Exclusive Webinar: Essential Insight for Entrepreneurs on the Role of the Non-Executive

Inside Knowledge with Daniel Broby: Academic, Fintech Pioneer and Business Expert.

A webinar you should not miss, with Daniel Broby, an award winning academic and published author, to explore the role of the non-executive in business. Daniel will share insight drawn from firsthand experience and his academic background to share essential knowledge on the following sub-topics:

• Good governance
• The structure of the board
• Setting and safeguarding the vision, values, and reputation of the organisation
• The rules set out in the governing document
• Legal duties
• Stewardship of assets
• The organisation’s operating environment
• Overseeing the work of the organisation
• Audit and Remuneration committee

Find the full webinar transcript below:

Owiss

Okay, so let us start. Hello everyone, I would like to welcome you all to our webinar. I'm just giving a couple of seconds for our attendees to be connected.

Let me start by saying thank you everyone for joining us today at our SFM webinar on understanding business structure, and particularly the role of the non-executive director.

As this presentation is being made and we go through the presentation, if you have any questions please do not hesitate to put your questions in the Q&A tab and which is the bottom of your screen. We will go through your questions and answer them at the end of the session.

I would like to let you know that this webinar is being recorded and it will be available on our social media channels and we will be sharing this presentation at the. Let me start by introducing the panelists for today, so it is myself Owiss Refaat, I'm the chief operating officer at SFM Corporate Services, which is a Corporate service provider. We are established in four jurisdictions: Dubai, Geneva, Seychelles and Hong Kong. We provide company formation and corporate services. We have with us today Daniel Broby, who is a leading member of the faculty at Strathclyde University in the department of accounting and finance. He has worked in the fund management industry for over 30 years across several c-level positions, starting from a chief executive officer a chief investment officer as well as a chief portfolio manager at leading funds managers. He also holds several directorships at asset managers.

Let us go through the presentation. I am going to pass you across to Daniel.

Daniel

Good afternoon everyone and thank you Owiss. So, what we're going to talk about today is good governance and good governance as related to the non-executive director. That involves talking about the structure of a company board and looking at how the vision and the mission of a company effectively shape the direction that that company takes. We will also talk about how the rules of a company are set out in the governing document and the legal duties that the director has, as well as the stewardship of the assets that he is responsible for. This all comes down to the operating environment of a company and how the directors oversee the work of the organization and importantly the audit and remuneration committee which again I will come on to.

So, good governance essentially is like a house. It is built on pillars and all those pillars have to be in place. Those pillars are leadership and integrity and we're going to come on to a lot about integrity because for the non-executive director that is really one of the prime things that he is there to represent decision making and risk control, but also to make the board effective and I am going to touch on diversity as well because that is important.

I will show academic evidence to show that is the case but also openness and accountability and all that makes the organization have a purpose and a direction. The non-executives are central to good governance because they provide this internal mechanism to make sure that it works. Now the board of governors have a duty and a role to effectively address what's called an agency problem. The problem is that the management of a company are not always aligned to what the shareholders of the company are aligned to and so in that respect managers and equity holders have this friction and what you want is a policeman, so to speak, to ensure that is handled well and that's the non-executive, but also there are other frictions that occur like, for example, between equity holders and creditors between capital contributors and other stakeholders. By other stakeholders we can mean anything from the regulator right the way through to the customer. If you want a good academic piece on this there's a number of papers which I am going to refer to during the presentation. John and Zenbett effectively did a very good piece in the journal of banking and finance on corporate governance and board effectiveness.

What it all boils down to, save you having to read, that is best practice so it's best practice in decision making, how do you make good decisions? but also how do you make independent decisions, particularly for the non-executive directors who are there obviously ensuring this role where conflicts of interest are handled? Likewise meeting attendance, we had an issue a decade ago where some directors were taking non-executive directorships that they couldn't actually handle. Some people had over a thousand of them, you can't possibly attend that many meetings so what you need to do is put time and effort into the success of the company.

