Non-executive directors

This post ponders on the crises of large organisations in this social media age of ours – whether it’s in relation to the economic crisis as in Paul Kingsnorth’s article in the Guardian, or in the field of political parties, charities and trade unions. I also pay particular attention to the role of non-executive directors.

This weekend I joined a gathering of Puffles’ followers at one of what have become monthly Sunday pub lunches in Central London. What started off as a handful of people (4-8) people is growing into an interesting gathering of people from a diverse range of backgrounds who have a broadly similar world outlook of wanting to make it a better place for all of us. Today we just happened to be talking about (amongst other things) the crisis of large organisations & institutions.

In terms of the banking crises (see this summary from the BBC regarding the hearings), one of the things that has struck me by its absence in terms of discourse is the role of non-executive directors – and their failures in all of this. This is something that I’d like to think would make for more than an interesting PhD/DBA thesis – a comprehensive study into the role and behaviour that non-executive chairman and non-executive directors had in the banking crises. (I use the plural deliberately).

John now Lord McFall provides an excellent example of what this looks like, skewering the then chairman of Northern Rock, Matt Ridley in his appearance before McFall’s Treasury Select Committee. The official transcript here as well as George Monbiot’s take here. One question that critical observers may want to ask is what qualified Ridley for the job of chairman of a big bank, paying particular attention to both his academic and family background.  But this is just one particularly high profile example.

I stumbled across this paper by Christopher Pass from 2002 – which makes for more than interesting reading. There’s this definition of the role of a non-executive directors which is worth quoting in full:

Non-executives are appointed on a part-time basis and perform various duties including (in some cases) acting as the company’s chairperson and sitting on various key committees:

The Nominations Committee, the Remuneration Committee, the Audit Committee.  Nonexecutives are seen as ‘guardians’ of the corporate good and act as ‘buffers’ between the executive directors and the company’s outside shareholders, i.e. they monitor executive actions and question executive decisions and are required to ensure that the company is acting in a ‘responsible’ way and in the best interests of the shareholders and other stakeholders.

In the cases of the banks that had to be formally bailed out by the taxpayer, something went wrong – badly wrong with the non-executive directors in their role as the guardians of the interest of shareholders. Similar rumblings have been heard off of the back of the inquiry into hacking and the corporate governance of large media organisations with particularly powerful chief executives or proprietors. What sort of individual is able to stand up to such powerful figures, represent the interests of shareholders and also ensure compliance with the law?

This also raises the question of how companies appoint non-executive directors.

  • How do they recruit non-executive directors? (Is it a case of going to this place and saying “He looks like a splendid chap – he’ll do!”!?!?)
  • How do people become non-executive directors?
  • What qualifications and/or attributes does a person need to become a non-executive director?
  • How do shareholders, investors, regulators and wider society judge whether a particular individual has been a successful non-executive director or not?
  • Should the role of a non-executive director involve far more ‘contact time’ and regularly go beyond board meetings, all the way to the front line? (Especially in the case of large corporations and organisations).
  • Should the responsibilities and duties of non-executive directors be extended to go beyond merely ensuring ‘value for money’ for shareholders? (In particular large organisations where their failure could have significant negative impacts on large numbers of people and linked businesses).
  • Should greater pressure be put on (larger) organisations – in particular those with a significant public face (e.g. lots of retail outlets) to ensure that their non-executive directors are a reflection of the society that they operate in?
  • Should there be workers’ representation (whether trade union or otherwise) on boards of large companies in a non-executive role? (Would this make management-to-staff relationships less adversarial or would both sides be compromised?)
  • Should non-executive directors engage directly with both workers, shareholders and customers of the company/ies whose board/s they sit on?

I don’t know the answers to the above questions. (Probably why I’ve asked them). What does concern me is the prospect of another massive banking bailout – and society’s response to it in these difficult times. The first banking bailouts came very shortly after the bubble burst. The sheer scale of those bailouts are as such that part of me feels that the general public is still coming to terms with just how big they were – i.e. we are still dealing with the shock of it all.

Today, we are a few years past that point – a point where we’ve since had both the MPs’ expenses scandal, the hacking scandal and the huge cuts to the public sector (and the rise in university tuition fees that have no electoral mandate whatsoever – because the Browne Review was published after the election & Labour and the Conservatives refused to state their position until after that review was published) that have not only impacted on those who are most vulnerable, but also those who – like me – have found themselves out of a job. I can’t imagine that the general public will tolerate another bailout.
Is reform of the role of non-executives part of the solution, or is it the equivalent of rearranging the deckchairs on the proverbial sinking ship? Have we reached the stage with the very large (and predominantly centralised) organisations of this world where they have become flailing behemoths unable to cope both with the scale of the financial floodwaters engulfing their lairs and the small but constant stings of nimble social media users running rings around them at the same time? 
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9 Responses to Non-executive directors

  1. Radegund says:

    On your throw away comment about university tuition fees. The Conservatives made it very clear that we where waiting for the review and would likely implment its main recomendations and that is what we did. I think we had a mandate for that.

  2. “I think we had a mandate for that.”

    Tories always think they have a mandate for taking access to education away from children from poorer families, and ensuring children from richer families get superior access and education. Nothing new there.

    The composition of the members of the Independent Review of Higher Education Funding and Student Finance says it was stacked. The Tories would never have agreed to accept the main recommendations of a review in advance if they’d thought the review would come back with the sensible answer that tuition fees should be abolished as a disastrous experiment.

    • Andrew Bower says:

      “Tories always think they have a mandate for taking access to education away from children from poorer families, and ensuring children from richer families get superior access and education. Nothing new there.”

      Unsubstantiated and offensive, not to mention the inverse of the truth.

  3. “Unsubstantiated and offensive, not to mention the inverse of the truth.”

    Standard Tory line whenever their support for the rich and their attacks on the poor are correctly and openly identified. Nothing new there.

  4. The question with any “non executive director” is “Who appointed them?” and “How do they benefit by being appointed?”

    If you take a look at the people on the Independent Review of Higher Education Funding and Student Finance, none of them are the kind of people who would have any immediate personal understanding of how tough it is to be told “You can only go to uni if you don’t object to getting over your head into debt to the tune of £30,000.”

    For someone like David Cameron or George Osborne, who were wealthy enough at university to be members of the rich kid’s rioting club, thirty thousand is what you’d expect to blow on an end-of-term night out at a posh restaurant ending by trashing the place.

    Thirty thousand is more than one year’s average annual income. A kid whose parents between them don’t earn thirty thousand in a year, is going to be absolutely put off the idea that someone like them can go to a place where the fees cost that much, and that’s exactly why the Tories were in love with the idea: keep the lower classes out of the “best” unis, have more spaces for “people like us” who deserve the best kind of education. (Labour’s initial, unforgiveable support for tuition fees is harder to explain, unless it’s by their love affair with the US – the fond and misplaced belief that the US does better by its students by charging tuition fees. But it’s notable that in Scotland, a country with a long, long tradition that education goes by ability to learn not by parental wealth, tuition fees were resisted from the start. The only students charged tuition fees at Scottish universities are those from parts of the UK where tuition fees have been imposed by Westminster.)

  5. Pingback: Accountability | A dragon's best friend

  6. Pingback: The sale of Northern Rock | A dragon's best friend

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