In Malta, the business concept of a non-executive director is still in its infancy. In fact, Maltese company law makes no distinction between executive directors and non-executive directors. Granted, the MFSA website, under the Corporate Governance section has a document entitled Corporate Governance Guidelines For PLCs (last updated July 28, 2006), which does make reference to the role of the "non-executive director" but if the law is blind to non-executive directors the MFSA guidelines are almost inconsequential and in need of a much needed re-think.
I actually believe the time has come for the government to revise the law itself so as to re-define the role and purpose of the non-executive director, granting it more wide-ranging and far reaching duties and obligations.
What is a non-executive director? To my mind a NED is an outside director (not an ex-employee of the company or affiliated with it in any way) and a very different animal to inside directors (executive directors) who normally serve or have served as executives for the company. The NED should therefore be independent, impartial and competent.
His role is (and I am paraphrasing from the UK Corporate Governance Code - June 2010) to constructively challenge and help develop proposals on strategy, to scrutinise the performance of top management, to be satisfied with the integrity of the company's financial information and to ensure that financial controls and systems of risk management are robust and defensible. They also help determine the remuneration of executive directors and have a prime role in appointing and, where necessary, removing, executive directors, plus they are involved in succession planning. Quite a long list and all of it pretty important stuff.
I think the time has come for the government to revise the Companies Act and give the NED legal personality and define a precise role for such an important player in the boardroom. I also think the time is ripe for certain companies to make the role of the NED a full-time job, to have at least one NED in the boardroom, and for such companies to provide (make available) sufficient financial resources to the NED, enabling him/her to appoint their own external financial, business and/or legal advisors in order to internally evaluate, verify or investigate the company's key business decisions.
What do I mean by "certain companies"? I am actually referring to companies (public or privately owned, small or large) which make a distinction between the shareholder and the directors / top management and appoint different individuals for each of the key positions namely the CEO / managing director, executive directors, non-executive directors and the chairman. In such companies, the NED can be a regulatory requirement and with time this requirement could (I would like to think) be widened to include other types of companies.
In addition, I also believe that there should be an official and vetted list of eligible NEDs who pass a fit-and-proper test. Such NEDs could be persons coming from the world of banking, law, accountancy, consultancy, ex-CEOs and ex-chairmen. My point is that the composition and membership of the board of directors for "certain companies" should be subject to MFSA scrutiny and prior approval.
To which type of companies this should be applied, I will consider in another article. At this stage, however, I am just trying to promote the idea in principle and provoke a healthy discussion. In fact, and linked to this topic, the time has perhaps also come for us to separate the Registry of Companies from the MFSA and for Corporate Malta to actually have a stand -alone Companies House (but again I can only explore this idea in a future article).
The suggestion that the NED becomes a regulatory requirement is not being made to choke business with more bureaucracy and compliance issues, or to saddle companies with extra expenses, but to professionalise the role of the NED for the benefit of all stakeholders involved and business in general. I think a shareholder would be better served if he knew that the chairman, the executive directors and top management were under the scrutiny of an independent and competent NED who had the obligation, resources and competence to test the robustness and appropriateness of key business decisions.
Allow me to give an example: Sir Stelios, founder and largest shareholder (owning 38 per cent shares) of EasyJet (low cost airline) strongly disagrees with outgoing chief executive Andy Harrison's decision to go-ahead with the CAPEX of new aircraft (circa 100). He argues that now is not the time to invest in new (expensive) aircraft but to control costs and improve profitability. EasyJet, apparently, only made £1 profit per passenger last year and CAPEX in new Airbus jets will only mean that the company will struggle to pay out dividends for the years to come and certainty be unable to make the £4 profit per passenger which Stellios argues is possible.
Without delving into the intricacies of who is right, I think that we can all relate to this sort of tension between the executive directors, the chairman, top management and the shareholder(s). You don't have to be a multi-million plc to relate to, or empathise with, these tensions and this is why I think a NED armed with enough information and resources to keep all concerned on their toes is healthy in the modern day business. The NED would in this example, force top management to take note of the largest shareholder's reasoned arguments and test the robustness of management's CAPEX decisions and share the findings with fellow directors in the boardroom.
Non-executive directors can be extremely useful to any type of company- public, private, SME, start-up, corporate or family business. They also have an important role to play in the boardroom. It could be a family business that needs to ensure that management (non-family members) are serving the interests of the shareholders (family members).
Alternatively, a family business that needs a fresh "outside" perspective to its business decisions having for decades relied on the leadership of soon-to-retire family members. Alternatively, it could be a plc which is willing to provide the necessary resources and financial backing to a NED to scrutinise top management decisions for the benefit of its shareholders. The benefits of having a NED are many and specific to the individual circumstance of each and every business. The first step, however, should be to make the necessary legal changes so as to have in place professional, experienced and qualified NEDs who can contribute to the overall good health of Business Malta.
Mr Fenech is managing director of Fenci Consulting Ltd.
www.fenci.eu