Likewise for the board itself the permanent board, they need to be sure that the recruitment of the right people is done in a way that is systematic and obviously in the best interests of the company and its members its shareholders. The board is the strategy piece, it's the piece that does the planning so you have to ensure that obviously best practice in the way that you determine strategy is actually done. The chief executive has obvious oversight of the company, better than anyone else and in that respect his interaction with the non-executives is quite crucial.

Now just make a provision here what I am going to talk about today is the single unitary board, that is the Anglo-Saxon approach to ports there are other board structures, for example, there's a supervisory board structure in Germany where you have a dual board between the strategy board and the supervisory board, which is made up of people from the unions and other stakeholders of the company. That is run in a very different way but the broad principles and best practices still apply. The audit is very important, I am going to drill down into the audit later on rules and regulations.

We all know about rules and regulations, but bylaws and policies are extremely important to a board and in fact some boards even have a policy committee that regularly reviews policies, so then I will talk about committees and which committees are necessary and which are nice to have and also how you handle complaints and investigations.

Let us now talk about the competency of the board. You want your board to deliver value. You have to start to think about what the skills of the board are what are their competencies and what sort of diversity in the board should you have to achieve that? You must begin from understanding that competencies differ between different people and in that respect the board should really try to look for differences when you look at many of the boards. Years ago, companies were very singular in their profile, male middle-aged, perhaps older with similar backgrounds of schooling university education and such like and possibly even the same career patterns. Nowadays, we realize that that isn't actually creative to value added so I will go and come back onto that as to how you can improve board competencies essentially what you want is to have the board members bring skill to the table and again I will talk about how to do that. The character of the directors and how they interact with things is also important. You can't have someone who's too timid, who is bright and understands all the issues but essentially doesn't tell anyone about that, they just grumble about it afterwards, that unfortunately just being able to understand the direction of the business isn't as the same as contributing to the direction of the board. So what are the attributes are worth your consideration? self-awareness, so again, it's a personal thing you have to have people who are direct to level material you need people with integrity and also you need high ethical standards and bear in mind that everyone you bring on board will impact the dynamics of the board in a different way by their contribution. They will shape and direct it. Their personalities will move the board in different directions, again that is why you need diversity. How do you go about getting that diversity? Well the first thing you can do is create a matrix, at the board level you can actually say well what have our directors got and what do they bring to the table? Director ‘A’ may have industry experience, Director ‘B’ might not but on the other hand you might have knowledge about abroad public sector policy which may help with the regulators.

For example, you may have someone who understands the legislative process, so if you've got a business that you want to effectively move into a new area, say in a digital world where the laws haven't yet quite caught up with the reality of your e-business, if that's what it is then you might want that sort of skill and you can map your skill across all your directors and you can see where your holes lie. You can make a specification specifically for the non-executive that fulfills the criteria you are looking for. What are those additional competencies? They can be broken up into behavioral, into governance and into technical. Behavioral again, bear in mind that everyone's individual psychology impacts the board, but you know are they team players or are they collaborative? Do what they say, does it communicate clearly? Are they sound in their approach?

We talked about integrity but do they also have things like listening skills? Can they listen to the employees as well as the management as well as the board and can they understand the effectiveness of how decision-making process works? It is not good enough just to get a whole group of people around the table and say you've got a board of directors, you need to have a willingness to devote time and energy in getting that right and that's governance.

In terms of governance effectively there's a difference between governance of smaller companies and larger companies but there's also what you bring to the table in terms of, do you have financial literacy? Remember as a board member you're responsible for signing off the report and accounts and audited by a third party, by an auditor and prepared for externally by an accountant from your internal financial resources, but you have to make sure that you are representing a true and fair view to your members which means signing off those accounts and understanding how they're prepared.

