The Importance of Non-Executive Directors during the Coronavirus Pandemic

Kerman & Co website
August 7, 2020 Publications

In 2019 the Quoted Companies Alliance (QCA) and Downing LLP commissioned Henley Business School to consider the role NEDs play within listed growth companies and companies considering an IPO. Following 32 in-depth interviews with investors and directors and 3 focus groups deliberations, the QCA published its research report on The Role of Non-Executive Directors in Growth Companies, in September 2019, setting out the desired responsibilities of NEDs depending on the size and complexity of a company.

The QCA has recently published a further analysis by Filipe Morais (Lecturer in Governance at Henley Business School and part of the research team of the September 2019 report) considering the factors NEDs in growth companies need to focus on during the Coronavirus pandemic.

This comes as no surprise that, in the current uncertain climate, the specialist experience and skillsets of NEDs are needed more than ever.

The Companies Act 2006 makes no distinction between the different categories of directors of a company. All directors are required to comply with the relevant conduct and duties provisions of the Act.

In common practice, however, the directors of listed companies are classified depending on their role in the company: those involved in the day-to-day management, or who are full-time employees, of the company (Executive Directors) and those not involved in the management of the company (Non-Executive Directors).

Non-Executive Directors (NEDs) play an important role in achieving strong corporate governance and promoting the performance of the company. They provide crucial independent judgment on the issues faced by the company.

A summary of the key insights of Mr Morais' analysis is outlined below.

Small company with a low level of complexity

For small entrepreneurial-led companies, it may be the case that the CEO-founders have a substantial ownership stake and the business does not have a very complex operating model. Where this dynamic exists, the current pandemic has highlighted the need for NEDs to “keep the CEO on track”. In the case of many small companies, CEOs will not have extensive experience of operating a public company. It is therefore crucial that, when their decisions may have a serious impact on the survival of the company, the CEOs can draw on the public markets experience and knowledge of the NEDs. The NEDs will need to provide the potentially difficult independent advice (free from the emotional connection to the company) needed for the survival of the company.

Small company with a high level of complexity

Where a company is small but has a high level of complexity, it is likely that the company is still building its management team. Due to the specific pressures that the coronavirus crisis has brought (e.g. the need for strong internal processes and the survival of the company), those management teams which survive will hopefully have developed crucial skills for the future. The NEDs will need to assist this by highlighting to the Executive Directors the important aspects of the business and establish an evidence -based discipline as to how the team operates.

Large company with a low level of complexity

The impact of the coronavirus crisis on these companies (large but with established, fairly simple, business models) may range from catastrophic to hardly any impact. The NEDs will therefore need to provide an independent view on the changes needed to return to previous growth. Where the business has scaled back but is stable, the Executive Directors may be hesitant to make such changes. The NEDs' crisis and change management skills will be fundamental in facing the difficult decisions needed to promote the future success of the company.

Large company with a high level of complexity

Where the business model of a large company was already complex, the coronavirus pandemic will likely present further complications. In this scenario, the NEDs will need to understand the agendas and interests of the other directors throughout the different stages of the crisis. This should allow each NED to raise important questions whilst taking into account both the evidence available and the multiple interests and positions of the board.

Regardless of the size and complexity of the company, the skillset of the NEDs will need to compliment the executive team to successfully navigate the current climate. Whilst the coronavirus has undoubtedly caused serious issues for many businesses, those companies that survive this crisis can use it as an opportunity to reflect on any weakness that it has exposed and the requirements of their board for future success.

A link to our Covid-19 hub is here where you can find further advice notes and which is updated on a regular basis.

Should you require further information about anything covered in this article, please contact Peter Kohl, Joan Yu, Arthur Horsfall or your usual contact at the firm.

Originally published at Kermanco.com prior to the firm’s combination with Armstrong Teasdale in early 2021.

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