A fine balance: NED roles in financial institutions

Corporate failures, including that of Carillion, have focused minds in the financial services sector on the precise role played by non-executive directors (NEDs). Ever-increasing scrutiny from regulators on individuals’ roles and responsibilities sits alongside a broader public debate about the effectiveness of Boards and how they are evaluated. In this climate, it is important for both the firm and the individual NEDs to understand what is – and is not – part of the NED job description.

Walk the line

We are often asked to advise on how responsibilities should be divided between executive directors and NEDs. There is some overlap. Both are subject to director duties under company law. Both are responsible for the firm overall and setting its strategy. But it is only the executive which is involved in implementing that strategy.

NEDs should not involve themselves in running the day-to-day business of the firm. Instead, their role is to scrutinise the performance of management and offer constructive oversight and challenge. This requires NEDs to foster good relations with firm management in order to understand the business, its commercial drivers and its inherent risks, while simultaneously remaining sufficiently distanced and independent. In practice, it can be difficult for NEDs to walk this line.

Particular challenges may arise where the individual has recent experience in management or, as is common in some global firms, where the individual has a concurrent executive role for another group company.

Recent client queries

Should a NED attest to the regulator that she will ensure the implementation of a regulatory change programme?

What happens if a NED disagrees with the approach taken by the executive directors?

Can a NED attend executive management committees as an observer?

Are the regulatory expectations of approved and notified NEDs any different?

The challenge of challenging

The sense of personal accountability of NEDs, whilst not dramatically altered, seems to have shifted as a result of the Senior Managers Regime. In the same way that executive Senior Managers are focused on documenting their “reasonable steps”, we see NEDs questioning not only the challenge they are providing to the executive, but also how they evidence that behaviour. Here, the focus should be on minuting of board meetings and constitution of board committees. It is important that NEDs resist any temptation to maintain separate records or “dossiers” of challenge.

For those NEDs with dedicated prescribed responsibilities, the establishment of a framework which demonstrates appropriate oversight (whether of training, policies or control functions) should also be prioritised. Perhaps most challenging in this respect is the oversight responsibility for leading the board’s development of the firm’s culture (applicable to certain dual-regulated firms). There is a clear regulatory expectation that NEDs should hold management to account for embedding a positive culture within their firms and scrutinising the root causes of poor behaviour. Ensuring that appropriate culture indicators are received and that cultural impact is appropriately incorporated into board discussions and decision-making is, of course, challenging, but something on which all NEDs would be wise to focus.

A perennial question from company secretaries and those working within the “Office of the Chair” is how best to provide NEDs with sufficiently detailed management information without overburdening them or tipping the balance towards executive-style decision-making. There is unfortunately no easy or template answer to this question, but, that being the case, it is not one that can simply be ignored. Keeping an open dialogue with NEDs is key, as is management preparing to be “agile” so that information gaps can be filled or adjustments made for particular items, meetings or phases in the firm’s operations or business trajectory.

How we can help

Over the years, we have worked closely with firms to ensure that NED appointments meet regulatory requirements, including those under the Senior Managers Regime and the FCA’s SYSC rules. We have extensive experience of assisting firms and individual NEDs with the approval process, including with skills gaps, training and development plans, and interviews. We regularly advise NEDs on the legal and regulatory expectations for their role, how to contribute effectively to board and committee discussions and decision-making, and on the design of reasonable steps framework tailored for their role.

We also support boards in carrying out effectiveness reviews (including an analysis of management information) and in the design and implementation of assurance processes to support the provision of regulatory attestations or confirmations.