At the same time as having these skills you also must think strategically because you would want to drive the business forward and thinking strategically is a very different skill. From a broad perspective it is one of the most important things. One of the new innovations that's coming to board practice is something called a deep dive because what happens is when you've got all these other things like you're signing off accounts, like going through your various bits and pieces on preparing the policy documents and going through remuneration and so forth you tend to find that actually, that's taken up a lot of your time, you don't have time to think strategically so what you do is you set aside time in your board meeting for a deep dive into an issue you want to spend time on. That issue is typically identified at a board retreat where effectively you just think strategically and get away from the minutes of management which is really what a board should be trying to do at all times. Risk management is important, there's no point having a great company delivering returns if the risk blows those returns up, so risk management and how you handle risk and how the risk committee interacts with the board is again very important and that comes into the client compliance focus. How do you comply with the laws and regulations that are there and all that good governance leads to profile and reputation, which is important to the business and how the business is perceived? Now, having said all that, as though that isn't enough for one person to have or for collectively a board to have, you also need technical skills. Now, not everyone can have all the technical skills, you can have someone who has a childhood financial analyst or an ACCA on the board for financial experience but you may also need legal experience. You may need someone if you're an IT business, in fact one of the deficiencies in a lot of boards who don't go through the matrix approach I have just shown is that actually they tend not to have the degree of its competence in this digital world that they actually need we also need people to understand public relations. You need people to understand human resources and so forth. Now, the board itself might have those people on the board because your human resource manager might also be a director of the company and therefore is reporting with his experience likewise your public relations manager or your marketing manager may be there, you'll be or represented as a business direct development director. So again, it comes down to why we want to map the skills and hopefully those are the people of sufficient competence that they're able to guide and direct the board with facts and knowledge so that they can make those strategic decisions. Obviously, the CEO the chief executive, is really the guy who is effectively day-to-day implementing the strategy of the board and he should have all of these skills and be able to understand and communicate them. Where he's got deficiencies, he should definitely go out and hire to meet those deficiencies, so being a director comes with duties and those duties actually technically don't come with executive powers, so you can have a director who is not an executive so a non-executive who is someone who's there for the oversight and strategy but is not in the day-to-day management company.

The majority of directors are likely to be employees of the company and in that respect they need the contract of employment and very clear divisions of what they actually are meant to do and what their terms of reference are whether they have that or not.

Both non-executives and directors have a duty to the company and likewise in the event that things go wrong, and no one likes to talk about that, but if you're coming on board as a director you are also responsible when things go wrong as well. Effectively an insolvency threatens to the creditors rather than the members, in other words, to the people you borrowed money from. So, directors are subject to a number of other statutory requirements and restrictions now what I am going to talk about, I am not going to talk about any specific jurisdiction but these typically apply in order restrictions whether you're in Dubai, the UK, the US or offshore in the Cayman islands or whatever, you will have effectively specially requirements.

The most common strategy requirements is clearly to keep books and records and these had to be kept well and I will come back to that later on how you keep minutes. There are restrictions on entering into certain types of transactions so these are related party transactions essentially you should not be buying your house off your wife and putting it into the company as an inflated value or something like that. There is a whole set of related type transactions and typically jurisdictionally these are spelled out by the letter of the law. If there's a breach of any duties or requirements the director can be struck off, he can be disqualified from being a director and this is the important one, he also has personal liability and I will come on to that. Insurance can cover that liability, so you can get something effectively called directors indemnity insurance. I would suggest that you really shouldn't take a position as a director unless that insurance has been taken out because the world is a very complex place and litigation does happen so your responsibilities then are the strategic direction of the company to get it going in the right direction through discussion of board meetings, off sites and deep dives and so forth. This is not just a strategy but you need someone to implement that strategy.

The vision mission they effectively must be the management and it is your duty to ensure that there is good management, good people and that they are doing the right thing which involves monitoring of their activities. Now, in my experience on boards the one thing that is counterproductive to the above-tooth strategy and management on the monitoring side is the amount of information. You can have too much as well as too little information. In terms of too much information, if you've got a board pack that sent you a week before that's pages long and very important information is included about, for example, an instance of corporate fraud that effectively doesn't correspond to good monitoring, giving information has to be done in a way and structured by the board in a way that is informative and gets the right information to them in a timely fashion. All of that obviously impacts the strategy and there's another academic paper that I can refer you to in the journal of management science, which shows the impact of getting all of this right on effectively the direction of the board. Once you've found the right person and you found a good non-exit or full-time board member and you bring them on board you need to induct them because they don't know enough about the company at that stage. They might have industry experience but essentially you need to induct them into the way that the company does business. Now, they might want to change that but that does not matter, you have to show them how the business model works, what the drivers of profitability and performance are at that stage and then as part of that induction. You need to a review of what happened at least over the last months, if not before, which means going through all the board papers and minutes to understand what the current issues are to make them effective, hopefully from day one, so before they go to their first board meeting they have this. I would suggest meeting with key executives and interviewing them for one hour with the head of each division.

