3
years employed by

NEDS
Is not a
professional
advisor to the
company.

NEDS

Is not a
professional
advisor to the
company.

NEDS
Is not a significant
supplier or a
customer of the
company.

NEDS
He has no
significant
contractual
relationship with
the company.

Independence
Phan (2006)
defines
independence as
consisting of
...the feeling of
freedom to express

Independence
and the freedom
from undue
influence by top
management or
the controlling

Numbers of neds
In principle, the
NEDs provide a
counterweight to
the CEO and
chairman of the
board, and so

Numbers
The Cadbury
recommends that the
majority of them
should be
independent.

Numbers
The Higgs Report
provides that at
least of the
board, including
the chairman

Duties
All directors are
subject to the
following
fiduciary duties
Exercise honest

Duties
Act in good faith
at all times,
To act in the best
interests of the
company,

Duties
Exercise diligence,
care and skill and
Exercise prudence.

Statutory duties
Directors have a
duty to keep
accounting
records which
are:

Statutory
duties

Sufficient to
show and explain
the companys
transactions,

Statutory duties
Such as to
disclose with
reasonable
accuracy, at any
time, the

Statutory duties
In accordance with a
set of generally
accepted accounting
principles which
must be stated.

Statutory duties
If the company is
one which is
required to be
audited the
accounts show a
true and fair view

Statutory duties
for the period of the state
of the companys affairs
at the end of the
period ... [and which]
shall be approved by the
directors... (Article 104
CJL).

Function of NEDS
Non-executive
directors are
appointed to
bring five key
qualities to the

Function of NEDS

Independence,
Impartiality,
Experience,

Function of
NEDS

Specialist
knowledge
(Jersey
Financial
Services

Function OF
NEDS

Personal qualities.
Contributing to the
strategic direction
of the company.

Quality of NEDS

WHAT MAKES
A GOOD NONEXECUTIVE
DIRECTOR?

Quality
Contributing to
the strategic
direction of
the company,

Quality
Efficiently solving
problems that arise,
Communicating
with third parties,

Quality

Ensuring all
the audit
requirements
are satisfied,

Quality
Remuneration of
the executive
directors,
Appointing the
board of directors.

Criticism of
NEDS
Insufficient
knowledge,
Insufficient time
spent with the
company,

Criticism of NEDS

Overriding
influence of
executive
directors.

THE HIGGS
REPORT

THE HIGGS
REPORT ??
????

Higgs Report
The report
proposed that
NEDs should
take an active
role in the

Higgs Report
and should
become more far
more accountable
for their
performance.

Higgs Report
Their role
should be
clarified in the
Combined Code,
and should

Higgs Report
Strategy. To
contribute to the
development of the
companys strategy
and constructively
challenge views of
the executive

Higgs Report
Performance. To
monitor the
performance of
executive management
in meeting their agreed
goals and objectives.

Higgs Report
Risk. To satisfy themselves
that the financial
information produced by the
company is accurate and
that the financial controls
and systems of risk
management are robust.

Higgs Report
People. To have
responsibility for
setting the
remuneration of
executive directors
and to have a prime
role in both the

Question 1
Evaluate the
strategies that
NEDs can use to
uphold the
efficiency of the

NEDS EFFECTIVENESS

To be effective,
a non-executive
director needs
to;

NEDS
Build a
recognition by
executives of
their
contribution in

NEDS
Be wellinformed about
the company
and the
external

NEDS
Have a strong
command of
issues relevant
to the business,

NEDS
Insist on a
comprehensive,
formal and
tailored induction,

Effectiveness
Continually develop
and refresh their
knowledge and
skills to ensure
that their
contribution to the

Combined Code
The Combined
Code describes
an effective nonexecutive
director as one

Combined Code
Upholds the
highest ethical
standards of
integrity and
probity,

Combined Code
Supports
executives in
their leadership
of the business
while monitoring

Combined Code
Questions
intelligently,
debates
constructively,
challenges

Combined Code
Listens sensitively
to the views of
others, inside and
outside the board,

Combined Code
Gains the trust
and respect of
other board
members,

Combined Code
Promote the
highest standards
of corporate
governance and
seeks compliance
with the provision

Question 2
DISCUSS THE
SITUATIONS IN WHICH
NON-EXECUTIVE
DIRECTORS ARE
LIKELY NOT TO BE
INDEPENDENT.

Answer
1. Material
business
relationship with
company in last 3
years.

Answer
Employee in
last 5 years
Close family
ties with

Answer
Receives other
remuneration
from company
besides directors
fee.

Answer
Served on
board for
more than 9
years

Answer

Joint
directorship
in other
companies.

Question 3

Critically
analyse
Myners
report on

Answer

Paul Myners (2002)

condemned the NEDs
for being ineffective.
Some NEDs held too
many positions in
public companies,
more than they could

Answer
The NED nurtured
the mentality of
you scratch my
back and I will
scratch yours.

Answer
A NED might tacitly
undertake not to ask
difficult questions or
take a stand against
executives on the
board, provided that
the NEDs of his own

Conclusion
Let us
meet in
part 6.