Role of non-executive directors in corporate governance
Non-executive directors are defined as “A Non-working director who do not actively participate in the organisation and they are independent”. They are not employed in the company. The Non- executive directors has the responsibility to increase the value of both staff and the shareholders. They have the risk of satisfying themselves and others regarding the financial informations and they play a vital role in the appointment of new employees. The non-executive directors will monitor and challenge the performance of the executive directors in order to make the stakeholders believe that non-executive directors are worth in an organisation. The non-executive directors are best known as whistle blowers. They are not dependent on the remuneration from the organisation. They play a key role when the board reviews its annual performance. An experienced non-executive director will help in the development of an inexperienced board of executive members to keep their stakeholders satisfied. They are more competitive while decision making, communicating, strategic thinking, commercial awareness, influencing and representing, and self management. Their independency helps them to apply their experience to solve a particular situation. Almost all the board have majority of non-executive directors when compared to that of executive directors in an organisation. For example NAB bank has 13 board of directors on which 9 of them are non-executive directors. The report submitted by Australian Institute of Company Directors (AICD) in 2005 indicates that Australia has to low frequency of non-executive directors in an organisation. The most evident role of non-executive directors in large firms is when they solve a controversy even if they are not paid high.
The corporate governance is the system that helps to run the business successfully. It takes care of shareholders, stakeholders, executive and non-executive directors. The corporate governance helps to understand the clear objective of the organisation, so that the goal can be attained in future. However it has some critical issues like incentives, performance measuring etc. It actually started with London stock exchange in 1992. Since then it has created a lot of expectations from the shareholders. It also provides accountability and transparency when dealing with the incentives. The corporate governance works successfully because the people take responsibilities and they react differently when an issue arises. Eventhough governance is carried by both executive and non-executive directors; the independent decision made by the non-executive directors affects the growth of the organisation to some extent. Sometimes the decisions of the non-executive directors make specific issues public which is supposed to be a secret. Although both executive and non-executive directors are carried by the same law, non-executive directors take much more time to solve an issue because they does not know anything about the history of the issue and it takes more time for them to even understand the subject of the issue when compared to that of executive directors. The non-executive directors are employed in order to avoid under using of resources. They can have contact with a huge network of people to spread their organisation. The nonexecutive directors are not deemed under any management, they work on their own with the available knowledge
Role of Non-executive directors:
In most companies non-executive directors are either a former executive director or retired employee who works on the request of the management. The role of non-executive directors is becoming complex and has to reconcile some strategies in order to make them the most effective. The burning needs of the organisation make the non-executive directors to perform in order to with stand in the management. Non-executive directors perform their duties, particularly those sitting on the Nominations Committee, remuneration Committee and Audit Committee on an irregular basis, meeting only a few times a year and satisfying the management needs is a challenging role. The contribution of non-executive directors in organisation is more important for good corporate governance. They have the responsibility to put in in order to obtain a good strategy. They should scrutinise the performance and monitor in order to attain the goal. They play a vital role in fixing the remuneration of the executive directors and recruiting of new employees. Some Non-executive Directors are not deemed to be independent under these criteria; the Board considers that they bring valuable experience to Board deliberations and that at all times they act in the best interest of the company. They should be flexible in terms of their availability when there is a crucial issue. The non-executive director’s involvement in an organisation is explained by agency theory, stewardship theory, stakeholder’s theory and resource independency theory of directorship and responsibilities. The non-executive directors can work full time in a small firm. Preparing a strategic plan and successfully implementing them are dealt by non-executive directors. The non-executive directors plays a vital role in financial growth, encouraging certain standards, offering advice, helping with implementation of certain strategies, building long-term relationship with other firms and bringing their experience to work when certain issues arises.
