Non-executive directors
Non-executive directors can add value to a family enterprise in several ways. They bring outside experience and independent judgement to bear on major matters requiring board decisions. They can act as a link between the board and the shareholders, provide the benefit of their personal contacts and help to ensure that the overall governance of the family enterprise operates effectively.
The role of NEDs in the governance of public companies listed on a stock exchange has increased in prominence in response to investors’ concerns about excessive executive remuneration, board appointments, evaluation of board performance and the relationship between the board and the company’s auditors. In order to strengthen the autonomy of these NEDs the corporate governance guidelines advocate that NEDs should be “independent”, free from any commercial or personal ties that could impair their ability to probe and challenge the board.
In a privately owned family enterprise these requirements can be difficult to apply since the choice of NED is often influenced by prior relationships that help to increase the levels of trust and respect between the controlling family and the NED. This does not mean, however, that NEDs in a family enterprise should not be “independent”; it just emphasises the importance of NEDs having an independent mindset and the courage to base decision-making on the merits of the decision rather than extraneous influences or considerations such as relationships with family members or even personal financial gain.
Some other concerns about NEDs in the governance of a family enterprise are
- they may lack the specific expertise of insiders and family members, resulting in poor strategic decisions
- they may lack a clear understanding of the family’s values
- a business centric mindset might overlook the family and ownership dynamics that occur in every family enterprise
- the advantages brought by their objectivity may be counteracted by a reduction in co-operative interaction from the family if they do not respect or admire the NED
- they can be perceived as expensive.
These types of concerns can be addressed by ensuring there is a thoughtful process in place for Selecting board members.
