The term 'governance' derives from the Latin term 'gubernare', meaning to 'steer'. Corporate governance is the way in which companies are regulated, controlled and directed. Corporate governance requirements emerged as an important issue after the various companies collapses all over the world. corporate governance in UK is quite different from other countries like japan and continental european countries. Even united kingdom also faced various company collapses that led to various modifications in the structure of corporate governance.many practitioners , theorists, policy makers were of the opinion that there is a need of corporate governance reform in UK and they supported various issues such as splitting the role of chairman and chief executive officer, appointment of non executive directors to the board, reducing the remuneration packages of executives, imphasizing on improving relations with institutional investors and improving corporate disclosure. [4] The role of Non-executive directors also emerged to be very important for the maintaining the integrity and accountability of the company. [5]
Section 2
Literature review
Section 3
Structure of board in UK
Structure of corporate governance depends upon the country to country which may be unitary or dual board . in UK and EU member states unitary board structure is predominant however in austria ,germany and netherlands dual structure of corporate governance exists. [6] Unitary board consists of single board comprising of both executives and non executives and this single board is responsible for all the affairs of the company. In dual board functions of supervision and management are divided among non executives and non executives respectively. [7]
As UK follows the unitary board structure of corporate governance we will be discussing in detail about the unitary board . Shareholders elect the directors of the company at annual general meeting . Executives and non executives work hand in hand and the executives are monitored and supervised by non executive directors. chairman is the head of the board and CEO of the company has the responsibility to report to the chairman about all the issues related to the company. [8]
Agency problem
Factors for appointment of Non executive directors
The major factors for introduction and appointment of non executive directors in UK were major corporate collapses and contribution of managerial malpractice in those collapses. [9]
Section 2
Role of non executive directors in UK corporate governance
Non executive directors are considered to be the main stay of good corporate governance. There role has got two dimensions the first is that they monitor the acts and performance of executive and ensure that no person is influencing the board decisions and second dimension is that they provide overall supervision and strategy to the company. [10] in UK there is no legal requirement for the companies to appoint non executive directors and companies act 1985 does not even diferentiated between executive directors and non executive directors but still nearly all listed companies in UK have significant number of non executive directors. [11]
Monitoring role of non executive directors
Non executive directors can efficiently monitor the company's executive and performance by virute of their nature of being independent and impartial.They can monitor the acts and works of executives and if required they are empowered to take steps to remove the under performing executives and also plays a important role in controlling improper self dealing. [12]
Independence of non executive directors
the duty of the non executive directors is to act and work independently without any kind of influence so that they can actually perform their functions for which they are appointed. Idea of independece is emphasized in various codes and reports. As non executive directors are not holding any shares in the company and they are independent thats why they are expected to take best independent decisions in the interest of the company and the shareholders. [13] To ensure the independence of non executive directors they should not have any kind of connection to the company other than their seat on the board. [14]
UK codes of best practices on Non executive directors
In UK there is much reliance on non statutory codes of conduct in relation to the corporate governance. [15] Although the codes has no statutory basis and they are not mandatory but still all the listed companies in UK are bound to disclose how they have applied the recommendations and if they have not complied with the recommendations they have to explain the reason foe their non compliance. [16]
Cadbury report on the role of non executive directors in UK
according to cadbury report non executive directors should be selected impartially by a formal process. [17] Cadbury report also emphasized on independence of non executive directors on the issues of strategy , performance, resources
According to Cadbury report
"Non executive directors should bring an independent judgement to bear on issues of strategy, performance, resources, including key appointments and standards of conduct." [18]
Cadbury report recommended that there should be at least three non executive directors on the board which can influence the decisions of the board and two them should be independent. [19]
Cadbury code of best practice encouraged the independence of non executive directors both from the management and the other relationships with the company. [20]
Cadbury report recommended some guide lines to ensure that non-executive directors are acting independently. [21]
Appointments should be made for specified period. [22]
Appointment of non-executive directors should be made by a formal process by nomination committee including the whole board. [23]
Non-executive directors should not be involved in share option and they should not be pensionable by the company. [24]
Non executive directors should not be involved in any kind of relation ship which can hamper their independence. [25]
Non executive directors should have right to information. [26]
Tyson report
tyson report was the immediate response to various company collapses regarding the ineffective role of non executive directors. [27] tyson further specified the role of non executive directors and laid down various recommendations.
non executive directors should provide direction and advice to the executive in framing the strategy of the company and mainly emphasized on the monitoring role of non executive directors in the fields company's management, performance, legal position, ethical performance, information provided to the investors and stakeholders, appointments etc. [28]
Higgs report
The chancellor of the exchequer gordon brown and patricia hewitt commissioned derek higgs to prepare a review on the role of non executive directors in UK. [29] adn final higgs report was published on 20th january 2003. [30] higgs report was also the outcome of various company collapses. it basically emphasized on the qualities and requirements of a non executive director. report stated that non executive directors need to have integrity, high ethical standards, sound judgement capability, challenging and having strong interpersonal skills. [31]
Arguments in favor of role of Non executive directors.
