The Role Of Non-Executive Directors Harvard Case Solution & Analysis

Introduction:

The role of the non-executive director is to provide a creative contribution through objective criticism to the board. The Cad bury Report 25 considered that NEDs should: ‘bring an independent judgment to bear on issues of strategy, performance, resources, including key appointments, and standards of conduct … [and] the caliber and number of non-executive directors on the board should be such that their views will carry significant weight in the board’s decisions.’

Non-executive directors have an important role to play in the proper running of the companies, and therefore the economy at large and bringing an independent judgment to bear on standard of conducts, performance, strategy, resources and the key appointments. However, there is no legal distinction between non-executive and executive directors and they share the same duties like legal, responsibilities and the liabilities as their executive colleagues, which are contained in the Company Act 2006.

Non-executive directors provide experience and have the caliber and personal qualities to bring specialist knowledge that help the board with valuable insights and also with key contacts in related industry(Ouchi, n.d).

The most important factor is the independence from the management of the company and its interested parties, which bring the objectivity to the board deliberations and plays a vital role in monitoring the management. The balance of the board, executive and non-executive directors should be such that no small group of individuals dominates the decision taking power of the board.The amount of non-executive directors should not be less than half the board.

The Code of Governance provides the level of remuneration for Non-executive directors that should reflect the time commitment and responsibilities of the role.Non-executive directors receive the fixed fees rather than a salary, though some of the remuneration can also be received in shares, which is mentioned in the Higgs Review. However the code states that remuneration for Non-executive directors should not include the share options or other performance related elements which can create the conflict of interest.

A number of provisions should be designed to ensure that the Non-executive directors are able to dedicate sufficient time to their role within the company It is important and fundamental that the Non-executive directors have a strong command and expertise on the issues related to the company so that they can contribute effectively to the board and to generate the respect of other directors. The code states that “The letter of appointment of a Non-Executive Director should set out the expected time commitment. Non-Executive Directors should undertake that they will have sufficient time to meet what is expected of them. Their other significant commitments should be disclosed to the Board before appointment, with a broad indication of the time involved and the Board should be informed of subsequent changes.”

Non-executive directors are appointed to bring the board independence, impartiality, wide experience and special knowledge.

Specific Roles of Non-Executive Directors:

The non-executive directors should be used by the Chairman and chief executives to provide a general counsel and a different prospective on the matters that are important and also seek the guidance on the particular issues before the board meetings. The key roles of the executive directors are

Strategic Direction:

The non-executive directors have a clear and wide view of the factors that are affecting the company and the business environment of the company than the executive directors because of vast experience, therefore,the main role of the non-executive director in the formation of the strategy is to provide a creative and informed contribution and to work as a critic for the objectives and plans set by the management.

Monitoring Performance:

The non-executive directors have the responsibility for monitoring the performance of the management and also monitoring the progress made by the company in achieving the goals and objectives they have set. Also, they have to monitor the strategy that has been formed is working or not. Non-executive directors are also responsible for setting the remuneration of the executive directors and have the role of appointing and removing the executive directors and in succession planning.The Role Of Non-Executive Directors Case Solution

Communication:

The role of non-executive directors is to connect the company with outside world through different contacts and opinions based on the level of experience they possess, those networks can be of useful people and organizations.Moreover, the Non-executive directors can be called to represent the company in the external matters of the company.

Risk:

Non-executive directors have therole to assess the level of risk and make certain procedures to identify and eliminate the risk.They are needed to satisfy themselves on the integrity of the financial statement of the company and also to make sure that the financial controls and the risk management system are robust and can help in identifying and eliminating the possible risk. .............................

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