Click the headings below for more information:
- I have had an approach. What due diligence should I undertake?
- What should a NED ask for?
- How are NEDs authorised?
- What material items should be in the NEDs Service contract?
I have had an approach. What due diligence should I undertake?
BEFORE AN APPROACH
In today’s regulated environment, a company seeking to appoint a NED in the UK insurance sector must have satisfied itself as to the attributes and appropriateness of the appointee or candidate before an offer is made. The company’s approach should be cognisant of the issues already covered in this Information Bank.
Before considering an approach from the appointee NED’s perspective (i.e. before answering the question above), it is worth looking at how companies recruit and appoint NEDs to their Boards.
In practice, recruitment may take many forms. Positions may be advertised; recruitment specialists (“head-hunters”) may be employed; individuals may be targeted and approached, sometimes based upon existing relationships or sometimes in conjunction with bodies such as consultants, trade associations or the professions, particularly auditors or law firms.
Networking is clearly valuable, but “cronyism” is to be avoided, especially as clones of existing management are unlikely to exhibit all the qualities required of insurance NEDs when it comes to robust challenge and constructive criticism.
In many instances, companies are likely to have taken soundings from others, including regulators or quasi-regulators, as to whether their NED candidate would be appropriate and pass muster. This represents a form of “reverse due diligence” as far as the actual individual is concerned. Indeed, as far as entirely new firms are concerned, the FCA has indicated that they are in favour of a Pre-application Process, which would naturally include the authorisation of new NED appointments.
It is worth mentioning that a very considerable number of recruitment agencies offer their services in sourcing NEDs. These do not really concern the guidance offered by this website, although the Institute of Directors does produce what it terms an NXD Directory for its members as an aid to recruitment. Also, the iNED Committee, at the WCI, has a range of contacts with specialist recruitment agencies that can be accessed upon request.
Most, but not all, NEDs will be drawn from the ranks of those who are nearing retirement or who are recently retired from conventional full-time employment; often in senior positions.
A significantly large number of former accountants, lawyers, actuaries, management consultants and underwriting or broking Executives, not surprisingly, take up NED positions within the insurance industry.
Equally, those recently retired from prominent positions in market organisations (e.g. Lloyd’s) or from government or regulatory bodies will often be sought for their expertise or prominence.
Established NEDs with portfolios of existing appointments may also be considered, based upon successful reputations as NEDs or valued connections, although care has to be taken over possible conflicts of interest and time commitment considerations.
Naturally, companies will wish to scrutinise CVs (in the form of a curriculum vitae or résumé) and a series of interviews is to be expected with existing members of the Board and with the regulators; especially if a new Board is being formed. Some companies are now requesting Criminal Records Bureau (CRB) and credit reference checks as part of their due diligence on potential NEDs.
The final decision should be made by an Appointments or Nominations Committee, except in the case of a start-up company where the founding Directors may be responsible for making the initial appointments; although interviews with the appropriate regulators may still form part of the process before any final offers can be made or before authorised permissions to conduct business are granted.
Listed companies (PLCs) may also have specific rules in place that require all Directors, including NEDs, to be the subject of a vote by the shareholders at the Annual General Meeting (AGM).
NED TALENT POOL
The International Underwriting Association (IUA) published an article in 2015 commenting on the potential for talent pools of future NEDs to shrink in the face of increasingly prescriptive regulations for those performing NED roles.
AFTER AN APPROACH
It follows, therefore, that the individual NED should satisfy himself or herself, that it would be the correct decision to join the Board of the company in question by carrying out appropriate due diligence. In this instance, the term due diligence refers to the care a reasonable person should take before entering into an agreement, contract or transaction with another party.
It is worth bearing in mind that the risk factors will be different as between established companies with existing track-records of performance and new or start-up firms, where the future may be even less certain or more difficult to assess based on a lack of past data.