(c) As regards the structure of the board of directors the Corporate Governance Code requires that the board should include an appropriate combination of executive and non-executive directors (and in particular independent non-executive directors) such that no individual or small group of individuals can dominate the board’s decision-taking. The requirement of independence if emphasised in the code and factors that might suggest a lack of genuine independence could include facts such as whether the director in question:
– has been an employee of the company or group within the last five years;
– has, or has had within the last three years, a material business relationship with the company either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the company;
– has received or receives additional remuneration from the company apart from a director’s fee, participates in the company’s share option or a performance-related pay scheme, or is a member of the company’s pension scheme;
– has close family ties with any of the company’s advisers, directors or senior employees;
– holds cross-directorships or has significant links with other directors through involvement in other companies or bodies;
– represents a significant shareholder; or has served on the board for more than nine years from the date of their first election. Non-executive directors do not usually have a full-time relationship with the company, they are not employees and only receive directors’ fees. The role of the non-executive directors, at least in theory, is to bring outside experience and expertise to the board of directors. They are also expected to exert a measure of control over the executive directors to ensure that the latter do not run the company in their, rather than the company’s, best interests. As the Code puts it: ‘As part of their role as members of a unitary board, non-executive directors should constructively challenge and help develop proposals on strategy. Non-executive directors should scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance. They should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible. They are responsible for determining appropriate levels of remuneration of executive directors and have a prime role in appointing, and where necessary removing, executive directors, and in succession planning.’
The code requires that non-executive directors should:
– appoint one of the independent non-executive directors to be the senior independent director to provide a sounding board
to the chairman and to serve as an intermediary for the other directors when necessary. The senior independent director should be available to shareholders if they have concerns.
– have meetings with the chairman without the executive directors present at least annually to appraise the chairman’s performance and on other such occasions as deemed appropriate.
– where they have concerns which cannot be resolved about the running of the company or a proposed action, ensure that they are recorded in the board minutes.
– give a statement to the chairman for circulation to the board if they have such unresolved concerns on resignation. It is important to note that there is no distinction in law between executive and non-executive directors, and the latter are subject to the same controls and potential liabilities as are the former (Dorchester Finance Co v Stebbing (1989)) and consequently, the code stresses that it is up to each non-executive director to reach a view as to what is necessary, in particular circumstances, to comply with the duty of care, skill and diligence they owe as a director to the company. |
