Whilst the Board of Directors of a company would necessarily comprise the executive management team, there are yet many organizations that may be running as family concerns or small businesses that have not realized the importance of the role of an independent non executive director or an outside director. An independent Non-Executive Director is apart from an inside director who may have previously served as an executive manager in the same firm. An Independent Non Executive Director (NxD) is not an employee of the company or affiliated with it in any other way. He would be independent of the management, without any direct relations with the management. For instance if a person has relatives in the management of a company, such person is not qualified to be an independent non-executive director of the company. Nor would an independent non-executive director have any interests in the profits of the organization other than the fee paid by the company.  Nevertheless the legal liabilities of an independent NxD remains the same. Being an Independent NxD or even a Shadow Director does not absolve such director from the roles, responsibilities and liabilities of the whole Board.  There is no legal distinction between executive and non executive directors.  Non-executive directors have the same legal, fiduciary, ethical responsibilities and potential liabilities as their executive counterparts.

The latest Companies Act No. 7 of 2007 specifies in Sections 187 and 189 the scope of a Director and clearly indicated that all Directors, whether they are Independent NxDs or  not, share equal responsibilities. Their responsibilities are no lesser by virtue of their being independent NxDs. But this should not deter those willing to contribute their worth as Independent NxDs since such stipulations were made solely to deter management malpractices that had been resultant in the collapse of many an organization in the past.  Simply ensuring that proper governance procedures are in place and are being followed is all that is necessary to ensure the safety of the Board, noted Fayaz Saleem, Principal Consultant of Executive Search/AIMS, pioneer head hunting company engaged in the search and placement business for several decades.  Mr Saleem further commended the Sri Lanka Institute of Directors for its continued commitment to cultivating good corporate governance practices of Boards of Directors. He was impressed by the ongoing Corporate Stewardship & Board Room Governance workshop which is being conducted by the SLID in six modules up to June 2010.

Essentially the NxDs role is to provide a creative contribution to the board by providing objective criticism.  The NxDs should bring an independent judgement to bear on issues of strategy, performance and resources including key appointments and standards of conduct.   It is the duty of the whole board to ensure that the company accounts properly to its shareholders by presenting a true and fair reflection of its actions and financial performance and that the necessary internal control systems are put into place and monitored regularly and rigorously. A non-executive director has an important part to play in fulfilling this responsibility whether or not a formal audit committee (composed of non executive directors) of the board has been constituted.

Mr Saleem made a fair comment that it may not be practical for non executive directors to give the same continuous attention to the business of the company as a regular director. Whilst they would naturally be expected to show commitment to the Company success as their executive colleagues, in actual fact, could a NxD serving on the boards of several entities give detailed and critical attention to each entity as expected, especially in view of the legal and accountability risks Directors face?  He felt that companies and Directors may well be alert to such risks when making/taking up appointments on the Board.

The new Companies Act No.7 of 2007 has imposed a number of statutory duties on those wishing to take up the responsibility of director.The rules cover the independence of directors, the appointment of non-executive directors, disclosure relating to directors and the constitution of remuneration committees. A company may have more than one Independent NxD who has expertise in different fields of professional activity such as the legal field or a technical field. Smaller organizations who may not require a fully fledged Board of Directors due to the size of their business may seek the appointment of the independent NxD to provide direction and expertise.

An independent NXD may constructively challenge and contribute to the development of strategy of the company, scrutinizing the performance of management in meeting agreed goals, objectives and succession planning.  They would necessarily have to satisfy themselves that the financial information of the company is accurate and that financial controls and systems of risk management are transparent and open to scrutiny by shareholders. Their inputs are sought in determining director appointments, director removals and in determining the remuneration of executive directors.  Independent NxDs also play a part in the standards of conduct of the organization and are custodians of the governance process, although they are not involved in the day to day running of the business but rather monitor executive activity. In key areas where executive directors clearly have conflicts of interest(i.e.remuneration of directors and supervision of the audit of the company’s accounts), the impartial view of the NxD would be sought.

Mr Saleem expressed that it was not compulsory that a NxD is or has been a public figure of a large conglomerate who had made a name for himself in the business field and had often been sought to be present at various fora. An individual who has proven success even in an organization that is not in public view would contribute well as an independent NxD. The Independent NXD would generally be a mature individual with academic and professional qualifications who has acquired extensive knowledge and experience in a field, having held senior management positions in both the industrial and technological sectors. He would have displayed creativity and innovation, gained the respect and trust of team players and stakeholders and would be accepted as individuals with a good business sense and a record of successful leadership.

There is either a dearth of Independent NxDs in Sri Lanka or perhaps the significance of the role they could play has not yet been recognized, especially in smaller organizations. Inability to identify a suitable NXD might be one of the issues facing smaller companies. On the other hand, there are also a growing number of private companies, including relatively small ones that are actively searching for the ‘right’ non-executive director.

A small or large organization may choose its non-executive directors because they have a breadth of experience, are of an appropriate calibre and have particular personal qualities. Additionally, they may have some specialist knowledge that will help provide the board with valuable insights or perhaps, key contacts in the industry and society. Of the utmost importance is their independence of the management of the company and any of its ‘interested parties.’ This means they can bring a degree of objectivity to the board’s deliberations, and play a valuable role in monitoring executive management.

There are a great many high achievers, e.g. slightly younger professionals who have returned from overseas or retirees in Sri Lanka who may not necessarily have had their names in the limelight but who are well known personalities. Such professionals could be invited to serve as NxDs and would prove remarkably useful in providing guidance to smaller organizations.  Company management and stakeholders should use their non executive directors to provide general counsel and a different perspective on matters of concern.  They should also seek their guidance on particular issues even before they are raised at board meetings. Independent NxDs, then, are appointed to bring to the board: independence; impartiality; wide experience; special knowledge; personal qualities. Smaller companies would gain immensely from seeking out suitable individuals who could constructively serve as Non Executive Directors. Mr Saleem felt that companies would do well to embark on an aggressive drive to identify high performing professionals who fit the criteria, to serve as NxDs.  He observed that there was a large gap in the availability and the future need which should be addressed sooner than later.

As appeared in Daily Financial Times 1 Mar 10 & The Nation – Sunday 22 Mar 10

 

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