Non-executive director (NED) Best practice of corporate governance is half of the board should be NED and the number

should not be less than three. All staff of the audit committee and remuneration committee should be independent NED and half of the nomination and risk committee can be NED. At least one NED should have significant, recent and relevant financial qualification or experience as it is necessary to review financial information effectively.

Contributions:

bring wide range of experience and expertise give good strategic advice to the board challenge the strategic decisions made by executive directors wherever necessary staff the key board committees to scrutinise the performance of the executive management in meeting goals and objectives

as member of the audit committee appoint external auditors and scrutinise their performance and question if there is any conflicts of interest as member of audit committee investigate any allegation of insider dealing as member of nomination committee recommend on selection and appointment of new board directors

as member of remuneration committee setting appropriate level of remuneration package for directors and senior executives

satisfy themselves that financial statements are accurate act as kind of conscience for the board as a whole alert for emergence of problems with an ethical dimension or issues of corporate social responsibility

Factors may restrict NEDs effectiveness:

being independent will may be difficult because they are mainly appointed through business or social contacts with directors

may have had past link with the company as an employee nomination committee may restrict its search to directors who will fit in with rest of the board normally work on a part-time basis which may lead to lack of business knowledge may not have proper induction or lack of regular updates related to the company involvement in a number of committee may lead to lack of time given to each committee and board meeting companys information and communication system may not be effective in passing i nformation on due time

unwillingness of the executive directors to supply necessary information mezbah.ahmed@hotmail.co.uk

Non-executive director (NED) undue pressure from united group of executive directors who are determined to push through a policy with which NEDs disagree In most adverse situation NEDs can resign but that will increase the crisis in the company. But, if they remain in the office and continue to fight back then executive directors may resign which will leave the NEDs with the responsibility for picking up the pieces.

Issues about independency:

An independent NED is a person who has no connection with the company other than as an NED. He or she might own an insignificant amount of shares of that company.

An NED is not independent if he or she is on the board representing the interests of a major shareholder. Because the views given by the NED will be made in the interests of that shareholder.

If a NED has a close relationship with the company (other than being an NED) or with an executive director; this is doubtable if he or she is independent If an NED was an executive director or have had a significant interest on the company over last five years than he may not be seen as independent

The contract term for an NED should not be more than three years in first two terms. An independence review in necessary before each re-/appointment

After first six years of service term there should be an independence review in every year After first nine years of service term the reappointment in every year

Shareholding and share option:

In the case of shareholding, NEDs are advised to hold the shares until their contract is terminated. Because early share disposal may give signal to the market and can be seen as insider dealing NEDs should try to avoid share option as a part of their remuneration package because this will align NEDs interest with the shareholders. In case of share option; safeguard is to set the vesting period after contract term terminates.

mezbah.ahmed@hotmail.co.uk