Are Non-Executive Directors doing enough to ensure they comply with the new guidelines of the Corporate Governance Code?

The purpose of this article is to highlight the new guidance that has been introduced by the Financial Reporting Council (FRC) in March 2011 (the Guidance). More importantly, to offer the Non Executive Directors (NEDs) some solutions as to what they can do to comply.

The new FRC Guidance on the role of the NED focuses on the need for them to become, and remain, well informed about the company and business issues. Are NEDs really in a position to do this? Numerous articles have been written in the press, and on the internet, about the challenge and the need to comply with the guidelines. Few, if any, go on to explain to the NED how they might achieve this. 

Some Background

UK Corporate Governance Code 2010 (the Code) is a set of corporate governance guidelines aimed at listed companies. Under London Stock Exchange (LSE) listing rules, all companies have to disclose how they have complied with the Code and where they have not.

The FRC Guidance on Board effectiveness is one of a number of guidelines issued by the FRC to assist listed companies in complying with the Code.

So, whilst there have been no “statute” changes, the guidelines, in some ways have the same impact. There could well be a severe effect on a listed company’s share price if they stated they were not going to comply with the Guidance – which they would have to declare under listing rules.

Historically, successful civil claims against NEDs are rare. However, recently the case of Lexi Holdings plc v Luqman (2009) developed case law on this subject. Two NEDs were held liable for failing to intervene to prevent the company suffering a loss caused by an Executive Director.  Certainly the environment has changed (as explained in the DLA Piper note) and courts may be prepared to intervene more in the future. 

Non Exec Directors

All NEDs are expected to acquire an understanding of core business activities and their exposure to significant risk. Investment in material business change projects would come under this heading. Whether the amount spent was measured in £000s or £millions it is the risk / business impact that is critical here. All directors (including NEDs) have a duty of care and are not absolved from this simply because they fail in this duty collectively as a Board. Similarly the Board cannot delegate this duty of care to Board committees.

The NED must insist on receiving high-quality information in a timely fashion. High-quality information is that which is appropriate for making decisions on the issue and should be accurate, clear, comprehensive, up-to-date and timely, contain a summary of the contents of the paper and inform the NED of what is expected of him or her on the issue. However, what is clear and comprehensive from a technical perspective can be far less so for an NED without the appropriate technical background.

NEDs can protect themselves to some extent through indemnification by the company, or by indemnity under the company Directors and Officers liability insurance policy. However, to protect their reputation they need to protect themselves from claims in the first place. 

How can Pelicam help?

FRC guidelines create a requirement on NEDs to investigate and assess risk in the organisation. Pelicam can help satisfy this requirement with assurance work and in particular the health checks on projects. 

This will deliver high quality insightful information in a format that a non-technical person can understand.

The focus will be on what is critical to project success and benefit realisation.

The review is not just an audit, but includes pro-active intervention and remediation where applicable.       

The advice is pragmatic and delivered to the client and the project team in a positive way that can be acted upon.

Pelicam's assurance work is carried out in a collaborative style by project directors with over 15 years' experience.      

To ensure consistency, coverage and granularity Pelicam’s Project Assurance Method (PPAM) builds a 500 point review evaluating each aspect of the project in the context of the organisation. This is compiled into a 50 point Key Focus Area Dashboard, using a traffic light system, supplemented by a detailed key findings report and management summary. 

PPAM draws out the key issues that jeopardise projects and benefit realisation. It then presents the information in an understandable and unambiguous style.

An example of a section of one of our dashboards is given below:

Pelicam regularly assure projects for some of the largest organisations in the UK. Recently Pelicam have been working with the NEDs of a large financial services organisation to provide independent and impartial progress assessments of a complex £500 million pound technology programme. 

The Guidance states that it is the responsibility of the NED to investigate and challenge the Board where necessary. The environment for NEDs has changed and the courts may be prepared to intervene and, perhaps, punish more in the future.

It is essential, therefore, that NEDs take the time to understand the Guidance and their responsibilities. The PPAM and dashboard gives the NED the information they need to drill down to the critical issues and ensure that risks are managed in order to protect the stakeholders they represent and themselves.

Corporate City law firm, DLA Piper, have identified some of the risks facing NEDs now and also have offered some advice as to how they can protect their own reputations.