Independent NEDs and their role in governance PDF

INDEPENDENT NEDS AND THEIR ROLE IN GOVERNA NCE CONTENTS ❑Types of directors ❑Role of NEDs ❑Characteristics of NEDs ❑Their importance in governance ❑Problems with NEDs ❑Maintaining independence of NEDs TYPE OF DIRECTORS ❑Executive directors:...

INDEPENDENT NEDS AND THEIR ROLE IN GOVERNA NCE CONTENTS ❑Types of directors ❑Role of NEDs ❑Characteristics of NEDs ❑Their importance in governance ❑Problems with NEDs ❑Maintaining independence of NEDs TYPE OF DIRECTORS ❑Executive directors: A board member who is also employed by the Company. For example the CEO, Finance director, Operations director. ❑Independent non-executive directors: A person who has no connection with the Company whatsoever. The Company normally relies on his independence to have an independent opinion on business affairs, without any influence from other director or shareholder. ❑Non-independent non-executive directors: A NED is not independent if he is representing the interests of a particular party. He/ She can be representing a major shareholder or other stakeholders such as a supplier or NGOs. Therefore, unlike an independent NED, his/ her opinion would be biased. ROLE OF NEDS ❑Strategy ❑Scrutiny ❑Risk ❑People  CHARACTERISTICS OF NEDS ❑Upholds the highest ethical standards of integrity and probity ❑Supports executives in their leadership of the business while monitoring their conduct ❑Questions intelligently, debates constructively, challenges rigorously and decides dispassionately ❑Listens sensitively to the views of others inside and outside of the board ❑Gains the trust and respect of other board members ❑Promotes the highest standards of CG and seeks compliance with the provisions of the Code wherever required THEIR IMPORTANCE IN GOVERNANCE ❑Experience and knowledge ❑Perspective ❑Reassurance ❑Contribution ❑Dual roles PROBLEMS WITH NEDS ❑Lack of independence ❑Prejudice ❑Preferences of best directors ❑Enforcing views (imposing) ❑Prevention of problems ❑Time constraints ❑Weakening board unity MAINTAINING INDEPENDENCE OF NEDS The perception in CG is that NEDs contribution is enhanced if they are independent. Various safeguards can be put in place to ensure that NEDs remain independent. These includes: ❑Connections: NEDs should have no business, financial or other connection with the Company. Thereby excluding anyone who has been an employee, auditor or someone who had a material business relationship over the last few years. Some countries exclude people who have been connected with the Company for the last decade. ❑Cross directorships: This is where an executive director of Company A acts as NED on Company B and the executive director of Company B acts as NED on Company A. ❑Share options: They should be excluded from the share options scheme ❑Appointment term: Appointment should be for a specific time period and reappointment should not be automatic. ❑Advice from external subject matter experts at the cost of the Company