Keeping non-executive directors independent

USING linguistics to distinguish between competing non-executive director remuneration philosophies.


The current Corporate Governance Code precludes “circumstances which are likely to impair a non-executive director’s independence”. The particulars of these circumstances vary but include participation in share options, performance related pay and long-term incentive plans or bonus schemes at the company they help oversee, guide, govern and supervise. 


In something of a departure from current practice, the government wishes to change legislation and Code rules to enable non-executive directors [NEDs] to more closely tie their remuneration to the success of the company. This seems to overlook the code but also something fundamental about good corporate governance too. Namely, independence is an attitude of mind, but it is also a value since it reflects the culture of service that all boards should have. Good independent non-executive directors believe in their organization and its mission and purpose. The best do so strongly, so much so that they are not afraid to criticize it or make recommendations for change. 


To declare my perspective, I endorse the importance and benefit of existing practice in the separation between executive board management and those (non-executive directors) who oversee them. Unlike recent news of other new business initiatives, consultations and White Papers from the government, I worry that these proposals to dilute or undermine the delicate supervisory balance that currently exists - despite sensible, articulate and widespread opposition from thought leaders and investors – might actually makes its way onto the statute book ahead of the next election. 


I have long been an advocate for non-executive directors to be known by the (American) designation of “independent directors”. My forecast is that sooner rather than later there is going to be a need for investors, regulators, shareholders and stakeholders to easily distinguish between those NEDs for whom their independence ‘may’ be compromised by closer alignment with the board incentive plans and those who choose to still remain aloof.


But how will investors, shareholders and stakeholders distinguish the too closely aligned common or garden NED from the real McCoy? My expectation is that the solution is both linguistic and philosophical. An easy and practical way to distinguish between those non-executives who – in future - take a bigger proportion of their income (for example) in shares or other such incentive plans would be to continue to formally call them – as so often now in the UK – “non-executive directors” and those that don’t so closely link their remuneration and financial rewards to more scrupulously preserve the appearance/reality of their independence as ‘independent directors’.


After all, surely, the independent director is just that: independent? He or she stands back from the firm and its board to examine it with a critical eye. They help guide and shape strategic thinking, perceptions and also the better understanding of risk. The one thing they do not do is get involved in day-to-day management. That is the province of the executive, and this boundary between their separate roles must always be respected. Those that wish to blur this distinction should – henceforth – be viewed differently and known as non-executive directors. Those that don’t: as independent directors.


Photo credit: Economic Times/India Times