Introduction
Is the non-executive director (NED) an endangered species? Does it matter?
Neither corporate collapse nor corporate scandal are new. They rightly attract media scrutiny and the interest of policymakers and regulators. Illustrative examples include Thomas Cook (2019), Carillion (2018), Patisserie Valerie (2018), Northern Rock (2007) and, earlier, Barings Bank (1995). In the charity sector, Kids Company (2015) is a further notable instance. Global examples include Volkswagen (2015) and Enron (2001). Most of these cases have resulted in some type of regulatory or legal action. Proceedings have included legal actions for fraud initiated by the Serious Fraud Office, actions against auditors and – of concern here – cases against directors, often seeking disqualification under the Company Directors Disqualification Act 1986. Such action may be initiated by the Insolvency Service on behalf of the Secretary of State or, in particular circumstances, other official bodies.
What follows argues that the continued role of the NED matters not only to the individual director, to business and companies but also to society as a whole. The contention is that without effective NEDs, corporate governance will be weaker, companies more exposed and society less well served. If that is the case, then education is as important as law in enabling NEDs themselves, policymakers, media and wider society to understand and appreciate both the responsibilities and the limits of the NED role. In conclusion some recommendations will be made to this effect.
Following collapse of the well-known charity Kids Company in August 2015, the Official Receiver commenced disqualification proceedings against its directors (who were also the trustees of the charity). The judgment in the application, in Re Keeping Kids Company (2021), was delivered in the High Court by Mrs Justice Falk, who rejected the disqualification application. The judgment contains useful legal analysis and opinion drawing on past cases around the various aspects of directors’ duties and liabilities. However, the judge also drew attention to the wider implications of the proceedings, an aspect of the judgment often not referred to in legal discussion. Mrs Justice Falk reminds us of the importance of NEDs broadly and the importance of their role – both as directors and, in this case, also charity trustees – in the service of society more broadly.
Paragraph 911 of the judgment reads:
The charity sector depends on there being capable individuals with a range of different skills who are prepared to take on trusteeship roles. Most charities would, I would think, be delighted to have available to them individuals with the abilities and experience that the Trustees in this case possess. It is vital that the actions of public bodies do not have the effect of dissuading able and experienced individuals from becoming or remaining charity trustees. Disqualification proceedings, or the perceived risk of them, based on wide ranging but unclear allegations of incompetence rather than any want of probity, carry a high risk of having just that effect, and great caution is therefore required. This is particularly so for individuals otherwise involved in the management of businesses, and professionals for whom additional regulatory issues may arise: in fact, the sorts of individuals whose experience is often most needed. The result of proceedings being brought in other than the clearest of cases is likely to be to deter many talented individuals who take the trouble to understand and appreciate the risks either from charitable trusteeship at all, or at least from all but the most wealthy, well endowed, charities which are likely to have least need of their skills.[1]
This judgment is directly applicable to the wider role of the NED in the commercial sector. Society is served by highly competent, experienced and responsible business executives acting as NEDs. In doing so they deliver both commercial wisdom and competence in governance, and in a functioning market economy exercise a role that also conveys confidence in business and the economy.
The role of the NED matters perhaps more than many realise or are prepared to admit. Should we celebrate it more than we do? We should, as a society, certainly do more to understand it, its purposes and its responsibilities.
Corporate failure or malfeasance, individual culpability, professional negligence or neglect of duty rightly attract criticism and action. Nevertheless, the understandable tendency to allocate blame often fails to give due weight to both the complexity of the corporate environment and respective responsibilities for failure. It is axiomatic that NEDs should discharge their duties competently in accordance with the law and with moral intent in the service of society. However, any lack of clarity over those duties, particularly in law, or potential exposure to regulatory action as a consequence of confusion over roles or responsibilities, will not only reinforce unrealistic expectations but also discourage NEDs from taking on this important corporate and social duty.
This would be detrimental to society’s reasonable expectations of good governance. Non-executive directors are rightly held to account under law but clear expectations, both in law and more broadly, are also essential. Consequently, society too must be clear about the role it wishes NEDs to discharge, to ensure the continued flow of suitably qualified individuals.
The concern here is with law, with expectation but most of all with education.
About the author
Richard Turnbull is the Director of the Centre for Enterprise, Markets and Ethics. He holds degrees in Economics and Theology and a degree of Doctor of Philosophy in Theology from the University of Durham. He is also a chartered accountant. He has authored or edited numerous books, articles and other publications in church history and business ethics, including an acclaimed biography of the Earl of Shaftesbury. He is a visiting Professor at St Mary’s University, Twickenham and a Fellow of the Royal Historical Society.
The author would also like to thank his colleagues at the Centre for Enterprise, Markets and Ethics, Andrei Rogobete (Associate Director) and Dr John Kroencke (Senior Research Fellow), who also contributed.
Notes to Chapter 1
[1] ‘In the matter of Keeping Kids Club and in the matter of the Company Directors Disqualification Act 1986, in the High Court of Justice’, [2021] EWHC 175 (Ch), Approved Judgment, paragraph 911.