Some companies do not do that because it's time consuming but I think that gives more depth to how you look at a business and personally, I also like to do a site visit. That comes from my background in fund management where I like to see the nuts and bolts of how a business is doing. You learn a lot from site visits, you know whether the server is on its last legs years old and sort of in a room that's got an air conditioner that's faulty that tells you a lot about the IT as much as speaking to the IT director, who tells you he's got state-of-the-art equipment. You then need to have the regulatory and governance issues explained to you in a way so that you know your responsibilities, depending upon the industry vertical that you are in.

Take case such as Enron, an energy company that decided it would be better going into trading energy rather than producing it. World finance awarded Enron the corporate governance awards, which was probably the most embarrassing award ever given by World finance because as you know Enron was one of the biggest financial frauds and collapses in the history of the United States.

What did they do wrong? Well they did not separate the CEO and chairman effectively, they only had one woman out of board directors, they put on their boards several industry insiders and politicians. Why? Because they were big names! Before this award they got, they actually waived their code of ethics. A big red flag effectively then what they did was they started estimating profits and then booking those estimated profits, again, another red flag that should have come up in the discussion during the audit process.

I will come back to the audit process and how to do that well, but obviously when you've got a high-profile politician on your board and you've got trophy board members rather than functioning board members some of these things can get missed. Essentially what this was, was an aggressively trading financially derivatives company, in other words, an unregulated bank that essentially was using leverage off-balance sheets instruments and therefore when it went wrong it blew up.

In terms of the structure of the board, another academic paper you can look up if you're interested is Netter and Yang, who delve into the determinants of board structure and everything I am saying about board structure comes from academic evidence, it's not just my own thoughts on what makes good governance deliver value to a board and in that respect there are different models. Broadly speaking as the diagrammatic shows you've got your board of directors and you need a company secretary who's recording and keeping those records and that board of directors effectively oversees the executive committee and they do that effectively through the audit committee, governance committees and the remuneration committees and a bunch of other committees, in this modern day maybe a CSR committee, border code conduct or a risk committee.

All of these things add up to good governance so the chair, notice I didn't say chairman, again more enlightened these days, the chair of the board is very important and in fact I have just said from the Enron case study, it's probably a good idea to separate the chair from the CEO role so someone can keep heads apart or bang heads together as needs be and to keep you to your agenda. If you want to know more about the chair another academic paper, Coles and Hesley from the journal of management.

In terms of the role of the chair, making sure that the objectives of the meeting are met and setting the agenda is actually very important if you think of the borders of making the strategic direction. If you're setting the agenda, you've got the ability to set the agenda of which way you're going to head towards your strategic agenda and they are responsible for everything that's recorded and carried out in that respect. To ensure that all the policies are up to date and kept updated as they go along, I would suggest that they are there to ensure that there's full participation. Non-participation at board meetings results in poor governance. Somebody can be ill and not attend but I actually think it's a good idea to report attendance in your reporting accounts because then you can actually see if your board members are being good on their attendance or not, and obviously keeping strictly to time limits unless it's warranted to extend them, it's all very well being very good at time but there's also the issue that you want to be able to go into an issue if you identify an issue that needs more time spent on.

Let's talk about the company secretary. Eventually this can be an in-house position or externally outsourced and they maintain the step statutory registers including registered members. If you do it in-house I really suggest you get someone who is chartered or certified to do that as a dedicated role outsourcing it is cheaper than hiring a dedicated person but it is very important to ensure that all the statutory forms are filled properly.

Why wouldn't everyone outsource it? Well one, cost sometimes, it can be very expensive for very small companies but large companies, I would suggest you do it unless you have very specific industry level regulatory issues like, for example, in financial companies. For example, a pension administrator that I was on the board of, we needed an in-house, effectively, company secretary because there are a number of things that we had to do with the pensions regulator that were in addition to what the outsourced company secretary would know about outside of their purview of knowledge. Likewise, they should be able to be on top of all the deadlines and so forth and keep the auditors and members duly informed of meetings and so forth.

