NEDs are Common, but Could Be Better
Almost all webinar participants said they have NEDs on their boards, but while most said they were good, a few said they could be better. Gillen said boards should have the highest expectations of their NEDs, saying “Everything begins and ends with the board.”
NEDs Have Specific Responsibilities on Boards
Strategy, risks to strategy, and oversight of management performance are 3 key areas where the audience said NEDs hold the most value. But their influence doesn’t end there. From challenging the CEO to scrutinising management’s performance, they have plenty of other responsibilities.
Being an NED Requries a Big Time Investment
Gillen believes the time commitment could be the biggest impediment to a director’s effectiveness. But he adds that passion and ambition are prerequisites for any NED to be successful as well. These 3 factors will often determine how effective a board member will be.
Webinar Recap: Seamus Gillen, author, board consultant, and director of ValueAlpha, and Martyn Chapman, chief product officer at OnBoard, explore the key role non-executive directors play in a board’s success.
In most cases, non-executive directors (NEDs) aren’t involved in the day-to-day operations of a business. Yet, they play a pivotal role in the boardroom.
In fact, the success of a board rests largely on the performance of NEDs. Yet, there is often misunderstanding on the role NEDs play.
Recently, Seamus Gillen, author, board consultant, and director of ValueAlpha joined Martyn Chapman, Chief Product Officer at OnBoard, for a discussion about the important role of non-executive directors. They explored:
Here, we share some of the key takeaways from this session.
NEDS are Common on Boards
Gillen and Chapman kicked off the session with a series of participant polls, and one fact became abundantly clear: NEDs are a fixture on most boards. Nearly nine in 10 (88%) of webinar participants said they have NEDs on their board. Of those with NEDs, 100% have independent NEDs and 15% have NEDs that are not independent.
The most dominant board model among webinar attendees was the unitary model, with a NED majority plus executive directors. Nearly half (48%) said this model best describes the board with which they work.
These results weren’t surprising. “The dominant model in the UK is a unitary board with NED majority,” said Gillen. “A NED-only board is a model that tends to be found only in Scandinavia.”
When it Comes to NED Performance, There’s Plenty of Room for Improvement
Gillen and Chapman also asked attendees to provide an overall, average rating of NED performance on their boards. Here’s a look at the results:
At face value, this is positive. Very few attendees rated their NEDs as poor – and no one rated them as awful. However, Gillen pointed out that there’s clearly work to be done.
“I know this is Utopian, but I expect all board directors to be excellent,” he explained. “Everything begins and ends with the board. If something goes wrong, it’s often at the board level. We need directors to be at the top of their game. The fact that ‘excellent’ only constitutes 22% of the poll findings is slightly worrying.”
But what exactly does NED excellence look like?
According to Gillen, “excellent board directors are people who know exactly what the right discussion should be had in the boardroom and ensure the agenda is focused on the value narrative of the business, rather than going off track. An excellent board director has careful attention to detail in relation to the composition of the board and whether the people sitting around the board table are the right people to be having those discussions. Their behaviours will be exemplary and they will not be destructive.”
On the other hand, “Poor NEDs are people who don’t take these things seriously.”
Boards must make it a priority to ensure all directors fall into the “excellent” category.
“I’m always concerned to hear that there are non-performing directors on the board because the effectiveness of the board is the effectiveness of the weakest director,” said Gillen. “If there’s anyone on the board who is non-performing, they’re slowing down the rest of the board and creating liabilities. My advice is that those board members should be removed as quickly as possible.”
NEDs Add Value in Certain Categories – But Fall Short in Others
Gillen and Chapman polled the audience to see where NEDs typically add the most value. Three areas rose the the top:
Of course, these are all important. However, Gillen’s concern is that NEDs are falling short in other important areas.
“Only 40% say their NEDs are adding value in the areas of ethics, values, and behaviours,” he said. “That worries me because the tone is set at the board level.”
“I’m also slightly concerned that stakeholder/shareholder relations are only coming in at 25%,” he continued. “Understanding stakeholder needs is a fundamental part of having an effective board.”
Challenging the CEO is a Key Responsibility of NEDs
Gillen and Chapman went on to discuss the key responsibilities of NEDs. One thing topped the list: constructively challenge and help develop proposals on strategies.
“This is the most important thing a NED should be doing,” explained Gillen. “This is an issue, especially in the U.S. Many NEDs don’t consider it their job to challenge the CEO but rather to support him or her.”
This attitude is problematic. In fact, it’s the attitude behind some of the biggest company crises, including Boeing 737 Max, Theranos, and FTX. These are examples of when the board hasn’t existed – or if it had existed, they were focused on supporting the CEO, rather than challenging them.
“Even now, we find boards where we don’t have sufficient constructive challenge to the management team,” said Gillen. “We expect NEDs to take on the principle responsibility of critical challenge inside the boardroom.”
NEDs Have a Whole Host of Other Responsibilities
In addition to challenging the management team, NEDs have myriad other responsibilities. Gillen covered several of these responsibilities. Here are a few examples:
Of course, this isn’t a complete list of the expectations of NEDs.
Time, Passion, and Ambition are Essential Qualities of Effective NEDs
Being an effective NED requires an investment of time. In fact, Gillen feels the time commitment is “possibly the biggest impediment to a director being fully effective, and why regulators in different jurisdictions take a view on the problem of over-boarding – where directors take on too many commitments.”
NEDs must be able to make the time commitment. But, according to Gillen, there are two other, equally important attributes that are essential to the effectiveness of a NED: passion and ambition.
“I find that where many directors are non-performing is not only in relation to time, but also in relation to their passion and ambition for the business,” he explained. “Time commitment, passion, and ambition are three drivers for whether the director will turn up to meetings and contribute.”
Ready to take a deeper dive into the pivotal role of the non-executive director and how you can maximise the effectiveness of yours? Join us for “The Role of the NED,” an exclusive masterclass led by industry experts Seamus Gillen and Martyn Chapman.