N O N -E X E C U T I V E D I R E C T O R

R E S E A R C H – N O V E M B E R 2 00 4

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Board Performance
Non-Executive Directors and
Their Contribution to Business Performance
 BOARD PERFORMANCE

Introduction

As every week goes by, comments or surveys suggest

Gerald Russell that boards of directors, and particularly Non-Executives,
Senior Partner – London are having their time directed to dealing with compliance
Chairman – Non-Executive matters emanating from regulators the world over.
Director Programme
So is the impact of the Combined Code and the march of
regulation limiting the effectiveness of Non-Executives
operating as part of a unitary board? Is conformance
impacting performance?

Difficult questions. This research gives some interesting

pointers as to how Non-Executives see their role and
their contribution to their companies’ performance. It is
One year on from November 2003, when the major part of good to learn from the research that most Non-Executives
the Higgs Review1 (the Review) was incorporated into the are far from being discouraged. Indeed, whilst there are
Combined Code, it is valuable to research any changes in real concerns about the potential for an over-regulated
the perception of board performance by those most under the environment, Non-Executives see their primary role as
spotlight – Non-Executive Directors (Non-Executives). The enhancing business effectiveness.
Review focused on the contribution of Non-Executives and
aimed to balance board effectiveness and performance on the This is good news as increasing the effectiveness of
one hand and appropriate risk management on the other. Non-Executives is an issue that Ernst & Young has been
addressing over the last few years. Our activities include
In a recent interview Patricia Hewitt, Secretary of State the Independent Director Initiative, our joint venture
for Trade and Industry, said, “Derek Higgs’ Review was with the Institute of Directors; the Ernst & Young Non-
never meant to be set in stone. It was intended to start a Executive Director Workshop Programme on issues of
debate.”2 This report contributes to the debate by exploring topical interest; and our investment in an online service
the personal perceptions of Non-Executives regarding the dedicated to Non-Executives at [Link].
extent of their contribution to business performance. Given
recent interest by investors in the performance of boards, I am pleased that Ernst & Young can contribute to the
this report is particularly timely. ongoing debate through this thought-provoking report.

1
 Overview

This research was designed to go beyond the Review and

Background and Methodology develop insight into how Non-Executives are contributing
to business performance. While it was inevitable that the
participants would comment specifically on the Review,
There is an ever-expanding body of academic research
this report has implications in new areas that have not
on boards and Non-Executives but the findings are
contradictory and typically use secondary sources to previously benefited from a structured research approach.
develop statistical models of performance. We expected
that by taking a different approach, conducting face-to-face We had several objectives:
interviews with a representative sample of Non-Executives,
we would be able to bring new insights into the impact that  to establish if Non-Executives believe they make a vital
Non-Executives have on business performance and how this contribution to “wealth creation” and their own view of
impact is made. their effectiveness;

By guaranteeing our participants anonymity we were able  to establish how Non-Executives make such a contribution;
to elicit candid and refreshing perspectives on a Non-  to identify which crucial activities have the greatest
Executive’s ability to contribute to business performance. impact on business performance;
This ranged from one participant suggesting that some
Non-Executives still suffer from “the mushroom syndrome”  to establish what factors might constrain the Non-
– they are put in a dark cupboard and the light is only flashed Executive from making the best contribution; and
on them now and again to check they are still there – to
concerns about how Non-Executives and boards will cope in  to determine whether or not they have achieved the right
an over-regulated environment. emphasis between the conformance and performance
aspects of their roles.
This report was developed from independent research
commissioned at the University of Bath School of From this investigation we have made suggestions which
Management and the Oxford University Saïd Business will enable Non-Executives and their boards to enhance
School, advised and guided by [Link]. their contribution to business performance. Topics include
whether or not formal qualifications for Non-Executives
The Bath study comprised face-to-face interviews with 18 are required or desired, the impact of tenure, and how
Non-Executives and part-time Chairmen who worked for selection, deployment and evaluation of Non-Executives
companies either listed on the London Stock Exchange or
may be approached.
the Alternative Investment Market. These Non-Executives
represented 43 different boards and a wide variety of
Overall, the consensus amongst Non-Executives appeared
industries. Their ages ranged from 44 to 70 and the
to be that the Review’s recommendations were useful in
male/female ratio was 78%/22%. Sir Derek Higgs was
also interviewed. clarifying the requirements of the Combined Code, although
they raised some notes of caution with regard to the possible
The Oxford study used two different methods: face-to-face constraining effect of further governance regulation.
interviews with FTSE100 and other Non-Executives, and an
online of survey of 65 FTSE100 and other Non-Executives One particularly salient quote from the online survey was:
provided through the database of The Non-Executive Director
at [Link]. “There have undoubtedly been changes since Higgs,
although the extent to which these can be attributed to
his report is unclear. It was perhaps a timely catalyst in
encouraging City institutions and companies to think a
little more deeply about the role and potential contribution