Remember that when you are signing an audit, you need the auditors to come and present to the board of directors. You need to fit in with other people's busy schedules you can't just suddenly announce a meeting and expect someone can sign off on a reporting account and expect that a highly paid auditor is necessarily got that time in his diary free. There is a lot of coordination in getting the board going and I would also say that actually it's quite important to have a budget for the board. Many people think of this as essentially a group of people meeting or whatever but when you meet off-site, on-site or whatever it can be an expensive process when you get people together, coordinated with their travel and so forth. Again, another side you need to obviously ensure is who has access to what information, who can review what and effectively what is done in terms of custody and when you sign off? You are only applying a seal to a document once a resolution has been made by the full board of directors so as a result, these are very important document functions of the company and also who the signatories of the company are.

All too often companies forget to update their signatories with, for example banks, if you've got banks and one of the directors has rotated off, sometimes the signatory people forget about that and that actually is not good governance particularly when you're talking about finances. In terms of taking minutes, what do you want to do? You want to record and document so just be clear about it. You have got to give due notice make sure that there's a minute book that can be inspected and you want to record who's present, who's chair and who's taking the minutes.

That is important because you don't want too much word-smithing of the minutes taking place and if you vote on resolutions you need that recorded because that is legally binding the company when you vote on a resolution but also when you're having your meeting make sure that when you come to a decision to do something. We are going to start a new business line, assign responsibility you put some of these initials two initials to do that to assign that responsibility. Who is responsible from a management point of view?

I am ctually doing it day to day and who's responsible from a board point of view in other words for ensuring that strategically, it takes place, so two sets of initials, if something is strategic and also the time frame, don't just give open-ended ‘we will do this’ that's not very helpful. If you want to have a tightly run ship, referral to board meeting committees and so forth.

If it's an important issue but if you don't want to take the board time, do it subcontract to a board committee and the board committee can just report the conclusion to you, for example, find a new hire for human resources. We do not need to spend time doing that at the board level the remuneration and executive committee can do that for us. When you come to the minutes read and review them, make sure that actually they are a proper legal record of the facts and who said what and be sure that at each board meeting you review them line by line and I am quite serious about that because these are legally the record of your meetings.

After you've gone through the minutes it's good practice just to review last minutes and see whether each of those actions has been taken place and I would suggest you have an excel or some format where you can record the progress and say whether an action is closed, open, on time or not. In fact, like the accountants do color coding red, orange, green as to whether actions have been actioned. The articles of associations are rules setting out the governing document and SFM will help you with that so that's obviously something I don't need to spend time on but they are the power documents of the company itself, and how voting and election of officers and so forth are done, so as a non-executive you have to be familiar on reading them through is a prerequisite for the job.

I said a lot about the vision and mission of a company and every company should spend time on their vision and mission. In fact, I have been on boards where we spent many hours just word-smithing the one, two sentence vision and mission. Why? Because it is so important. Every word matters, sends a message about what you want to do. Do you want to be socially inclusive? Do you want to be a leader in the field? Do you want to be globally leading? These words actually all matter when it comes down to the organization and gets down to what people are reading from the board remember, not every worker/ employee of a company is privy to the board and therefore they get a very distilled version of what comes from it. You must be precise as to how you communicate.

There are legal duties following the company's constitution. It is the most important and promoting the success of that company. Exercising independent judgment, there is also the duty to exercise reasonable care skill and diligence and in that respect, you have what's called a fiduciary responsibility. That is a word derived from the Dutch that's been co-opted into American language but the fiduciary responsibility, the way I view it, is treat it like it's your own.

You know how would you like to be treated and you have a very high bar because hopefully you treat yourself and your family very well and not to accept benefits and inducements or whatever to preferred parties and so forth. In every jurisdiction you have anti-bribery regulations and such like and things like anti-terrorist regulations, you have to be aware of what those regulations are and how they apply to you. Not every jurisdiction has them but what every jurisdiction does have is taxation. The two things certain in life which is effectively taxation and death. So, the company is responsible for paying corporation tax but also for things like value added tax payroll tax and making sure that all those are filed and correctly reported for.

