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What is the role of the NED?

Following the collapse of Enron and Worldcom and the disastrous problems at Marconi and Energis, the role of the non-executive director has been hotly debated. Industry professionals remain unclear on what the primary role of an NED should be, according to a recent poll by UK mid-market player Sovereign Capital. Findings were published in a report titled Attitudes to the role of the non-executive director’.

The poll was published prior to the outcome of the Higgs Review, an initiative set up by the government in June this year to examine the role and effectiveness of NEDs.

NEDs are a resource frequently used by venture capitalists in portfolio companies. With the recent accounting scandals placing focus on the statutory and moral responsibilities of the NED, Sovereign Capital decided to gauge current sentiment in the poll regarding some of the issues raised in the last months.

Peter Brooks, managing director Sovereign Capital, said: “We believe that the role of the NED is a crucial one. If they are to be effective in their role, then it is only logical that they carry significant responsibility. After all, they have full voting rights. This means that the time and remuneration an NED would commit and receive should reflect the size and infrastructure of the company.”

Key findings of the poll reveal that 84 per cent of professionals and executives disagree with the view that NEDs can never know enough to fulfil their obligations and are therefore a waste of time. This same audience does not agree on what the primary role of an NED should be. Is it accountability, objectivity, strategic input, door opening, good-practice or a combination of all these factors?

Of those surveyed 46 per cent have worked with an NED whose decisions have had a negative impact on the business they represent and 63 per cent believe an NED’s financial involvement in a company is closely related to their performance. Sixty-nine per cent believe the maximum number of NED positions they should hold is three to five. The government says however that it will not impose an upper limit.

Brooks comments: “Anyone who considers becoming an NED should be fully prepared to take on the responsibilities and the consequences, good or bad, that come with it. For those that do not want such responsibility, then they should leave the board and consider becoming a consultant.”

What is needed is a much clearer and more realistic guide to the roles and responsibilities of the NED and the associated independent powers that go with it, he says. It is hoped the outcome of the Higgs Review in the New Year will answer some of these questions.