NED and board

A few weeks ago I wrote a post about the new Senior Managers Regime, being proposed by the UK’s Prudential Regulation Authority and Financial Conduct Authority to “clarify the lines of responsibility at the top of banks, enhance the regulators’ ability to hold senior individuals in banks to account and require banks to regularly vet their senior managers for fitness and propriety”.  All UK supervisors and trade bodies are now preparing their responses to this proposal, and the British Bankers’ Association is one of the first to publicise theirs.

On 3 November 2014, the BBA announced that it “supported the broad thrust of the reforms but raised some particular concerns”, and you can read more about their thoughts – including the full text of their response – here.  Interestingly – and perhaps swimming against the tide – the BBA is of the view that “non-executive directors perform different roles from executive director members of the board [and therefore] a different supervisory approach should be developed for NEDs”.  Checking a handy factsheet, we read that: “There is no legal distinction between executive directors and non-executive directors (the definition under the Companies Act 2006 defines a director as including any person occupying the position of director, by whatever name called); the distinction lies in the role that they perform.  Non-executive directors usually stand back from the day-to-day running of the business, drawing alongside the executive team as required to facilitate the strategic decision-making process.”  I understand that, I really do, but I have to say that if I were a NED looking at the AML guidance in my jurisdiction (bearing in mind that I work in the UK, Guernsey, Jersey, the Isle of Man and Gibraltar,so they’re the only ones I know about), I would be very uneasy about taking such a hands-off approach to AML.

For instance, the JMLSG guidance in the UK says that “senior management must be fully engaged in the decision making processes, and must take ownership of the risk-based approach, since they will be held accountable if the approach is inadequate”, and “senior management” is defined as “the directors and senior managers (or equivalent) of a firm who are responsible, either individually or collectively, for management and supervision of the firm’s business”.  Hopping across to Guernsey, their guidance for financial services businesses states that “the Board has effective responsibility for compliance with the Regulations and the Handbook [and] in particular the Board must take responsibility for the policy on reviewing compliance and must consider the appropriateness and effectiveness of compliance and the review of compliance at appropriate intervals”.  No-one in the AML environment makes any distinction between the responsibilities of executive directors and those of their NED brethren.

So maybe the BBA has highlighted something that we do need to address.  Are NEDS equally responsible for AML oversight, or does their distance from the day-to-day running of the business mean that they are not equipped to make these decisions?  And if they can’t contribute to the decisions on AML, can they contribute to the decisions on other sorts of risk?  And if they can’t take a view on risks at all, well….  What do you think?

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4 Responses to NED and board

  1. David Maxwell says:

    This is a really interesting and challenging issue. The value NEDs add to the Board is an external view, provided by someone who is not involved in the day to day running and management of the business. As soon as a NED gets involved in the detailed running of the firm, I think their value diminishes.

    Of course they should take a view on matters relating to the reputation of the firm, including the AML arrangements, but they should not be involved in the creation or implementation of those arrangements. They should of course scrutinise how the arrangements are working and express a view on their adequacy.

    I think it is a flaw in Company Law that the difference in the roles of executive and non-executive directors is not recognised. It is this flaw which causes problems for regulators when deciding what the responsibilities and accountability of NEDs should be.

    If the difference in roles is not recognised, then I would argue on one hand that it is a waste of time having NEDs on the Board (if they are expected to have the same knowledge of the detailed running of the company and to play an active role in the running of the company, then the company will have to spend time and money in training them to the same level as the executive directors) and on the other hand that it is far too risky for anyone to contemplate becoming a NED if that is the level of expectation.

    The distinction needs to be recognised in law and regulation, or we risk losing what is arguably one of the most important developments to come out of the numerous reviews of corporate governance that we’ve had over the last 20 years or so.

  2. This is an excellent comment, David – thank you. I certainly find contradictions in the system: in some places, exec directors and NEDs are considered the same, and in others they are different. And lack of clarity – or worse, ambiguity – is always a problem, as it leads to confused expectations. Perhaps NEDs need to band together to campaign for clarity.
    Best wishes from Susan

  3. Amanda Reilly says:

    I agree with David’s comments in the main however, in my opinion, companies should invest time and money in establishing and maintaining the competence of their NED’s. You reap what you sow whether a natural or legal person………….

    • Dear Amanda
      Welcome to the blog, and thank you for your comment. And I agree with you: I have met some shocking NEDs in my time, mere time-servers who sign anything put under their noses. On the other hand, I have met plenty who want to add real value to the boards on which they serve, but even they are sometimes surprised to learn of the extent of their AML responsibilities.
      This is obviously a subject that needs much more debate – I think the role of NEDs has sort of evolved rather than been planned, and now might be the time to really examine it closely and decide what it is meant to achieve.
      Best wishes from Susan

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