There are risks inherent in a situation where all the directors are also full time employees of the company and hence subordinate to the Chief Executive, especially if the latter is also Chairman. The risks are, of course, that the directors insufficiently represent the shareholders’ interests, and that the performance, style and future plans of the company may not be monitored from an objective standpoint. Professor Samuel Eilon (Imperial College London), in a thoughtful “Omega” Editorial quotes from a US report … “Numerous studies have made it clear that the inside directors act primarily as managers and that they cannot perform objectively in any capacity other than as managers, and that at worst they merely reflect the thinking of the Chief Executive Officer”.

This is the essence of the case for Non-Executive Directors. There are, of course, examples of plenty of companies with wholly executive boards, which have prospered, thanks to a particularly effective Chairman or Chief Executive Officer.

Boards may eschew Non-Executives for perfectly valid reasons. The theoretical advantages of Non-Executives may not be realised in practice. They may have too little time (or energy) to learn enough of business to make a useful contribution. As the Sunday Times once put it, “The average Non-Executive Director is scarcely more than a tame pensioner, sometimes a lap dog, contributing to the atmosphere of complaisance and non-enquiry characteristics of many boardrooms”. Tricker¹ points out in his authoritative study, ‘The Independent Director’, non-executive is not the same as independent. Representatives of customers, suppliers or major shareholders are not really independent, nor are those whose firms undertake consultancy or legal work.

The New York Stock Exchange uses as a definition of independent: “The director who is independent of management and free from any relationship which could interfere with the exercise of independent judgement as a committee member”. The appointment of such directors is a requirement for the New York Stock Exchange listing, and, at the time of writing, it has been argued that the Companies Act should be amended to provide for similar requirements in this country.

It is also generally considered desirable for Non-Executive Directors to be financially independent so that they may be fearless in their constructive criticism.

Non-Executive Directors not only prove valuable as part of the Board but are available to sit on audit and senior staff remuneration committees, where their objectivity provides the necessary unbiased opinion.

Who then should exert pressure for the appointment of Non-Executive Directors? The Watkinson Report published in 1973 states “Shareholders and the owners of the business still have a responsibility that extends beyond actually buying and selling of shares. They must exercise this responsibility more fully in the future and be provided by the Board with appropriate information on which they can form a judgement”. The main power in the hands of shareholders lies in their ability to elect and remove directors. It is the responsibility of shareholders to satisfy themselves that the Board is properly composed to suit the nature and purpose of the company. The government has

given a strong lead to encourage the appointment of Non-Executive Directors, which has been taken up by the CBI, the Institute of Directors and others. Nevertheless, in overall terms, the result is disappointing, no doubt due to the fact that many Chairmen and the Boards take a myopic view of the situation.

It is a widely held view that if a Board is to include Non-Executives there should be more than one. A single individual, unless his personality is quite unusually robust, will find it very difficult to withstand the inevitable group defensiveness of the insiders. The CBI has suggested that larger companies should have at least three independent directors.

In considering this matter, the Chairman might well find Tricker’s check list questions for discussion helpful (Appendix 2 to his book) - eg where are the pressures for change in the way we direct the company likely to come from and are we monitoring adequately?

How should Non-Executives be found? The most important needs are general ability, an objective mind, sufficient (but not too much) knowledge of the business and the time and energy to do the necessary homework. If personal networks prove inadequate in locating a suitable candidate, a Search consultant may provide a way of identifying sound prospectives. One possibility is, in the author’s view, insufficiently considered, namely that of regarding non-executive directorships as a management development opportunity. A company could well encourage its high flyers to take non-executive directorships in smaller, non-competing companies, thus gaining excellent experience and benefiting the “host”. There might be some risk of loss of the executive to the “host” company, but this is likely to be outweighed by the increased job satisfaction of the young executive. This is, of course, often done within the subsidiaries of groups or holding companies, but need it be confined to them? Experience of a different business and a different managing style would be at least equally valuable.

The task of Non-Executive Directors is not to rubber stamp the executive, but to broaden the dimensions of the Board’s decision-making ability. However, Non-Executive Directors, like all directors, have specific statutory responsibilities as a result of the Companies Acts 1985 and 1986, The Insolvency Act 1986 and the Company Directors Disqualification Act 1986. These Acts are aimed at curtailing the rogue director, but unlike a sniper’s rifle, catches all with a gunshot effect. The Acts do not discriminate between Executive and Non-Executive Directors and accords directors personal liability for fraudulent trading. Failure to exercise these legal obligations can result in directors being disqualified, fined or even imprisoned.

Thus the role of the Non-Executive Director is not passive and the archetypal Board resolution must not be passed “on the nod”. Non-Exec