The agency theory was developed by separation of ownership and management. The organisation’s ownership structure has impact on corporate governance. The development of Modern Corporation has expanded the board of members and the capability of owners. The number of non-executive directors in a board has been increasing because of the modernisation of the organisations. The agency problem between managers and shareholders arise because of the independent decisions made by the non-executive directors and it differs from the decisions of the executive members. Agency theory suggests that executive directors gain advantage to the firm’s owners. The cash composition of non-executive directors is same as executive director’s eventhough they do not participate actively in the organisation. The market reacts positively to the decisions of the executive directors when compared to that of non-executive directors. Moral peril exists with non-executive directors their risky attitudes, social ties and dangerous decisions. After conducting surveys with various firms, they are willing to take decisions from executive directors than non-executive directors. The compensation schemes of agency theory favour the executive directors and the shareholders encourage them to make decisions. The investors are given a confidence that executive directors are motivated to increase the organisation’s wealth and the shareholder’s wealth. The role of corporate governance is to protect the shareholders through executive directors. There is a rise in the interest rate when the business decisions of the non-executive directors do not coincide with the objectives of the organisation. Agency theory also states that organisations are willing to employ more non-executive directors than executive directors which have no impact on the annual turnover of the company. The differences between executives and non-executives in the norms could affect the firm badly. The balance between proximity and detachment depends on the relation between executives and non-executives. The interaction between board members and management are important in agency theory. There is a difference between the actual risk and awareness of risk, but the non-executive directors tend to take risk as per agency theory. The non-executive directors work for their own personal interest instead of improving their shareholder’s value and they are paying themselves a high package eventhough the business is not doing well in the market. This should be avoided by appointing more executive directors and giving them more authority than the non-executive directors.
The stewardship theory argues about maximising the interest of the shareholders. The non-executive directors do not provide a major support for the stewardship theory. The stewardship can also be called as an alternative to the corporate governance. The variation in performance occurs depending on the situation. This does not motivate the non-executive directors alone but also the entire organisation’s structure. It prioritises the shareholders and they get their share based on their priority. The CEO leads the non-executive directors and the shareholders in terms of their annual returns. The fundamental coalition between shareholders and non-executive directors gets worst in terms of the decision making. Breaking the rule does not produce the unfavourable penalties for corporate performance and returns to shareholders and is actually beneficial. The stewardship theory also involves in employee management, profitability and also qualitative & quantitative analysis in which the non-executive directors plays a vital role and takes their independent decisions. The stewardship theory is a tactical strategy which is firmly supported by the organisations widely. It helps the executive directors to create a lot of assumptions and this collides with the independent decision of the non-executive directors which becomes a conflict in the future analysis of the report. It involves more physiological and sociological aspects of the organisation which is not supported by the non-executive directors to a greater extent. The stewardship helps to find a person who can become a good executive director in future and it also helps to improve his abilities to become a complete executive director. It does not have a big impact on leadership qualities which is the main advantage for a non-executive director.
The management attitude of the stewardship theory was measured by examining the relationship between the individual and their supervisor, but the non-executive directors fail to maintain an understanding or a good relationship with the individual since they are not employed in the organisation. The main ingredients of the stewardship theory are trust, open communication, empowerment, long-term orientation and performance enhancement which does not hold good for the partial involvement of the non-executive directors. The stewardship theory gives a negative result for the belief that the independent board of directors takes much great decisions when compared to that of executive directors. It concentrates more on leadership philosophies designed by the organisation. According to this theory, the executive directors are more opportunistic in order to get good remuneration. It does not concentrate only on motivation of CEO but also on executive directors. The motivation of executive directors is less problematic and it concentrates on the organisation’s performance. It stresses to make the shareholders beneficial and raise their confidence level which will motivate the executive directors to improve their performance. The executive directors motivate the shareholders to invest high amount and assures them to receive a high interest.
The stakeholder’s theory often becomes a main debate in the organisation and it satisfies the acts that were described in management science. The theory has created a relationship model by answering the queries that were asked by the non-executive directors. It has some social policies which does not support the non-executive directors. It creates a relationship between foundation and the norm. The most often asked question is whether the stakeholder’s theory supports the non-executive directors. According to stakeholder’s theory, the organisation should have a good relationship with other organisations in order to find the effectiveness of the decisions made by the non-executive directors. They have some extrinsic values which are to dominate the noon-executive directors. This theory has got a lot of interest in the decisions of non-executive directors. The stakeholder’s theory is very normative and it can be found from their practical theory. The further goal is explaining their objectives to themselves. It supports parallelism and integrity. Stakeholders are vital for an organisation and they create hurdles for non-executive directors when they underperform. Almost all the boards would like to follow all the rules and regulations and this is recommended strongly by the stakeholders. The stakeholder’s theory is very big threat to non-executive directors because it does not support independent decisions. The stakeholder analysis explains that executive directors work with a legitimate interest when compared to that of non-executive directors. The stakeholder holds the primary responsibility than any other member in the organisation. The stakeholder theory also fits best for shareholders. The stakeholders are the backbone of an organisation, because they can create both positive and negative results for an organisation. They can even reverse the decisions made by the non-executive directors. The executive directors are closely related to the organisation and they are more of a stakeholder.
