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Transiting from an Executive to a Non-Executive Director

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By ADEYEMI Bisi

MON, 29 AUGUST 2016-“In considering whether a person has acted responsibly whilst a director of a company, it appears to me that this court must recognize the distinction between executive and non-executive directors. A person may, from time, be appointed as a non-executive director to bring a particular expertise to a board of directors. Where this is done, it appears appropriate to consider such person’s conduct as a director inter alia in relation to any such particular …purpose”- The High Court of Ireland in Kavanagh V. Delaney (2004) IEHC 283.

Under the Companies and Allied Matters Act (CAMA), there is no distinction between an Executive and a Non-Executive Director. Section 244 of CAMA simply defines Directors as “persons duly appointed by the company to direct and manage the business of the company”. There is therefore no statutory definition of an “Executive Director” or a “Non-Executive Director”. The collective understanding of what the two roles mean and represent has been developed by case law, corporate governance and general practice

Whether they are Executive or Non-Executive, Directors owe legal responsibilities to the company and it has been held that “it may be “unhelpful and even misleading to classify company directors as “executive” and “non-executive” for purposes of ascertaining their duties to the company or when any specific of affirmative action is required of them” – Re Elgindata Ltd.

An Executive Director is a member of the Board with “management or executive responsibility” for running the company’s business, while a Non-Executive Director (NED) is a Board member without responsibilities for the daily management or operations of the company. While Executive Directors have an “inner” or working knowledge of the company, the NED is generally expected to have a wider perspective of the business at large. Executive Directors are employees and usually have Service Contracts or Agreements with the company. The role of the Non-Executive Director is primarily to provide objective criticism on board matters by bringing an “outside” perspective, facilitate strategic decisions by the Executive Directors and ensure the responsible management of shareholder investment as well as the interests of other stakeholders. A NED is generally expected to have a wider perspective of the business at large and bring independent judgment to Board deliberations.

Within a group structure, Executive Directors would typically serve on the Boards of wholly or partly owned subsidiaries in a Non-Executive capacity.  While, this is the more prevalent case of Executive Directors serving simultaneously as NEDs, it is not out of place for an Executive Director on the Board of Company ‘A’ to serve as a Non-Executive Director on the Board of Company ‘B’ – a totally unrelated company. Indeed, Boards have been known to actively encourage their executives to seek NED opportunities where they will gain valuable insights and enhance their boardroom skills, help develop and better equip them as executives and thus improve their effectiveness generally. The NED experience also helps to correct the notion that some executives have of NEDs as “outsiders with no direct experience”. Taking up a NED position affords executives the opportunity of experiencing the seeming frustration of Non-Executive Directors when they do not receive sufficient information about the affairs of the company. Indeed, taking up Non-Executive Director roles will assist Executive Directors to strike a much desirable balance between their management of their employer company, their fiduciary duties and the independent state of mind required – “is this right for the company?” and not “is this right for the Management of the company?”.

An emerging trend is the transition of Executive Directors to Non-Executive Director roles on the Boards of the companies where they have served as executives. When a Managing Director or an Executive Director who has provided excellent leadership retires on account of the expiration of a fixed tenure or for some other reason, it is not out of place to invite the individual on the Board as a Non-Executive Director and indeed as is now the vogue – as the Chairman of the Board. The rationale is usually that the individual will add value to the Board from the wealth of experience and knowledge acquired over the period of the company’s business and operations. In the case where such a Director is appointed as Chairman of the Board, the composition of the Board should include sufficiently independent directors to provide an appropriate balance on the Board.

Gaining new perspectives, learning about a different sector from the one at which they hold executive office and gaining new insights into different approaches to threats and opportunities are some reasons for taking or seeking a NED role. Others have advanced the argument that it helps them understand their own Board better and the Board’s perspective to decision making. Regardless of the reasons advanced for seeking NED roles, Executive Directors should be conscious of the fact that as a NED, their reputation is a currency and must therefore seek such roles selectively.

One of the key elements of the role of a Non-Executive Director that is often underestimated by executives is the time commitment required of the position. Increasingly, NEDs are required to give more time and attention to the affairs of their companies. An Executive Director looking to transit to a NED roleshould thus consider this carefully before accepting a Non-Executive Director appointment. In addition to personal liability and other risks that NEDs are exposed to, the greatest risk that has been identified as facing NEDs is reputational damage – the risk of being on the Board of a company where one shares all the responsibility, yet has limited information and insight into the running of the business.

It is important to undertake an extensive due diligence on a company prior to accepting an appointment as a Non-Executive Director. This process should be formal or informal and seek to equip the appointee director with an understanding of the business and culture of the company, the financial performance and funding sources, its strategy and the reputation of the Executives and other members of the Board.

ADEYEMI, Bisi is the Managing Director DCSL Corporate Services Limited. Email:badeyemi@dcsl.com.ng|www.dcsl.com.ng