In the aftermath of the financial crisis nearly five years ago, the Financial Services Authority (FSA) of UK undertook to examine all candidates to become board members. Until they relaxed this requirement FSA interview panel had rejected several such appointments. The FSA is said to have commented that it was surprised by the number of times firms put forward candidates who are not the right individuals for the role in question and where there is no clear expectation of how that candidate will contribute to the overall skill and competence of the board.
The UK Corporate Governance Code clearly gives a strong role to the non-executives. Their job description includes:
# constructive challenge and help in developing proposals on strategy;
# scrutiny of management’s performance in meeting agreed goals and objectives and the monitoring of performance reports;
# satisfying themselves on the integrity of financial information and that controls and risk management systems are robust and defensible;
# determining appropriate levels of remuneration for executive directors;
# appointing and removing executive directors, and succession planning.
Considering the above, the ability of the NEDs to perform the above role is not being emphasized adequately. NEDs should have the stature to be able to make a constructive challenge to a strategy presented by an experienced chief executive. Do these NEDs allocate sufficient time to the company to perform their responsibilities effectively. Less time will be needed for smaller companies and those with less complex businesses, but, for larger businesses and financial institutions NEDs should at-least commit 2-3 days a month.
The SEC, the Central Bank and other corporate regulators in Sri Lanka should consider regulating the business of NEDs. It’s time to prevent the virtues of having NEDs on Boards being mis-used for personal gains of shareholders. The SEC could easily verify how many NEDs and some of them considered “independent” are placed by the shareholders or powerful management to manipulate the Board for personal gain. If a NED is an employee of the shareholder’s entity, what level of constructive challenge and integrity can be expected, to perform his role with objectivity? If the NED does not have complimentary skills what is he doing on the Board? Shouldn’t NEDs be able to demonstrate some level of independence to qualify as a Board member? Time to think?