They actually constitute the firm and they are hugely affected by positives or negatives of the firm. They obviously become financial dependent on the organisation. The organisation depends on the executive director for their social relationship, self-identification, and self-actualisation. The non-executive directors do not depend on a single category of stakeholders.
The rights of stakeholder are not affected as they strongly participate in the individual decisions made by the non-executive directors. The executive directors involve the stakeholders in their decision making and they act in the interest of stakeholders. The one-way development on the organisation is restricted in stakeholder theory. They need each and every individual to develop gradually, so that the organisation develops on its own. In recent, the economists have stated that stakeholders play a vital role to benefit the organisation. In most situations stakeholders creates indirect benefit for the organisation. But the non-executive directly expects to produce only direct benefits which benefit them more than it does to the organisation. The non-executive directors do not benefit the organisation more than the executive directors.
Resource dependence theory of directorship responsibilities:
The executive directors are most effective monitors of the management and they work on behalf of the shareholders and they are not independent. The survival of a non-executive director is based on how they deal with uncertainty. Even though the non-executive directors are considered as most effective members of the organisation, their independence is not accepted by the shareholders. The non-executive director develops a typology which is vastly not recognised by the management. In most of the firms non-executive directors are elected with resource dependency perspective. The most important determination of the non-executive director is to maintain the interest of the shareholders. The executive directors are commonly referred to as firm believers. There is no proof that the organisation has been dominated by the executive directors when compared to that of non-executive directors. The ratio of non-executive directors with the board of members does not have any impact on the performance of the organisation. Since the non-executive directors have a high remuneration, it inhibits the board of directors. The executive directors take a huge risk in order to reduce the agency cost. So the executive directors play a vital role in resource dependency theory when compared to that of non-executive directors. Monitoring, service, strategy and resource provision are the four main objectives of executive directors.
Monitoring is a crucial role which is best suited for executive directors and they examine the organisation’s annual report, company performance, CEO evaluation and challenging the decisions of non-executive directors. The board is the internal monitor who scrutinises the decisions made by the non-executive directors, because they tend to make decisions independently. So the board of members concentrates more on the individual decisions.
The executive directors have the responsibility to provide advice to the shareholders. Based on the annual reports and performance they will provide the required advice to their shareholders. The shareholder does not often give much importance to the decisions made by the non-executive directors and the advice rendered by the executive directors is not much worth for the non-executive directors. So they take their advice lightly which may become very important in case of decision making for a certain issue in future.
The executive directors change their strategies depending on their previous performance. They play a vital role in selecting an executive director, building a confidence in them, and actively reviving the performance of the organisation. Because the executive directors are the backbone for an organisation. In future all the strategies that were needed will be set by those executive directors. So it is necessary to employ a competitive executive director.
It refers to the ability to bring the resources to the organisation in order to provide a better performance. The role of an executive director varies based on the size of the firm, type of business etc. So as a result the resource provision has become very important to improve the performance of the organisation. Any form of resource is important for an organisation. If resources are used correctly, then the organisation can save a lot on those resources. One of the main resources for an organisation is executive directors.
The executive directors are unique in their decisions when compared to that of non-executive directors. Even though they have different characteristics, they take similar decisions and it does not tend to happen with non-executive directors. The proposition of non-executive directors is low when compared to the proposition of executive directors. The superficial independence of non-executive directors is not supported by the stakeholders. The person can take the role of an executive director irrespective of the number of non-executive directors in the board. A review by a Chinese organisation reveals that the non-executive directors are no use for an organisation and they are merely a waste of time and also it suggests that not even a single non-executive director can increase the performance of the firm. The non-executive directors can play a major role in small firm, but they don’t want to be a part of the organisation. This is the major disadvantage of non-executive directors. But the non-executive directors are willing to play a major role in large firms, but not in small firms. They have authority to challenge the decisions of executive members only if it is not a perfect solution. But they do not have any authority if the decisions bring out the expected performance result. The non-executive directors do not have the authority to act in more remote, supervisory role and by concerning themselves as the main directors for corporate governance in larger firms. Even they can fill the gaps of an experienced director; they are not employed with the organisation. The person who got a strong background with the company’s history, environmental constraints and opportunities can only be a perfect executive director in a board and those who work part time; who has got no idea regarding the issue cannot be good non-executive directors. All the above theories results in favour of the executive directors. Thus non-executive directors are a waste of time.
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