The role of non-executive directors (NEDs) was long considered something of an easy ride. Before the crisis, it was commonplace for City professionals, often in the twilight of their careers, to sit on a number of Plc boards simultaneously, fulfilling their duties simply by attending a small number of board meetings and providing appropriately-timed nuggets of sage advice.
Since 2008, however, the roles, responsibilities and, perhaps most crucially, the risks for supervisory board directors across Europe have undoubtedly increased. A report by global insurer AIG and the European Confederation of Directors Associations (ecoDa), to which I contributed, identifies three important themes that have made life irrevocably more challenging for NEDs. These are greater scrutiny from regulators, the continued internationalisation of businesses and regulators, and technology allowing a broader range of stakeholders to provide oversight.
Since the financial crisis, there is little doubt that regulators across Europe are under pressure to be more vigilant following perceived failings. Investigations alleging regulatory violations are on the rise and, while it is mainly focused on the financial services sector, the scrutiny by no means ends there. Legal costs associated with investigations in the energy, tech, manufacturing, telco and pharma sectors are all steadily increasing. From a NED’s perspective, the key areas that regulators are looking at include anti-corruption, bribery, competition and environmental issues.
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Coupled with a heightened level of regulatory scrutiny is a trend for greater cross-border cooperation among supervisors as well as growing extraterritorial powers – particularly from the US. The Securities and Exchange Commission (SEC) intervention at Fifa is a high profile example of this from outside the corporate sector. The long (and growing) arm of regulators such as the SEC means that directors’ liabilities are now likely to extend well beyond the borders of the UK. Directors today have to keep abreast of constantly evolving and complex local laws in all of the countries in which they operate.
The final key trend that has heightened scrutiny of the role of NEDs relates to technology. Put simply, there are now a far greater number of stakeholders who are monitoring the performance of boards and who have the ability to share their views with a range of influencers. A headline-grabbing recent example is the situation at Aim-listed Quindell, where little-known US researcher Gotham City used Twitter to publicise a report that was highly critical of the company, questioning its accounting of profits and cash flow. Ultimately, Gotham City’s report led to a class action law suit being instigated against a number of ex-directors.
While on the face of it, the AIG/ecoDa report might seem like difficult reading for non-executives, it in fact simply illustrates the way the role has changed. Today, non-executives need to be active and engaged with the companies they work with and, in doing so, they are far more likely to play a valuable role. Directors should insist on regular financial and risk reports, and stay fully up to date with a company’s financial performance and projections. They may also think about keeping a private record of events and decisions they have made.
With legal costs on the rise and regulators increasingly looking to hold directors personally liable, there is also a major role for Directors and Officers (D&O) insurance in the modern environment. Non-executives should not hesitate to ask companies whether they are covered and should then feel emboldened to take a more robust approach in the way they carry out their duties. There is no doubt that an insistence on D&O insurance is becoming more common in the UK among NEDs, and that should be further encouraged.
The days of non-executive roles as “jobs for the boys” have undoubtedly gone. It is now more important than ever that companies, insurers and regulators provide the level of support to NEDs that is needed to attract the best people and ensure the highest levels of supervision for our listed companies.