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What does the role involve?
A number of very similar definitions of NEDs exist. The Institute of Directors (IoD) sums up the role succinctly:
“Essentially, the Non-Executive Director’s role is to provide a creative contribution to the Board by providing independent oversight and constructive challenge to the Executive Directors.”
Insurance NEDs, as members of a unitary and balanced Board, should, in particular, constructively challenge and help develop proposals on strategy.
This means that, in essence, NEDs should:
- Scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance
- Be satisfied with the integrity of financial information and ensure that financial controls and systems of risk management are robust and defensible
- Focus on Board matters and not cross the line into areas of “Executive action.” This role can be difficult, at times, and may require skills that new NEDs
- have to learn or modifications to former patterns of behaviour among those NEDs who have previously held Executive positions
NEDs provide an independent view of the company that is separate from the day-to-day running of an enterprise. Accordingly, NEDs are specifically appointed to bring to the Board the following attributes:
- Special knowledge
- Personal qualities or expertise
* Such independence may be compromised by alignment to a particular interest e.g. that of a group or holding company. In that case, the NED cannot normally be construed as independent. On certain issues such Directors my need to recuse themselves from debate. However, on many issues there will be no conflict and the presence of such Directors may provide insights and experience which is to the benefit of the Board.
In other words, that status, in itself, does not invalidate a NED’s role, but it does take on a particular characteristic, in that the NED in question may seek to introduce checks and balances from, say, a parent company, or exercise a degree of oversight from a specific perspective.
The IoD indicates that Executive management should use their NEDs to provide general counsel and a different perspective on matters of concern. Executive management may also seek NEDs’ guidance on particular issues before they are raised at Board meetings. Indeed, some of the main specialist roles of a NED will be carried out in a Committee of the Board.
The key roles and responsibilities of NEDs include the following:
As an “outsider”, the NED may have a clearer, or wider, view of external factors affecting the company and its business environment than the Executive Directors. A typical role of the NED in formulating strategy is to provide a creative and informed contribution and to act as a constructive critic in reviewing the objectives and plans devised by the Chief Executive or Managing Director and his or her Executive team.
NEDs should take responsibility for monitoring the performance of Executive management, especially with regard to the progress made towards achieving the agreed company strategy and objectives.
NEDs are also responsible for determining appropriate levels of remuneration of Executive Directors and senior managers, and have a prime role in appointing members of the Board, and, where necessary, removing Directors who are not performing satisfactorily.
A Board’s effectiveness, along with the enterprise itself, can benefit from outside contacts and opinions. According to the IoD, an important function for NEDs can be to help connect the business and Board with networks of potentially useful people and organisations. In some cases, the NED may be called upon to represent the company externally.
Risk and Financial Integrity
NEDs must satisfy themselves on the integrity of financial information and ensure that financial controls and systems of risk management are robust and defensible. It is the duty of the entire Board to ensure that the company accounts properly to its shareholders or capital providers by presenting a true and fair view of its actions and financial performance. As part of that process, the necessary internal control systems must be in place and monitored regularly and rigorously. Grant Thornton describes this duty as an “agent-principal relationship.”
A NED has an important role to play in fulfilling this responsibility. The most common manner in which this function is performed is through an Audit Committee, composed exclusively of NEDs, who may call upon external auditors or management within the company, as required.
One of the key tasks of an Audit Committee in an insurer is to understand, fully, where judgement and interpretation have been applied to the financial data in relation to the rules that govern such matters.
Executive search firm, Per Ardua, have provided a useful synopsis of the generic role of the NED in insurance.