You as a director are legally bound to ensure that that happens in a good way. There are a whole bunch of other laws and I do not need to go into them, but it's health and safety, you can't have your employees tripping over and ending up in hospital for a long period of time. Likewise, there are consumer rights, the people you sell stuff to, are you selling it in a fair and a fair way was competition law, are you doing the right thing in a competitive environment? Nowadays, in the digital World, data is valuable so there are global data protection regulations that also you must be cognizant of. In some jurisdictions you can get fined, for example in Europe, a percentage of your global turnover, if you breach these.

Not only is it important to make sure that you've got it correct and that you don't let any crazy hacker get into your system and steal your data, but you actually have to be sure because this could actually be something that could really impact the bottom line of the business.

Are you licensed? Do your products have patents? What about food safety and hygiene? Intellectual property and so forth? There is a whole lot of stuff that comes into it and I have not even mentioned the legal requirements of regulated industries. In my industry finance, it is very important but likewise the health industry, producing vaccines, as you all now know, industries like the nuclear power industry, clearly you've got to understand the legal rep, the law and regulations relating to that. All industries have some degree of regulation, personal liability and all these skills and attributes and getting it right and so forth, don't they sound overbearing for the role of a director?

The role of the director also comes with personal liability. Now, companies have limited liability but that doesn't mean that you as a director don't have that if you say, an entrepreneur and you put your house on the line to get the loan to push the business forward, you might have signed a personal guarantee. Then regardless of what you do on the board, you are personally liable. Effectively, if the company is trading in an insolvent man manner and you have not proposed effectively winding down the company or seeking new capital or something like that, then you are personally liable for that. What about the assets that you dispose? Well you have an obligation to do that at arm's length. Valuations and people have the right to question transactions. If that is not done you could potentially have personal liability if the right advice has not been sought on. Disposal or acquisition of assets, hence the reason why our friends in wall street get such nice fees for that sort of business. What about how effectively you interact on your finances with a company? Lending from a company, to an individual in certain jurisdictions is totally prohibited but what happens with associated companies? What happens with employee share options schemes? These need to be investigated. Probably best to bring in external advice and make sure that you are doing the right thing and remember I said the board should have a budget. As a non-executive director you should have a call on that budget to bring in professional third party advice where you don't know something, so, if you don't know whether or not a certain transaction is right, you should bring in independent advice and have the board budget pay for that, so at least you're giving your best advice. It is all about core values and setting and safeguarding these visions. You have got to have common sense and purpose, so I've talked about the diversity of a board but actually you've got companies are have their own identity and you need to preserve that identity.

Some companies have a social identity for example they want to do something for the local community as much as something else, you need to preserve that and obviously communicate that as well as providing this long-term direction as well as communicating internally. A lot of boards make the mistake of ‘I’m very important as a board and director non-executive director let's communicate externally’ and they forget about the internal communication of what they're trying to do and remember there's this difference between management and the members. This is a conflict of interest, so you want to ensure that the message of the board is also being communicated properly internally. I would say that some other values come into it like inclusiveness, participation, quality and openness but those come with the individual as well. We are talking about stewardship of assets that is what you're doing when you're on the board. You are responsible for making sure that other people's money, their investments and the members the shareholders investments are looked after, the company's equipment goods and properties are secure and are effectively making a return on the investment that has been made in them.

In that respect the non-executive needs to ensure that all these assets are well managed. Having a carpool is fine but you know you need to make sure that those cars are maintained or whatever and that is properly depreciated on the balance sheet and so forth. Just buying a car for a director is not the same thing as being responsible about the way that you do it.