2
 BOARD PERFORMANCE

of Non-Executives. For good or bad, Non-Executives

are now expected to make a more formal contribution to
corporate governance than hitherto. They are also being
expected by some companies to contribute dramatic new
ideas and insights. It is this climate of expectation that,
more than anything, could help bring about change.”

Several themes emerged from the research:

 the confidence of the participants in their ability to

contribute positively to business performance, although
the magnitude of perceived impact varied considerably;
The Higgs Review  the overarching importance of the Non-Executive’s
In the “Review of the Role and Effectiveness of Non- strategy role and how relevant industry experience and
Executive Directors”, Sir Derek Higgs recommended that by perspective are indispensable;
ensuring sufficient emphasis on both the conformance and  the unwillingness of Non-Executives to sacrifice
performance aspects of their role, Non-Executives can make time spent on performance activity to conformance
a contribution to “wealth creation”. activity, resulting in a rapidly increasing overall time
The primary objectives of the Review were to re-invigorate commitment to deal with the escalating burden of
the role of the Non-Executive according to the needs of national, European and international regulation;
UK boards; to provide further clarity on Non-Executives’
 the criticality of the role of the Chairman
responsibilities; and to suggest what boards could do to
in creating the board and company culture,
strengthen the quality, independence and effectiveness of
selecting and motivating the Non-Executives and
Non-Executives.
driving all types of business performance;
In the Review Higgs outlined four primary tasks for
 the discovery that while the Review recommended a
Non-Executives:
maximum of two three-year terms for Non-Executives
 Strategy: constructively challenge and contribute to the to remain independent, tenure appears to make no
development of strategy. difference to the impact of their contribution;
 Risk: satisfy themselves that financial information is  the implication that industry experience is the foremost
accurate and that financial controls and systems of risk requirement for selection and that previous experience
management are robust and defensible. as a Non-Executive is not necessarily important;
 People: responsibility for determining appropriate  the view that a uniform qualification for Non-
levels of remuneration for Executive Directors Executives is unrealistic and impractical;
and have a prime role in appointing, and where
necessary removing, senior management.  the recognition that the selection criteria for Non-
Executives are changing significantly although the
 Performance: scrutinise the performance of
selection process still relies heavily on personal
management in meeting agreed goals and objectives and
networks to deliver candidates; and
monitor the reporting of performance.
 the importance of the total board’s contribution to
business performance, rather than by any single Non-
Executive, and how team working is believed to
enhance performance.

3
 Research Findings

The research findings have been distilled into four areas.

