Review of the role and effectiveness of non-executive directors in corporate governance

Non-executive directors play a crucial role in corporate governance, providing independent oversight and guidance to the board of directors.

Their primary function is to bring external expertise and perspectives to the company, helping to identify and mitigate risks. They are not involved in the day-to-day operations of the business, but rather focus on strategic decision-making.

Research has shown that companies with non-executive directors tend to perform better financially and have lower levels of corporate governance risk. In fact, a study found that companies with non-executive directors were 25% less likely to experience a corporate governance failure.

Effective non-executive directors are independent, knowledgeable, and have a strong work ethic. They are also accountable to the shareholders and the wider community.

The role of non-executive directors is a crucial one in corporate governance. They are expected to bring an independent perspective to the board and provide oversight of the company's strategy and operations.

The Higgs review, a report on the role and effectiveness of non-executive directors, was chaired by Derek Higgs and published in 2003. Higgs advocated for more provisions with more stringent criteria for the board composition and evaluation of independent directors.

Non-executive directors are meant to be independent, and Higgs wanted to remove some of the discretion that the Code allowed. This would help ensure that they are truly independent and not influenced by the company's management.

In the Higgs review, it was suggested that non-executive directors could have prevented some of the earlier scandals, such as the Robert Maxwell debacle. Many firms already refused to deal with him, and disclosure of his company's governance practices would have led to more pressure for change.

The review also highlighted the importance of the audit committee, which is responsible for overseeing the company's financial reporting.

The Higgs review, a report on corporate governance, was commissioned by the UK government and published in 2003. It aimed to improve and strengthen the existing Combined Code.

Derek Higgs, the chair of the review, strongly backed the "comply or explain" approach to corporate governance. However, he advocated for more provisions with stricter criteria for board composition and evaluation of independent directors.

In Higgs' view, the earlier scandals, such as the Robert Maxwell debacle, could have been avoided if a Code was in place. Many firms already refused to deal with Maxwell, and disclosure of his company's governance practices would have led to more pressure for change.

The Higgs review recommended removing some of the discretion allowed by the Code. This would have provided more stringent criteria for the board composition and evaluation of independent directors.

The review's findings led to an update of the Higgs guidance in 2011. The Institute of Chartered Secretaries and Administrators and the Financial Reporting Council worked together to create new guidance on board effectiveness.

For another approach, see: Amzn Guidance

The regulatory response to the role and effectiveness of non-executive directors is an important aspect of corporate governance. The Higgs Report in 2003 proposed that at least half of a board, excluding the Chair, be comprised of non-executive directors.

In 2006, the Financial Reporting Council compiled elements of the Higgs Report's recommendations into Good Practice Suggestions, which included the suggested proportion of non-executive directors on the board being raised from "not less than a third" to half. However, the bulk of the suggestions have not been formally incorporated into the Combined Code.

A CBI poll conducted in response to the Higgs Report found that 82 per cent of FTSE 100 Chairmen thought that the role of Senior Independent Director would undermine their own. This highlights the potential challenges of implementing new governance structures.

The Walker Review in 2009 examined board practices at UK banks and identified five key themes for improvement. These themes include:

The Walker Review concluded that deficiencies in board practice are predominantly of behavior rather than organisation, and that a process of challenging the executive needs to be embedded, a responsibility laid at the door of non-executive directors.