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For this month’s ‘Meet the Players’ article David O’Hara looks at the role of the non-executive Director. David and his Company,

Blackthorn Focus, are running NEDucation 2010 in June as a training event for non-executive Directors.

Expansion due to Higgs

Who are non-executive directors, what do they do and why are they appointed?

Non-executive directors are board members that are not part of the executive team. They are expected to scrutinise the executive board's performance and strategy while also deciding executive pay levels and monitoring the risks the company is taking.

In 2002, following massive corporate collapses such those of as Enron and Marconi, the government commissioned Sir Derek Higgs to report on the effectiveness of non-executive directors.

This led to a huge expansion in the recruitment of non-executive directors as Higgs' recommendations were worked into the Financial Reporting Council's Combined Code. Some non-executives are recruited to satisfy this requirement, while others have been brought in to improve corporate governance or simply provide input, advice and experience without having to assume executive responsibilities.

Research

I have recently undertaken considerable research on non-executives and their role, both on the main market and AIM.

AIM companies do not have to comply with the Combined Code (soon to be revised and renamed 'UK Corporate Governance Code'). It is widely considered to be excessively onerous and expensive for small companies and is not required by AIM, another example of the Exchange's pragmatic, light-touch regulation - a key part in its success.

There are many non-executives serving on the boards of AIM companies, however, so clearly non-exec input is valued by executives and shareholders.

The average number of non-executives on a FTSE100 board is 7.4. In the FTSE250 this falls to a mean of 5.3. Amongst the AIM UK 50, the largest UK companies on AIM, there are an average of 3.5 non-executive directors on board.

Three non-executives on the board of an AIM company are likely to cost shareholders a six figure sum every year. Owners have a right to ask who these people are, what they do and what qualifies them to sit on their company's board.

Typically, the non-executive director's role is a part-time one but, surprisingly, the non-execs at AIM companies can be much more involved than their peers in the FTSE100. The connections, experience and expertise a non-executive can bring to an AIM company can lead to improved financing opportunities, sales and investor relations. Having seen the biographies of many large-cap non-executives it is difficult to imagine them being able to add shareholder value in this way and I expect their contribution would manifest itself in improved corporate governance.

David O'Hara                    

pragmatic, light-touch regulation

connections, experience

and expertise

Scepticism

In recent years considerable scepticism has arisen over the effectiveness of non-executive directors. I recently asked a respected PR professional whether he thought non-executive directors had improved corporate governance. The response was laughter. One friend summed up his colleagues' attitudes to non-execs as: "Who are these people, where did they come from, what are they doing and to whom are they accountable?"

In the UK, non-executive directors have the same legal responsibilities as any other director. For non-executives (who are typically part-time), the risks are huge: For example, can a non-exec be sure their company is implementing workplace safety correctly and is not breaking corporate laws (going concern etc.)? Are non-execs fully aware of the latest regulations and legislation and how it applies to their role?

Furthermore, in a listed company, is the company making the correct decisions and creating appropriate newsflow to attract a proper market valuation? What is the company's investor relations strategy and how is the board communicating with the market? Non-executives need to be certain the company is adhering to the correct accounting principles and reporting appropriately.

the same legal

responsibilities

NEDucation NEDucation NEDucation

NEDucation 2010 is a Blackthorn Focus event to educate and update non-executives of UK-listed companies, enabling them to discharge their responsibilities to maximum effect. When putting together this event I considered the parties that non-executive directors need to hear from. As an investor myself, my first thought was of fund managers. After all, if non-executives are supposed to have improved corporate governance that should reduce investment risk and, all things being equal, a low risk investment should be more highly valued than an identical but riskier one. Has this happened? Since the wholesale recruitment of non-executives, are investors happier with board conduct? I was delighted to find that fund management groups were as exercised by the contribution and effectiveness of non-executive directors as Blackthorn Focus and I look forward to hearing the opinions of representatives of Hermes, F&C and BlackRock at NEDucation 2010.

A conversation with a former fund manager highlighted the non-executive director's biggest concern (after pay) - corporate liability insurance. The recruitment of Michael Lea of Jardine Lloyd Thompson as an expert speaker on the issue will help non-executives present understand this crucial aspect.

The Financial Services Authority and the Financial Reporting Council will be speaking at the NEDucation 2010. Their perspective, motivation and methods contain vital lessons for any company director that is required to comply with their regulations.

Discussing this event with companies has been a revealing experience. I cannot reconcile some large companies' reluctance to train their non-execs with the corporate governance statements so prominent on their websites. This has left me with the uneasy feeling that many UK-listed companies are not serious about the non-executive role. I hope I am wrong and these fears are not proved well-founded by any high profile failures of corporate governance that end up costing myself or aimZine readers money.

NEDucation 2010 is a one-day event from Blackthorn Focus. More information on the programme and speakers can be found here: www.blackthornfocus.com/neducation2010

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Written by: David O'Hara

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The views expressed in this article by David O’Hara are his own and do not necessarily represent the views of Aimzine Ltd.