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Outside edge

The last bastion of the free lunch is set to crumble.

While it might be harsh to imply that the role of the non-executive director is quite the well-paid, cushy number that some make it out to be, it is fair to say that, for many, such appointments have amounted to little more than a genteel way of topping up the pension fund at the sunnier end of a long, if not illustrious, career. Things are set to change.

The Higgs report on non-executive director practice and effectiveness, due out this week, is unlikely to make controversial reading but it may just put into sharp relief a few recommendations that to date have attracted rather more in the way of lip service than execution.

As with so many things, the problems lie not in the theory but the practice. Non-executive directors can bring a diversity and breadth of experience that truly enhances the effectiveness of the board. Their independence permits them a degree of perspective and an ability to challenge often lacking among the executive directors who may be too close to make the tough decisions. Similarly, they have an important role as judicious outsider in audit matters, incentive schemes and share structures when internal conflicts of interest are inevitable.

But how do you find a good one when the quality varies so much? What makes a good one, when the boards seeking to appoint them already suffer from their own deficiencies and limitations?

The duties and responsibilities are the same for all directors. Surprisingly, many are still oblivious to this. Rightly, that naivete is soon to be dispelled. Certainly, non-executive directors in the split-capital debacle have experienced an icy awakening.

Nobody can suggest that the appointment of non-executive directors can either prevent fraud or guarantee performance.

These appointments are part-time, so they cannot be expected to be as informed as the executive directors, in which case, it can be argued that personal liability is not reasonable if they have acted in good faith on the information that they have been given. Furthermore, the risk of personal liability would undoubtedly discourage those possessing a wealth of experience from staying in the system.

However, it is clear that many non-executive directors scarcely cover themselves in glory. Some spread themselves around and thinly at that. They need to explain precisely how it is that they can divide their time, manage and maintain their fiduciary obligations with such an array of directorships.

If their argument is convincing, then how do some presume to hide behind a defence constructed on the premise that they had no idea of what was going on and that they had limited knowledge of the product structures?

How did they spend their time if not to inform themselves? Where in the company minutes do their repeated requests for detailed explanations of their colleagues appear?

Non-executive directors are not paid to be supine, even if that was the reason they were hired. In future, directors will either need to give more of their time, for which they will have to accept greater responsibility and accountability, or they will have to step down. That alone is unlikely to repair the shattered confidence of investors.

The FSA has recently announced proposals to crackdown on conflicts of interest among directors in general. Its consultation document also demands more disclosure from trusts and seeks to restrict cross-investments. The all-too-cosy network is set to unravel, with directors, employees and professional advisers of the investment manager being banned from the trust&#39s board.

Investors are keen that Higgs provides an authoritative statement on what constitutes an independent director. The answer is unlikely to please some of the investment trust managers, although that is not the message they will be sending out in their press releases.

Anne McMeehan is director of Cauldron Consulting


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