there are scholars and thinkers who think that role of non executive directors is very important in UK companies. some people think that they can at least add to the what executives cant do alone. according to agency theory perspective non executive directors are playing very important monitoring role on the remaining board. [32]
1 They are providing objectives to the companies business. [33]
2 They are providing non Bias evaluation of the performance of chief executives and other executives managers to the shareholders. [34]
3 they are providing independent views on the issues of strategy divestment , structure ,authority limits, budgets , investments and various other issues as well. [35]
4 they are providing experience and extra knowledge to the board. [36]
5 they help in the appointment of chairman which checks the working of executives. [37]
6 they have good links with other organisations as well so they help in building the business of the
company.
7 according to the agency theory perspective presence of non executive directors can reduce the notorious conflicts of interest between shareholders and company management. [38]
8 research has proved that non executive directors are importantly attached to UK institutional investor community as well. [39]
9
9 monitoring function of non executive directors prohibits the executive directors to gain complete control over their own remuneration packages. [40]
10 presence of non executive directors positively effect corporate control activity and facilitate takeovers by activating takeover constraints which creates discipline in the management of the company and thus benefit shareholders as well in bidding process. [41]
11 appointment of non executive directors have the positive effects on the mind of the shareholders as well and has got positive share price reaction. [42]
12 Some evidence shows that chief executive turnover is strongly related to the performance of the company and important role being played by non executive directors in that performance. [43]
13 appointment and use of non executive directors also reduces the agency costs of the companies having widely dispersed shares. [44]
14 non executive directors may be valuable in proving various contacts and advice to improve the business of the company. [45]
Arguments against the role of Non executive directors.
There are people who have the believe that Non executive directors are of no use to corporate governance in UK. the main aim of introducing the concept of appointment of non executive directors was to eradicate agency problem. but some academics think that market itself provides a solution to the agency problem. they think that non executive directors are just impotent part in the board structure. [46] some argue that there can be conflict in the role of non executive directors as they are expected to monitor the work of executives and to work with executives on the board as well which can actually be conflicting. [47] their is a tension between the strategic and monitoring function of non executives as they have to monitor inside directors contribute to the corporate strategy at the same time. [48] Till now non executive directors are unable to prevent any of the company collapses in UK for example Burmah Oil, Alfred Herbert and British Leyland. [49] not only they are unable to protect the various collapses but some times they can also be the harmful for the companies because of their ignorant behavior and lack of actual knowledge about various issues in the company. They later on gives their judgement or decision about those unclear issues with same unclear knowledge which can also be harmful for the company. [50] some researchers also think that participation of non executive directors on the board co damage the corporate governance as it can reduce the entrepreneurship in business which may weaken the board unity. [51] many company directors are against the presence of non executive directors as they loose their individual decision making power which can be useful sometimes. [52] some studies have reported positive share price reaction to the appointment of inside directors rather than non executive directors. [53]
Reasons for under performance of non executive directors.
1 the first and the most important reason for the underperformance of no executive directors is that their selection is even less rigorous than selection of a clerk. they are just selected on the wishes of dominant director. [54] and as non executives are appointed by executives this clearly compromise their independence if the process of appointment is unduly affected by cronyism. [55]
2 they are not even told about their future role and contribution before the appointment is made. in UK on an average a non executive director is just working for one day in month. [56] this is the reason most of non executives does not have the knowledge of what is happening in the company which results in negative contribution rather than positive contribution.
3 most of the non executive directors are the directors of other comapanies as well so it is hard for them to give sufficient time to any of the company.
Section 3
Emperical survey on the role of Non executive directors from UK companies
Future trend of role of non executive directors in UK
According to author both group of directors ie executive and non executive directors have different but both have essential functions in good corporate governance and performance of a company. there should be an appropriate balance between their powers and contribution. [57] Non executive directors should be appointed to work full time rather than working on part time basis so that they can give sufficient time and effort to up bring the business and the reputation of the company. there should be wider pool for the selection of non executive directors. and there should be a balance between the executive and non executive directors so that no one can actually monopolize the business of the company . all the non executives should be from the different disciplines such as consultants, academics, lawyers , analysts etc so that they can provide diversity to the board but they should be experienced and have sufficient knowledge as working as non executive directors is not for training . [58] the recent development has emphasized that non executive directors in UK have a duty of care and skill to perform the monitoring role. [59] non executive directors have fiduciary duty of honesty and loyalty. [60] the main reason for the appointment of non executive directors is to bring impartiality to the board room and for that legal liability and criminal sanctions should be attached to the role of non executive directors. [61]
Conclusion