The non-executive must be prepared to resign, he has got to be prepared to say okay you don't do it this way, I don't feel comfortable with this and I resign. Therefore, a lot of the people who become non-executives are very high profile because their reputation is worth more than the salary they bring from the non-executive position. Sadly, that's why there's a bit of a glass ceiling as to how to become a non-executive because obviously for most people the salary of a non-executive is something which is more enticing and therefore they tend to pay lip service to a powerful CEO. Not being prepared to resign. This is a very personal issue but I just think that people have to think about this with their own integrity and all of that comes down to the operating environment of company that's all continually changing. Every board meeting will be different, one non-executive must be on top of that and ensure that all the policies and services and everything fits into how you do it. I am going to go very quickly through the next slides because these are typical business school stuff, so you can read them in your own time. You can do one when you are determining strategic direction using swot analysis. We probably all know that strength weakness entities and threats. I will not spend time on that.

You need to understand the drivers of the business, not just from the financial perspective but from the customer perspective, internal customer perspective, learning and growth, and the business process less known from a business school perspective is what we call pest analysis which is political, economic, social and technological. Therefore, some larger companies have politicians, for example on the board, to get the holistic larger societal oversight issues. There you can read the headlines in your own time. The management committee should understand those but it's part of the board and the non-executive to give the strategic view from that. You know, how is taxation and politics influencing our business what about regulation? Will it change in the long run because politics is going to change? All these things are important discussions

Five porters. This one is a thought analysis in terms of overseeing the organization. This is where we come to the committees and so forth and no one is expected to be an expert but this is where the non-executive needs to be sure that the committee work is being done in the right way.

Audit and committee audits and renumeration committee are vital and every company should have it. There are two pieces of academic works here Daflan and Sullivan, Canyon Perk, essentially, they found the independent audit committees effectively delivered better results and I am not surprised by that. It is an academic fact and that top management pay is better overseen by effectively having a remuneration committee so I would strongly recommend every board have an audit and remuneration committee. The audit committee is responsible both internal and external and mostly down to objectivity structure risk management staffing and how the timeline of the audit is done.

Most people like to hear about when talking about non-executives what you get paid. Well here there is a split and a dichotomy between the size of the company. We all know that the directors of very large listed companies on the New York stock exchange to buy stock exchange or London stock exchange get paid in very large sums of money, potentially up to millions of pounds. However, the majority of companies are in terms of number rather than size are what you would call small medium enterprises, and in that respect there's a difference in pay between what you get based upon what industry you're in, largely because that also impacts the sort of size and market dominance of your company. So, pharmaceuticals for non-executives tend to be in the data on the chart on the left comes from standards and poors from ISS analytics. The non-executives in the pharma industry tend to get the most and the banking industry ironically tends to get the least as non-executive.

Although the bankers themselves, the executive directors tend to be known as the highest paid and their non-executives do not because of the scrutiny that's gone into their salaries. There is a hierarchy and it goes down from there to what you get from smaller companies and so forth and smaller company board from a non-executive point of view still need to pay fairly well because remember what I have said about personal liability.

To conclude, what do we have? We're talking about good governance, reducing these agency problems between the members and the board and the management the non-executive is central to that. You really should as you've heard there are all these issues so the non-executive is there to police the board but by being a policeman in that respect, he has both legal and moral responsibilities. He should also be bringing skill to the table and effectively his experience on how to deal with various issues so there is my own compliance disclaimer and I am open for questions. I will return you to Owiss for that.

Owiss

Thank you very much Daniel. Let me give you a couple of the questions that I have already received.

The first one is stating an executive director is liable for actions or wrongdoings of the company just like a regular director, taking an example when there are static statutory violations by a company where directors are also the integrable.

Daniel

For that the answer to that is yes. As I said the directors have liability and what you should do is ensure you've got directors liability insurance and bear in mind you can be liable for a whole lot of stuff which you wouldn't think you're liable for. Corporate homicide is a thing in some countries. A company can be guilty of murder and the board of directors ultimately is a responsible entity in that respect, likewise, bribery and corruption, if the company officials knowingly give and make bribes or take them you can be responsible for that under certain anti-bribery legislation, particularly for example, the legislation we have here in the United Kingdom.

Owiss

Thank you very much. Another question, it states I have seen some boards having a fair number of non-executive directors. Is there is a limitation or any limitation on the number of the non-executive directors on the board? If not do you have a suggestion on what and how many would be as a reasonable ratio between a non-executive and an executive of board?

