Noses in and fingers out
In the complex and ever-evolving world of corporate governance, the role of the non-executive director (NED) is both challenging and rewarding. As a NED, your responsibility extends beyond the ordinary; you are a guardian of the company's strategy, an overseer of performance, and a champion for ethical conduct. This is what it is to govern.
The position presents an array of unique challenges, from maintaining independence to understanding the intricacies of the business, dealing with potential conflicts of interest, and upholding the highest standards of corporate governance. However, the benefits can be equally substantial. You'll have the opportunity to influence the strategic direction of the company, contribute your expertise in a meaningful way, and play a pivotal role in shaping its future.
In this blog post, I will delve into the complexities and rewards of being a non-executive director, exploring personal experiences, expert insights, and practical advice to help you navigate this important role successfully. Whether you're considering a non-executive directorship or already in the position, this post will equip you with valuable knowledge and guidance. So, let's embark on this journey together, unlocking the true potential of being a non-executive director.
One of the foremost complexities of being a non-executive director is maintaining independence while being deeply involved in the organisation. For instance, NEDs must objectively assess the company’s strategy and performance, ensuring a balance between growth and risk. This can be challenging when the execution of strategies directly impacts company performance and, in turn, director remuneration and reputation.
Another paradigm is the need for a deep understanding of business intricacies without being involved in day-to-day operations. For instance, a NED in a tech firm might need to understand complex algorithms or data privacy issues to make informed decisions, despite not being involved in the daily technical operations.
Lastly, potential conflicts of interest pose a constant challenge. For example, a NED might also serve as a director in another company that becomes a potential supplier. In such a case, making a decision that's in the best interest of the firm can be challenging due to conflicting personal and professional interests.
There have been several high-profile cases of conflicts of interest in recent years, some of which have been highlighted in the media.
- In 2019, Google's parent company, Alphabet, faced significant criticism regarding conflicts of interest in its boardroom. It was reported that the board included directors who had potential conflicts of interest due to their roles in other companies and educational institutions that had business dealings with Alphabet, raising governance and ethical concerns[^1^].
- A conflict of interest case that captured headlines in 2020 involved the then-U.S. Postmaster General, Louis DeJoy. Despite his role, DeJoy held a multi-million dollar stake in his former logistics company, with contracts to the Postal Service. This raised concerns about his ability to make impartial decisions in the best interest of the Postal Service[^2^].
- In 2021, the World Health Organization faced scrutiny when it was revealed that members of the committee responsible for drafting global sugar consumption guidelines had ties to the sugar industry. This situation sparked a debate about the potential influence and conflict of interest that could affect public health policies[^3^].
Several experts in the field of corporate governance have weighed in on the challenges faced by non-executive directors Renowned corporate governance scholar, Professor Bob Tricker, asserts that "The non-executive director's role is one of stewardship rather than management, which requires a delicate balance between being too involved and being too detached"[^4^].
Echoing this view, Dr. Roger Barker, Director of Corporate Governance at the Institute of Directors, emphasises the importance of understanding the business's intricacies without getting caught up in operational details. He states, "Non-executive directors have the challenging task of understanding the company's business model and competitive environment, without getting involved in day-to-day management. They must be able to challenge and advise the CEO and other executive directors from a fully-informed perspective"[^5^].
Highlighting the potential conflict of interest, Sarah Wilson, CEO of Minerva Analytics, mentions, "Non-executive directors may find themselves in a position where their duty to the company conflicts with their personal interests or duties to others. Navigating these conflicts requires integrity and a robust governance framework"[^6^].
These expert insights underscore the multi-faceted challenges of being a non-executive director, encompassing independence, deep understanding, and conflict of interest.
Despite the challenges, many industry experts maintain a positive outlook on the role of non-executive directors. Prominent Australian business leader and non-executive director, Diane Smith-Gander, spoke about the role's rewards saying, "Non-executive directors have a unique and rewarding opportunity to shape a company’s strategy, culture, and values. It’s not about micromanaging, but providing strategic oversight and challenging the status quo where necessary"[^7^].
David Gonski, an Australian businessman widely respected for his boardroom experience, emphasises the importance of independent thinking among non-executive directors. According to him, "The most crucial characteristic a non-executive director should possess is independent thought. They must be willing to ask the tough questions and to challenge executive management when necessary"[^8^].
Lastly, Elizabeth Proust, an accomplished Australian non-executive director and former chair of Nestlé Australia, highlights the preventative role non-executive directors can play. She states, "A diligent and engaged non-executive director can help avert crises by critically evaluating strategy and risk, as well as fostering a culture of openness within the boardroom"[^9^].
These Australian perspectives offer a broader view of the role, highlighting the importance of strategic oversight, independent thought, and preventative measures.
In the face of these complexities, the role of non-executive directors remains pivotal, now more than ever. As guardians of corporate governance and stewards of strategic oversight, they can propel organisations towards ethical, sustainable, and profitable futures. Their independence allows them to challenge prevailing norms, fostering innovation and progress. The journey might be laden with hard questions and tough choices, but the potential to shape the corporate landscape makes it a rewarding endeavor. The future beckons for those willing to rise to the challenge, always keeping in mind the delicate balance between personal interests and duties to the companies they serve.
I will leave you with a snippet from an old friend of mine, Paul, who said governance is about adherence to the NIFO Principle - noses in and fingers out.
[^1^]: Google's Parent Faces Shareholder Lawsuit Over Alleged Sexual Misconduct Coverup
[^2^]: Postmaster General's Investments Raise Conflicts Of Interest Concerns
[^3^]: WHO panel preparing sugar guidelines has several members with food industry ties
[^4^]: Bob Tricker, Corporate Governance: Principles, Policies, and Practices
[^5^]: Dr. Roger Barker, The Effective Board Member: What Every Member Needs to Know
[^6^]: Sarah Wilson, Minerva Analytics Annual Report 2020
[^7^]: Diane Smith-Gander, On Board: The Insider's Guide to Surviving Life in the Boardroom
[^8^]: David Gonski, The Gonski Report: Review of Funding for Schooling
[^9^]: Elizabeth Proust, Boardroom Reflections: Lessons Learned from a Life of Public and Private Service