Click the headings below for more information:
- I have a problem. What should I do?
- What are the penalties for non-compliance or failure?
- What help can a NED obtain?
I have a problem. What should I do?
Boards are rarely perfect and problems will surface from time to time. Issues such as: “they are not listening to me”; “key decisions are taken outside the Boardroom”; “the Chairman is autocratic”; “the regulator is unhappy and a Section 166 has been served on us” are not uncommon.
Living up to the high standards required by regulators or seeking to achieve some of the aspirational levels that Boards set as their objectives can be extremely demanding, and matters will not always run smoothly or as planned.
The answer to the question will depend upon the nature of the dissatisfaction or the problem and what may be termed its “seriousness.” Varying “grades of escalation” might be required, depending on the circumstance; e.g. from the NED verbally airing grievances in the Boardroom to taking legal advice.
As we have seen, the duties placed upon NEDs are onerous, but quite specific, and a framework, of sorts, exists to address problems when they arise.
The most obvious way to address an individual problem is to air it appropriately. After all, NEDs are appointed for their ability to challenge and be robust and they should not shy away from being critical of their colleagues if they feel that a genuine problem should be addressed.
There are specific channels that exist to facilitate such a dialogue. The Chairperson should meet the CEO or Managing Director or NEDS regularly to discuss Board matters.
NEDs can also meet independently of Executives to discuss company issues, including the behaviour and performance of fellow Directors.
In many companies the designated Senior Independent NED (SID) will be appointed to deal with problems that may arise in the conduct of a Board. NEDs should always have unfettered access to the Chairperson, anyway.
Recommendations as to how such matters may be resolved, and by whom, are contained in the UK Corporate Governance Code.
Annual Board Evaluation
Although they may be held too infrequently to address pressing problems, the annual exercise to evaluate the performance of a Board may present an opportunity to be constructively critical and to suggest improvements that may be beneficial to the overall conduct of the Board.
A specific section assessing and commenting upon the abilities of the Chair is a normal feature of such evaluations and may be particularly useful under certain circumstances.
Training & Development
Allied to the annual performance review is the issue of ongoing training and development. It always makes sense to ensure that a Board has all the appropriate qualities when it is formed and specific training, normally provided by external experts in this field, can reap benefits.
In addition, updating the Board on its duties, responsibilities and competencies by way of CPD (continuing professional development) or specific training sessions at regular intervals may be a valuable way of ironing out any difficulties.
Seeking Advice as per the NED’s Contract
More serious issues may form the subject matter of a need to consult a lawyer, accountant or auditor or some other type of specialist firm. Under the typical terms of a NED’s service contract, provision exists to seek independent professional advice at the company’s expense in order to assist the NED in the furtherance of his or her duty as a Director of the company.
Normally, a set of procedures covers such an eventuality that may require the NED, for example, to give senior Board colleagues prior notice of such an intention; to inform them of the name of the expert in question and to provide a summary of the issue under discussion. A cap on fees may also exist.
Discuss or Seek Advice from Regulators or Interested Parties
Although it may be construed as akin to whistle-blowing, under very extreme circumstances (e.g. misfeasance or fraudulent behaviour that the company will not address) a NED may seek advice from a regulator or a body such as the Corporation of Lloyd’s. Such a move should never be taken lightly and the consequences of such action should be considered very carefully. However, in extreme cases this type of behaviour might be appropriate.
In answer to the question that prefaces this section, if the regulators are dissatisfied following a visit from the PRA or FCA as part of a themed review or a regular assessment, they may require remedial action under Section 166 of FSMA. Themed reviews have, today, replaced those of the former ARROW visits by the FSA under their Advanced Risk Response Operating Framework and will, routinely, be carried out at specified intervals by regulators.
A Section 166 review and remedial action allows the regulators to appoint experts, at the regulated entity’s expense, to correct any matters that cause the regulators concern. To quote the FCA, “a Skilled Person Review is one of the regulatory tools the FCA can employ under FSMA as amended by the 2012 Act.”
Historically, Boards in the authorised sector would always wish to avoid Section 166 reviews and their corrective action as they are regarded, publically, as a censure or black mark. However, at a Worshipful Company of Insurers’ iNED Forum in the autumn of 2013, the PRA indicated that it intended to rely frequently upon Section 166 reviews as a regulatory tool of choice for diagnostic, monitoring or preventive purposes.
There are no options other than to work with the appointed expert in order to remedy the issues giving the regulator concern. If the company is non-compliant further more serious penalties or censures may ensue.
Resignation / Dismissal
A final option is for a NED to resign or be dismissed. Under the former circumstances, written reasons may be required which could become a regulatory disclosure requirement.
On the other hand, if a NED does not perform satisfactorily he or she may always be dismissed in accordance with his or her contract and its notice terms, or simply not be re-appointed when the contract term expires.