Daniel

Well firstly, the restrictions on the numbers would come from the memorandum and articles of association, which SFM would help you with. There is no correct size. If it is not there however there are optimal sizes for making decisions and there are optimal sizes for having efficient and short meetings and they're also optimal sizes for avoiding having this. CEO run roughshod over some of the better input, he gets from aboard so my view would be that you do need an independent as well as a non-executive on the board. More than one is of each is better. It would be nice to see an independent chairman as well and the rest of the board composition from executive directors. The more non-executives the better, until you start getting to the law of diminishing returns, so a board or just being effective in my opinion.

Owiss

Okay, thank you. Can a director refuse a decision that is already made by the board of shareholders or even a board of directors? In other words, from what we understand from your slides is that a non-executive has the right to resign or he needs to prepare himself to resign in case he would like to take an immediate action but can he refuse without resigning? Will there be an impact of his refusal of taking a certain decision?

Daniel

Yes of course. Well of course the directors are not directing themselves, they're directing the management, so the director wouldn't be directed to do something, however what happens is that when you come to make a decision that impacts the business you will make a resolution and that will be recorded in the board minutes and you can ask the non-executive effectively vote against that resolution. You can abstain from that resolution and that will be minuted and documented. You do not need to resign you could just say ‘I am sorry but I disagree with this and I would like that documented’.

Owiss

What if within a certain number of years a non-executive or even an executive director, resigned from their exercise in an x company and then after five years apparently following a certain audit, an issue appeared in the past when he was actually a director and he signed on certain decision. Will he be liable and how many years of liability will stay?

Daniel

Firstly, before I answer the question, I did not mention that there should be regular rotation of directors. This is to specifically to stop that sort of thing happening. So, in a term, limit to three years or have to be re-elected after three years.

In terms of the corporate liability, non-executive liability is when the decision is made just after leaving the board, this doesn't necessarily take the fact that he made decisions in the past and certainly in many high-profile fraud cases the person who's perpetrated the fraud has long since gone but obviously, is culpable and sadly not enough to get put into prison but obviously as you know some of them do.

Owiss

I have another question here, can we apply all these principles that we have discussed today for the non-executive for a non-profitable organization? Would that apply for its team as it applies for a company?

Daniel

Most certainly yes. I have been on the board of a few non-profits and in fact they are typically the champions of good practice and so forth, because their member-led organizations they have people who have got data's or are paying subscriptions and so they very much like supported on volunteer time. Yes, they most definitely require good governance.

Owiss

Okay well noted, one more. What if a non-executive is absent to a meeting aboard and a decision was taken at that time, it seems that there is an unethical decision made?

Preclusions are already in place; would he be liable for something that he did not sign because he was not present during that meeting?

Daniel

All directors should be informed of meetings in a timely fashion with a board pack that will give them the resolutions that will be voted on so essentially if he has seen the board pack and there's a resolution he should have given his voting intentions on that resolution, even if he can't make the meeting.

In terms of what happens, if this resolution just bubbles up in in the meeting well obviously if he is not there and that happens, individually he is not responsible.

It comes down to why you need board insurance, the director's indemnity insurance.

Owiss

Okay thank you. One last question for today. As a director or an executive, is it okay to assign a duty and immediately act by taking on the duty himself?

Daniel

For the director to suggest something and then do it himself yes, if he is an executive director and it is improved by resolution then yes. A non-executive director has no executive power so then the answer is no.

Owiss

Okay thank you very much. I think we are getting close to the end of our session today, I would like to thank you very much Daniel for your input and for the valuable information that you have shared with us today. Thank you to all for our attendees today. If you have any questions please don’t hesitate to contact us again and we'll be more than happy assisting you offline and taking this discussion further.

Thank you again Daniel and for those who were leaving us comments on the chat, yes we will be sharing the link of video and the slides with you so that you can have it and you can go through it again. if you have a last word Daniel, I will leave it to you.

Daniel

Thank you everyone for listening and as I said it is all about best practice so let's make the world and the companies we work for a better place. Thank you very much, I appreciate your help today and thank you for being with us. Keep safe everyone and wish you all to have a good day.