Independent NEDS and Their Role in Governance

Types of Directors

• Executive Directors: Employed by the company, such as the CEO, Finance Director, Operations Director.
• Independent Non-Executive Directors (NEDs): No connections with the company, providing unbiased opinions on business matters.
• Non-Independent Non-Executive Directors: Representing specific interests (e.g., major shareholders, suppliers), leading to biased opinions.

Role of NEDs

• Involved in Strategy formulation and oversight.
• Responsible for Scrutiny of management actions and decisions.
• Assess and manage Risk facing the organization.
• Role in People management, supporting and overseeing executive leadership.

Characteristics of NEDs

• Uphold the highest ethical standards, integrity, and probity.
• Support executives while monitoring conduct without micromanaging.
• Challenge ideas and decisions constructively and rigorously.
• Engage with others' views sensitively, both within and outside the board.
• Gain trust and respect from other board members.
• Promote the highest standards of corporate governance (CG) and compliance with applicable codes.

Importance in Governance

• Provide experience and knowledge to enhance board effectiveness.
• Offer perspective that balances executive opinion.
• Serve as a source of reassurance for stakeholders about decisions made.
• Contribute significantly to board discussions and decisions.

Problems with NEDs

• Potential for lack of independence, affecting unbiased opinions.
• Risk of prejudice based on personal or group biases.
• Preference for hiring best directors may undermine objectivity.
• Possible imposition of views rather than constructive dialogue.
• Difficulty in preventing problems due to lack of direct involvement.
• Time constraints may limit effective contribution.
• Risk of weakening board unity through independent perspectives.

Maintaining Independence of NEDs

• Connections: NEDs should have no previous business or financial ties to the company.
• Cross Directorships: Avoid situations where NEDs and executive directors serve on each other's companies to prevent conflicts of interest.
• Share Options: NEDs should not participate in share option schemes to maintain impartiality.
• Appointment Terms: NEDs should be appointed for specific periods with no automatic reappointment, ensuring ongoing assessment of their role.
• Access to external expertise should be available, funded by the company, enhancing independent decision-making.