NEDs have power, not just influence: they should use it or lose it.

katie porter

There’s no “NED box” to tick on the registration form for Directors required by Companies House.

Neither is there a distinction made between executive and non-executive directors in the Companies Acts.

Each NED has the same legal duties, responsibilities and potential liabilities as their executive counterparts.

Even insurance companies, the ultimate arbiters of reality, don’t offer cheaper premiums for NEDs.

Yet we all know that in practice many – although thankfully not all – NEDs behave, and are expected to behave, as if they are observers, influencers or, in the parlance of school governors – “critical friends”.

In my experience working with otherwise not-to-be-messed-with CEOs who become NEDs, there is a tendency among some towards timidity, fear of rocking the boat, and a hyper-gratitude for having a NED role at all in a competitive market.

Some NEDs place their “calling stuff out” setting on “Low” on the basis that they believe that “operational” matters constitute the bulk of a board’s deliberations and they are petrified of “interfering in operational matters”.

High on the list of some NEDs’ fears is a horror of developing a reputation of “being a pain the arse NED”. This widely used term, unsurprisingly, does not appear anywhere in the Acts.

To be fair to NEDs it’s not their fault that legislation has not yet caught up with the developments in ESG reporting, the trend towards “impact” investing and increasing calls by high profile business leaders for business to serve society.

The recently updated FRC Corporate Governance Code and the other “lighter” codes offer a clue to NEDs as to the regulatory direction of travel.

And the direction of travel is, without doubt, towards board decision-making which balances environment, society, governance and profit issues equally (ESGP).

My advice to NEDs, therefore, is to do three things: use to the full the powers granted to them by the Acts; build close, supportive relationships with GCs and thoughtful lawyers and become a complete pain in the arse in support of ESGP.

Why? Because society is demanding it. If you need convincing, watch the short video on social media of JP Morgan CEO Jamie Dimon squirming under the calm but razor-like interrogation of Rep. Katie Porter at a recent congressional hearing.

He failed to explain to her how he could help one of his low-paid employees make ends meet while he trousered $31m. As CEO his ESG settings seem to be set at “Very Low/Almost Off” in respect of costs.

I’m afraid the revolution is a ‘comin. And it won’t be about socialism. Or about reformed capitalism. Or about CSR. Capitalism is just fine. What will change will be the nature of the mandate society will grant organisations to make a fair return on capital employed. That’s all.

The harsh reality is that for Mr Dimon’s employee to make ends meet, his company will have to spend more on her and less on himself or others. It’s that simple. That means boards taking decisions that reduce profits. Slightly goes against the grain, doesn’t it?

I don’t buy the view that “ethics are good for business”. If you could make money from ethics, everyone would be at it. This is where NEDs come in. Their job will be to restrain the executives from unbalanced ESGP decisions.

They will feel the heat more acutely soon. And if they don’t measure up, society won’t allow them their much sought after “portfolio” careers. This will hurt them because many NEDs genuinely believe they are doing a good job and protest that they are “allowed” to say what they like.

The bar is about to become much higher. What passes currently for calling out poor conduct on the board by NEDs will in future be seen as merely benign nagging. NEDs will, in future, have to threaten serious consequences if their reasonable challenges remain unheard.

Do you think this is far fetched? If so, think again. NEDs will use or lose their power. Society has had enough of the Carillions & Persimmons, the dodgy auditors and poorly behaved bankers, unfair pay and male-dominated boardrooms. Listen to the mood music getting louder in the vacuum created by the extreme left, and right. Centrists are pro-capitalism on fair terms.

And lawyers will be the first to be told to change their behaviour by regulators. In turn, they will kick “the business” hard, because they will have the regulatory power and professional backing to do so.

Some lawyers will resist and end up in orange jumpsuits if not sidelined by a giant of a profession stung into action by society’s demands after years of complacent slumber.

NEDs will be next in line to worry about the consequences of their behaviour. My advice to them is not to wait for the tumbrels to roll, but at your next board meeting to ask this simple question:

“How does this decision impact the environment, our responsibilities to society, our requirement to meet the highest standards of governance and at the same time our need to make as much money as we can? Is this decision ESGP compliant?”.

Like Rep. Katie Porter, use your power to ask hard questions, repeatedly and without fear or favour. Otherwise, sooner than you think, you’ll be the one under cross-examination.

Ciarán Fenton

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