How can Non-Executive Directors add value to businesses?

The importance of Non-Executive Directors (NEDs) has been stressed on countless occasions in recent years, as many businesses seek to include an independent and new perspective to their senior leadership teams.

NEDs are individuals who have a place on the Board of Directors of a company, serving as independent board members who are not part of the executive team. Their primary role tends to be tied to planning and policymaking projects. This is in direct contrast to an Executive Director, who is a senior management official, very often having other responsibilities such as CEO, Chief Financial Officer, and other roles.

Despite this, many still seem to question the need to have a NED on the Board of Directors, particularly given that they are not directly involved in the company’s operations and come at an extra cost.

However, KPMG Malta Consultant Hilary Galea-Lauri on Thursday noted that the role of a NED is more crucial than one may think, as the role comes with the responsibility to “challenge management” and “ensure effective corporate governance”. This is done in a way to add value to the business.

Mr Galea-Lauri has had a long and established career working at KPMG Malta, having joined the company in 1986, being admitted Partner in 1998. After 25 years as Head of Audit, he stepped down in September, taking on a new role as Consultant.

In his post, Mr Galea-Lauri proceeded to delve deeper into the primary responsibilities of a NED, especially in terms of pushing for good corporate governance.

Firstly, NEDs must question and probe senior management, in order to gain a “deeper understanding” of management’s decisions and strategies. Mr Galea-Lauri added that this includes challenging assumptions and seeking additional information, as well as “robustly debating key issues”.

He also remarked that they must provide objective analysis. This is where the importance of an independent NED comes in, as they need to review management’s proposals and performance in a way that is objective and completely unbiased.

“Critically assess financial statements, business plans, and risk management processes,” Mr Galea-Lauri said, before adding that it is important for NEDs to provide an “external perspective” to identify any potential “blind spots or areas for improvement”.

Additionally, NEDs are accountable to shareholders and must act in their best interests. Therefore, they need to ensure that the decisions management makes “align with the company’s long-term goals and create value for shareholders”.

To better understand the situation at a business, NEDs must also actively engage with stakeholders, including employees, customers, and suppliers, thus learning more about the company’s operations and potential risks.

“They need to incorporate this knowledge into their discussions with management and challenge them on issues that affect stakeholders,” Mr Galea-Lauri explained.

Tied to the previous point, he also mentioned that NEDs should monitor management’s performance on a regular basis. This includes reviewing key performance indicators, financial metrics, and corporate governance processes, thus ensuring the company is being managed “effectively and ethically”.

NEDs must act as independent figures within the Board of Directors, and hence, they need to “render independent advice”.

“They must leverage their expertise and seek independent advice when required which can help them challenge management’s proposals with informed and objective insights,” he added.

Lastly, Mr Galea-Lauri stressed that NEDs, together with senior management, need to engage in constructive dialogue to focus on what is best for the business.

“Foster an environment of constructive dialogue and open communication with management. Establish a strong working relationship to effectively challenge management while maintaining a collaborative approach,” he affirmed.

Summarising the key responsibilities, Mr Galea-Lauri pointed out that NEDs must be “vigilant, independent-minded, and committed to their fiduciary duties”. “They should observe the highest ethical standards and play an active role in promoting transparent and accountable corporate governance,” he concluded.

The importance of a NED in a business was one of the topics highlighted during the Family Business Forum held last month. Business leaders and leading corporate service providers stated that an outside perspective can bring added value to businesses, and can also serve as individuals to aid in conflict resolution.