1. How do Non-Executives contribute to

business performance? Interview Perspectives
The participants were unanimous in believing that they made In our interview Sir Derek Higgs said that he felt the Review
a vital contribution to business performance although there threw a “good deal of daylight” onto the role of the Non-
was significant individual variation. Almost all also believed Executive, helping them to be more aware of how to maximise
that they had found the right emphasis between conformance their contribution and helping Chairmen to deploy Non-
and performance, despite apportioning their time across Executives to best effect. He said:
the roles very differently. Factors determining each Non- “The challenge we have in the UK is to raise performance by
Executive’s focus were their deployment on the board and encouraging rigorous behaviour and judgement and effective
the pressures and opportunities facing their companies. decision-making at the top of companies by boards who are
acting as stewards for the shareholders. One way boards can
We set out to understand how they make this contribution. be effective is to make sure there is not too much risk but more
importantly another is to make sure that they are doing the right
The value of teamwork, co-operation and good working things in creating wealth.”
relationships were key factors in enabling Non-Executives to
Although the participants represented a wide range of
contribute to business performance and were consistent themes industries and experience they were remarkably consistent
in the interviews, as was the pivotal role of the Chairman. in their views of their ability to contribute to business
performance. They were also broadly consistent in their
��� practical perspectives, interest and dedication to their
respective companies, and commitment to their fellow board
�
members.
�����������������������������

��� One particularly relevant comment from a FTSE Chairman was

�
that Non-Executives can only contribute to performance “if two
absolutely key things happen: first that he/she receives timely and
��� accurate information and secondly that the Executive Directors are
prepared to communicate with the Non-Executives.”
�

���

�
��������� ����� ������ ������������
������������������������������������������������

When interviewed about their contribution to business

performance via their four roles, the overwhelming conclusion
was that the strategy role was perceived to have the greatest
impact. Indeed, the mean impact of the Non-Executives’
perceived contribution via their strategy role, on a scale of
0 to 4, was 3 compared to both risk and people where the
impact was 2.28 and performance was 2.22.

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 BOARD PERFORMANCE

��� In our interview Sir Derek Higgs emphasised the

challenging aspect of the Non-Executive’s contribution,
���������������������������������������

���
saying, “The one fundamental right and obligation of the
���
Non-Executive is to keep asking questions until they get an
acceptable answer.”
���
Several participants considered a key omission by the
��� Review was the contribution the Non-Executive makes in
the creation of the corporate culture. Establishing a culture
���
of openness and transparency is essential for promoting
���
integrity and ethics in the company. Thus the influence
� ��� ��� ��� ��� ��� ��� of Non-Executives, and specifically the Chairman, is felt
���������������������������������
beyond the boundaries of the board.

Further analysis of the data endorses the importance of the

strategy role. There is a strong positive correlation between ���
the time a Non-Executive spends on their strategy role and the
perceived level of impact their contribution has on business ��� �������������
performance. Interestingly, for the other three roles there was �����������������
no such positive correlation, implying that more time spent on ���
���������������
these roles does not necessarily reap performance dividends.
��� �����������
All of the participants were actively involved in their respective
companies’ strategic planning and decision-making processes ���
and saw it as a natural, expected, desired and essential aspect
of their role. The traditional image of the Non-Executive, ���
constrained from being able to participate in organisational
decision-making or employed only to carry out a governance
��
function is, therefore, not borne out by our research. ��������� ����� ������ ������������
�������������������������������������������������������������������������
The majority believed that their contribution via their other
three roles was also important and needed to be balanced
with strategy. Non-Executives are responsible for selecting, Implications for Management
replacing, and monitoring the performance of management.
 The balancing act required to address adequately
It is clear the participants recognised that without their focus
each of the four roles, combined with increasing
and capability in these areas the business may be at risk of
corporate governance and regulatory demands,
underperforming. The pendulum should not swing too far means that FTSE Non-Executives should expect to
towards a ‘fashionable’ focus on strategy. commit at least 3 days a month.

Participants identified additional approaches through  The Non-Executives with the most relevant strategy
which they believe Non-Executives have an impact on skills will bring an industry perspective such as from
business performance: a competitor, customer or regulator.

 Directors and shareholders are right to demand that

 providing objective advice;
the Chairman be effective. One participant summed
 bringing specialist consultancy advice; up the importance of the Chairman in creating a
high-performance environment, “The culture on the
 working as a board team; board depends entirely on the Chairman and many
people like me will only work for companies where
 constructively challenging management; and there is a good one.”
 contributing to the organisational culture.

