Who is watching the NEDs watching the execs?

Would Steinhoff have been any worse off if its supervisory board had been populated by feckless individuals with no experience of corporate affairs and absolutely no desire to supervise the executives?

Of course, as we all know, Steinhoff’s supervisory board was replete with highly skilled and experienced individuals who we are told were rigorously committed to carrying out their fiduciary duties. And while the failed furniture retailer was ultimately a deliberate, sophisticated fraud – driven by a CEO who used falsified documents and outright bullying to conceal his misdeeds – the question of whether alert, truly independent non-executive directors might have caught it earlier remains uncomfortably open.

And how about EOH? Should the non-executive directors have been able to pick up the “serious governance failings” that nearly destroyed the company in 2018?

Or Tongaat? How many of the non-executive directors met with Investec analyst Anthony Geard after he called on Tongaat CEO Peter Staude to resign because of the sugar company’s “appalling” financial results in 2018? For that matter, did any of them follow up on the stinging criticisms of the group’s capital allocation decisions made by shareholder activist Chris Logan back in 2014? It turned out to be at the root of the problems that eventually wiped out the company.

How much serious interrogation of the 2014 Australian acquisition of David Jones did the Woolworths non-executive directors do? Serious interrogation independent of the executive directors.

Did Mr Price’s non-executives (again, without the executives) pound the streets of Germany, Austria, Croatia, Italy, Slovenia, the Czech Republic or Poland to get a sense of just how attractive the controversial acquisition of NKD might or might not be?

And then, of course, there’s Spar. Perhaps its comparatively new crop of non-executives has learnt from the expensive lessons paid by others and are looking more closely – and independently – at the group’s ongoing problem areas.

Nobody knows

You see, the big problem with non-executive directors is that nobody outside the boardroom has a clue about how well or not they’re performing their duties. When a company implodes, it’s impossible to know what responsibility the non-executives should bear.

For that matter, when a company does remarkably well, how much credit should be showered on the non-executives?

The inability of outsiders – that is, everyone, including shareholders, who are not members of the board – to judge the contribution of non-executive directors is just one reason their remuneration is so problematic.

Another is that non-executive directors, or NEDs, if you like, should be prepared to challenge (albeit diplomatically) executive directors when necessary, but may be discouraged from doing so if they feel it might put their well-remunerated sinecure at risk.

And how clever is it to pay each NED precisely the same amount? Payment is generally based on attendance at board meetings or the number and type of committees they sit on, rather than the actual contribution each one made. This method of remuneration assumes each director contributed equally, which is hardly a way to discourage the laggards from being less laggardish.

‘Compensation falls short’

Despite all the difficulties in determining what contribution they make, it seems NEDs reckon they’re being underpaid for whatever it is they actually do. Or at least the ones in the UK do.

That’s according to a recently released paper by the UK’s Institute of Directors (IoD). “Currently, there is a widespread perception among NEDs that compensation falls short …”

This is one of the many findings of a commission set up last year to determine if it is time to update the role of NEDs, given that it has been 22 years since the Higgs Review. That review laid the foundations for modern UK corporate governance by defining the role, composition and independence of NEDs. At the time, the Higgs Review’s push to strengthen the role and independence of NEDs was regarded as a significant overhaul of board governance.

Higgs’ recommendations certainly looked good on paper. NEDs should constructively challenge and contribute to the development of the strategy. They should scrutinise management’s performance in meeting agreed goals and objectives, and monitor performance reporting.

NEDs, said the Higgs Review, should satisfy themselves that financial information is accurate and that financial controls and risk management systems are robust and defensible.

Finally, NEDs should be responsible for determining appropriate levels of remuneration for executive directors and have a prime role in appointing – and where necessary removing – senior management, as well as in succession planning.

That was the list of recommendations launched back in 2003, and it certainly amounts to an impressive set of demands. Few shareholders would begrudge paying directors decent fees for performing these tasks effectively. But again, the reality is that very few shareholders know if they are being performed effectively.

Afraid to challenge management

And what should we make of the fact that a 2025 survey of 2,400 global CEOs found that fewer than a quarter feel their boards are supporting them effectively? It seems nobody is happy.

A recent IoD survey of its members identified several obstacles to effective non-executive directorships. The five biggest were: reticence among NEDs to challenge management or major shareholders robustly; poor information flows from management; lack of NED engagement with the wider organisation and other stakeholders; insufficient curiosity among NEDs; and poor chairmanship.

All in all, it’s hardly surprising that the latest IoD commission reckons it’s time for another overhaul. The Higgs Review was framed for a different era, says commission chair Baroness Evans of Bowes Park – “one concerned with formal accountability and structural balance, not the complexity, speed and stakeholder pressures of today’s environment”.

What Baroness Evans’ commission sought to find out was whether NEDs continue to add measurable value to boards and governance, and to identify the key challenges to the role’s execution. It also wanted to examine how boards can move from risk avoidance and procedural compliance to active stewardship and strategic engagement.

After much research and interviewing, the commission identified four core findings:

• NED independence should be conceived less narrowly, focusing on independence of mind and cognitive diversity, as well as criteria to avoid potential conflicts of interest.
• Boards should be less conservative in their approach to NED recruitment, moving beyond the traditional pipeline.
• NEDs must be more engaged and curious, bringing greater energy to the role.
• Boards should spend more time within the business to better understand and support its operations.

If boards did rise to these expectations, it would be easier to accept the commission’s recommendation that NEDs be remunerated “in a way that better reflects the complexity, time demands, and responsibilities of the role”. Unfortunately, “complexity, time demands and responsibilities” merely describes what’s required, not what’s achieved.

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