Our clients from time to time are asked to consider joining the board of directors of a company listed on the London Stock Exchange as a Non Executive Director (“NED”). This may be an exciting opportunity but one which should not be undertaken lightly. The term Non Executive Director is not defined in legislation under English law – it refers to a director who is not a full or part-time employee or holder of an executive office of a company but who devotes part of his time to the affairs of the company as an adviser/director. Recent guidance issued in January 2013 by the Institute of Chartered Secretaries and Administrators on the roles and responsibilities of NEDs is a strong reminder that prospective NEDs should think carefully about the liability that they will be exposing themselves to by virtue of their appointment and the role that they will be expected to play on the Board. Before and after joining the Board, NEDs should take steps to ensure that they will be effective in their roles and not expose themselves to liability by virtue of their actions or inactions.

The UK Corporate Governance Code (the “Code”) applies to all companies with a premium listing on the London Stock Exchange irrespective of where the companies are incorporated. Companies admitted to trading on AIM, London Stock Exchange’s junior stock market for smaller growing companies, although not required to comply with the Code, generally strive to comply with the Code insofar as it is appropriate given their size and stage of development.

The Code provides that the purpose of corporate governance is “to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company.” Corporate governance is what the Board of a company oversees and the Code provides a guide to a number of key components of effective board practice including the systems and processes for ensuring proper accountability, openness and probity. The role of the NED is crucial for effective Board behavior and in summary the NED is a check and balance and should “constructively challenge and help develop proposals on strategy.” Under the Code principles, NEDs should scrutinize the performance of management in meeting agreed objectives and monitor the reporting of their performance. They should be satisfied with the integrity of company financial information and that the financial controls and systems of risk management in place are robust and defensible. They are responsible for the remuneration of executive directors as well as removing such directors if this is required.

An important point to note is that as a matter of English law there is no distinction between the duties and obligations owed by an NED and an executive director. Under English law, a director’s duty is to exercise the care, skill and diligence that would be exercised by a reasonably diligent person with: (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by that director in relation to the company; and (b) the general knowledge, skill and experience that the director has. Accordingly, whether the duty has been satisfied comprises both an objective and subjective test, with the result that more is expected of a director with specific skills and expertise, e.g. skills in finance or law.

The Institute of Chartered Secretaries and Administrators (“ICSA”) issued a guidance note in January 2013 on liability of NEDs: care, skill and diligence. The guidance suggests the steps NEDs can take that would help them demonstrate to a regulator, or to a court, that they had exercised care, skill and diligence in the execution of their roles and responsibilities. It is not reasonable to expect an NED to have the same detailed knowledge and experience of a company as an executive director. According to the guidance, when deciding whether an NED has breached his director’s duties, “a court would consider the steps a reasonably diligent non executive director in the same position would have taken to familiarize themselves with the company’s business and operations.”

ICSA recommends that prior to joining a Board, prospective NEDs should:

  1. carry out their own due diligence on the company. In a separate ICSA guidance note issued in May 2011, guidance was given on sample questions to ask during this exercise. The questions should cover matters such as the business, the governance procedures in place, the composition of the Board (to ensure that it is suitably balanced between executives and NEDs, is diverse and has the necessary skills), boardroom behaviors (to ensure that constructive challenge from NEDs is welcome) and how the Board operates (e.g. how often the Board meets, the quality of advance information provided and whether the Board rigorously evaluated to ensure its effectiveness). A prospective NED should diligently review the company’s website and annual financial reports and all other public information that has been announced to the market. Although public information is unlikely to disclose any wrongdoing, if there is a lack of transparency then this may be a warning signal. Before accepting an appointment, the prospective NED should meet in person with as many Board members as possible and at the very least with the Chairman of the Board, CEO and CFO. The prospective NED should be mindful that due to various insider trading and market abuse rules, there is certain price-sensitive information which will not be disclosed to him before joining the Board;
  2. ascertain what skills and experience the company is seeking from them to complement the existing Board and ensure that they have or can acquire the skills needed to serve that Board and they should devote time to developing and refreshing their skills;
  3. during the discussions held with members of the Board, ask questions and make a judgment on the culture, values and behavior of the Board;
  4. review their letter of appointment and ensure that it states the minimum time expected to be devoted to the role. A prospective NED should be satisfied that he can devote the time necessary to discharge his responsibilities on the Board and any committees of the Board and be mindful that at certain times of the year he may be required to devote additional time. A prospective NED should ascertain what Directors and Officers insurance cover is in place for legal action against the directors; and
  5. understand the various laws, rules and regulations (including of the London Stock Exchange) that they will be subject to on appointment. It may be helpful to meet with the company’s various advisers (lawyers, brokers and accountants) to discuss these various duties and obligations.

Upon joining a Board, new NEDs should have input into their induction program and take responsibility for their ongoing training and continuous development. An NED should keep up to date with developments in the company, its sector and changes in any laws and rules under which the company operates, and request training if he feels that it is required. The NED should insist on receiving high quality information in advance of all Board meetings which is accurate and up to date. Decisions made by the NED should be objective and in the interests of the company and the NED must avoid any conflicts of interest. The NED must provide independent oversight and be prepared to constructively challenge the executive team as and when required, which is not necessarily always welcome or easy to do.

In recent years the role of the NED has increased significantly. It is not a rubber-stamping exercise and requires the active participation of the director concerned if he is to avoid breaches of directors’ duties, or other applicable laws or regulations or indeed public censure in the media if corporate governance standards are not met.