5
2. How can Non-Executive contribution to 3. How do Non-Executive tenure and
business performance be assessed? qualification influence contribution to
Non-Executives do not believe that their impact on business
business performance?
performance can be measured by changes in high-level The Review recommended that six years is the maximum
financial indicators. The participants argued that it was appropriate tenure for a Non-Executive to remain independent.
difficult to segregate the effect of individual factors because But does tenure affect contribution to business performance?
company financial performance is subject to a variety of The research findings suggest that comparing Non-Executives
macro-economic, sector-specific and company-specific who have served on the board of a single company for more
influences. However, two methods to assess the impact of than six years with those who have served for less than six
their contributions were suggested: years shows no difference in their perceived level of impact on
business performance. There is also no difference in perceived
 subjective self-examination of their individual
level of impact that their contribution has in their strategy role.
performance, combined with board appraisal; and

 evaluation of their impact retrospectively over a long- There are two possible reasons for these results. Firstly,
term period (for example, against strategic decisions the ability to make an impact may be influenced more
such as acquisitions and divestments). by individual skills and knowledge than by longevity.
Secondly, new Non-Executives may be willing to expend
The participants were keen to place the exploration of how
greater time and effort in discharging responsibilities to
a Non-Executive individually contributes to performance
be fully effective. This was the case for participants who
into the broader context of all the directors on the board.
had worked for their companies for less than a year. They
Higgs also told us, “You can’t only talk about Non-
spent an average of five days a month on their role, in
Executives because they are only one part of the unitary
comparison to the overall average time of three days.
board unless you throw out the unitary system. I wouldn’t
do that and nobody in the consultation period for the
Related to tenure is whether a formal Non-Executive
Review was in favour of that either.”
qualification is required to raise the standards of Non-
Executive contribution to business performance. The
The importance placed on board appraisal indicates the
comments from the online survey indicated that trying to
support of participants for the Review’s recommendation
force a standardised qualification on Non-Executives might
that appraisals are undertaken. However, several of
make it difficult for boards to acquire the different skills
the boards represented have only just initiated board
required to respond to dynamic market situations.
assessment in response to the Review.

Implications for Management Implications for Management

 The length of time a Non-Executive has served on a
 Boards that do not address the assessment process
single board does not appear to affect their impact on
pro-actively will undoubtedly have it forced upon
business performance.
them by shareholders.
 One qualification to cover all the possible
 There is an inherent conflict between how the Non-
permutations of the Non-Executive’s role is likely
Executives believe their impact can be measured (on
to satisfy only the policy makers. As one Chairman
long-term performance) and how shareholders want
noted, “The reality is that, particularly in a fast-
to measure them (on short-term performance).
changing world, people come with partial skills
 The board working as a team was considered and we have a limited supply of them. There are
an essential ingredient in enabling it to make a quite tough demands in terms of time and effort and
vital contribution to business performance. How we have set the bar for our expectations of Non-
to measure the success of this aspect of board Executives very high.”
performance will be a challenge for most companies.

6
 BOARD PERFORMANCE

Qualification – An Emotive Subject 4. What constrains Non-Executives from

contributing to business performance?
The online survey provides insight into the current mood of The participants’ comments on possible constraints upon
Non-Executives on a standard qualification. Three their ability to contribute to business performance were
areas were of particular interest. remarkably similar. The three key areas and suggestions for
1. Should there be a standard-setting body removing the constraints are:
in the UK to qualify potential FTSE350 Non-
������ ������� Executive Director candidates before they Board structure and process – receiving the right
take up their roles? company information at the right time.
Although the majority said there should be a standard-
setting body, the comments on this question were Board behaviour and relationships – a cooperative
particularly negative and interesting. attitude from the Executive Directors; and an able
“I believe the role justifies specific training but I cannot at Chairman who is not only effective but also encourages the
present foresee a formal qualification which would be of universal right team dynamic.
application and benefit.”
“I have real difficulty with qualification. It is too simplistic and won’t prevent the things Personal input to the role – devoting enough days per
it is supposed to or guarantee the things we’d like.”
month to relieve pressures on time for complying with
“To add a meaningless qualification layer on top would be a very bad move; corporate governance regulation; and obtaining sufficient
stifling creativity in appointments and creating a cadre of the ‘golden circle’
would make it become even more of a closed shop.” industry knowledge.

2. When asked which organisations represent a suitable Implications for Management

governing body, the Government was the least popular.
 Additional Non-Executive compliance activities
“Why is there this tremendous need to interfere from a regulatory standpoint in every do not appear to be undertaken at the expense of
area of corporate life?”
other activities. Instead the time commitment, and
“Keep the Government well away from it!” hence remuneration, is increasing and in many cases
“The difference between the UK and continental Europe is the UK is trying too hard to doubling from as little as two years ago.
be politically correct.”
 Current industry knowledge is key if the Non-
Executive is to make a relevant and efficient
3. If qualification was not practical, what could be used as a
contribution to business performance.
substitute to qualification?
 Any new corporate governance regulation may not
�������������������� be well received. If the Government is intent on
��������������� ���
expanding regulation (and prosecution) there is a
�������������
������������������������ ��� reasonable expectation that the best Non-Executives
�����������
will opt-out of listed company roles. The online
������������ ��� survey revealed that the number one reason why Non-
����������������� Executives would refuse a role was because of risk to
���
���������� their personal reputation.
����� ��
 The impact of a poor-performing Chairman on
������������������������� overall business performance can be
disproportionately negative.

7
Practical Actions

Qualification
Respondents to the online survey suggested training, in
the form of personalised coaching or publicly available Has the Higgs Review had an
courses, as a suitable alternative for raising the quality of
Non-Executives. The comments suggest there is a clear impact on Non-Executive selection?
need for education for Non-Executives but there were
concerns about the quality, affordability and relevance of The online survey asked, “Through which channel did the
available programmes. Attempts by the Government to company at which you hold (or will hold) your most recent Non-
regulate qualification are likely to be vociferously opposed. Executive position, identify you?”

Specification and Selection Recruitment website

Personal contact
Before setting out to select new Non-Executives the Recruitment ��
Chairman should have a clear and objective assessment Specialist
of board attributes, strengths and weaknesses as well as ���
the needs of the company. Developing the Non-Executive ���
specification will enable the board as a whole to agree the Other ���
characteristics they believe will enhance board contribution
to business performance.
���

Irrespective of the process used for final selection, boards

that value high performance will devote sufficient resource
Business Associate
to specifying adequately their Non-Executive requirements.

When selecting the best Non-Executive director candidates

“The Review has led to greater recognition and appreciation of the Non-
for a board it should be considered whether their attributes, Executive role. However, there has been little movement towards more open
knowledge and experience have the potential to increase competition and little evidence of new blood being sought.”
board performance, while providing balance with the rest of “Networking and word-of-mouth are the most important sources for identifying
the board. One Chairman noted, “You would be mad not to Non-Executive positions. There may have been some change in making the
recruitment process more transparent and professional but it does not yet appear
recognise that you are surrounded by a patchwork quilt of to have yielded markedly different results.”
talents and that contribution in some areas will be informed
Source: Online survey
and definitive but in other areas it will be a point of view.”

8
 BOARD PERFORMANCE

In addition, candidates should: Chairman, team working is perhaps a necessary, but not
necessarily sufficient, condition for impacting business
 be equipped to contribute to business performance performance positively.
across all four roles, with strategic ability being most
important;
Board Appraisal
 bring relevant specialist skills that complement the rest Consistent with Higgs’ recommendation in the Review, the
of the board and meet anticipated changing company research findings suggest that boards should have a robust
demands;
board and director appraisal process. The Review did not,
 interact well with him/her; and however, provide any explicit recommendations on how to
carry out this process.
 be a team player with other board members.

An interesting finding of the research is that the period of In accordance with the participants’ suggestions that it is
time the individual has been a Non-Executive appears to possible to assess value-adding activities by measuring
make little difference to their perceived impact on business them against expected results, we recommend that boards:
performance. This suggests that when selecting new board
 identify specific decisions/initiatives deemed to be
members the individual’s skill set is more important than
vital to the board’s success in contributing to business
their prior experience as a Non-Executive.
performance;
Thus the idea that the pool of candidates for Non-Executive  identify expected behaviours necessary to maintain
directorships should be widened has support. constructive teamwork and sufficient balance between
control and collaboration;
Consistent with other recent reports there appears
 set target Key Performance Indicators (KPIs);
to be little change in how Non-Executives find new
opportunities. While the Review was clear in its  measure both the individual director’s (both Non-
prescription for finding new Non-Executives, the majority Executives and Executives) performance and the team’s
still rely on personal networks. The practical reality is that performance and progress against KPIs; and
the selection process only appears to come into question
 feedback progress and the results of assessment to
when a board is failing.
ensure learning and improvement.

Deployment The appraisal of individual directors must be carried

out with sufficient sensitivity not to undermine board
Deploying Non-Executives to enhance business
camaraderie. Given the importance of the Chairman
performance is an art, not a science, and very dependent on
in instilling the right board culture for effective Non-
the Chairman’s style and experience. It is also important
Executive contribution, providing constructive feedback to
that Non-Executive deployment is not a one-off exercise
him/her is also of critical importance.
but monitored on a regular basis. We have discussed
various ways Non-Executives contribute to business As a result of clearly defined performance expectations and
performance, both in terms of their roles and how they distinct metrics, we propose that an effective board and
approach their work (team working behaviours). director appraisal process:

It appears to be important and desirable that every Non-  increases focus on delivery of business performance;
Executive contributes to all four roles, albeit with a
specialist focus. Artificial segregation of the conformance/  provides a way of measuring individual Non-Executive
performance roles – as some commentators suggest – is and Executive Director contribution to business
likely to be unhelpful. performance as well as that of the board as a whole;

 highlights any underperforming directors; and

Maintaining an effective team tackles some of the major
constraints on the Non-Executives’ ability to contribute  enables the board to face external criticism objectively.
to business performance. Combined with an effective

9
Authors

!+ [Link]

Ernst & Young LLP [Link] and

The Non-Executive Director
Gerald Russell Betty Thayer Claire Usher
Senior Partner- London Chief Executive
Chairman – Non-Executive Director
Programme
Tel +44 (0) 207 951 3434 Tel +44 (0) 845 458 9850 Tel +44 (0) 7952 009163
Fax +44 (0) 207 922 1485 Fax +44 (0) 845 458 9840

neds@[Link] director@[Link] claireusher@[Link]

[Link]/uk [Link]
[Link]

Acknowledgements
The authors wish to thank:

Dr Philip Cooper Agnes Cheung, Javier Licea, Rachel Roberts and Alan Tam
School of Management Saїd Business School
University of Bath Oxford University
Claverton Down Park End Street
Bath BA2 7AY Oxford OX1 1HP

Tel +44 (0)1225 386544 Tel +44 (0) 1865 288847

Fax +44 (0)1225 386473 Fax +44 (0) 1865 288805
[Link]@[Link] enquiries@[Link]
[Link] [Link]

Footnotes
1 Higgs, Derek. ‘Review of the role and effectiveness of non-executive directors’. January 2003.
2 Clawson, T. ‘Squaring the Circle’ Profile of Patricia Hewitt. PLC Director. July/August 2003.
3 Each interviewee selected an impact score for each of four categories. For strategy, 44% ranked this a 3 and 28% a 4.
4 A Spearman Rank test was used to measure the strength of correlation. The correlation coefficient was .743 with a
two-tailed p-value of <0.05.
5 Where Some Impact = 1; Moderate Impact = 2; >Moderate Impact = 3; and Strong Impact = 4.

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Ernst & Young LLP [Link]/uk

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