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MASTERCLASS
ROLE OF NON-EXECS IN THE SPOTLIGHT
Martin Webster casts an expert eye over the Financial Services Authority’s recent consultation paper on effective governance
T
he last few weeks of 2009 saw not only Sir David Walker’s report on what went wrong with the governance of our major banks and financial institutions, but also the Financial Reporting
Council’s proposed update to the newly renamed UK Corporate Governance Code. Now the Financial Services Authority (FSA) has given its take on the role of the non-executive director (NED).
At the end of January this year the FSA issued a consultation paper on effective governance standards within the companies they regulate. They are admirably frank in what they say. Indeed, there is an admission from the regulator that it was caught napping: “We recognise that our focus on the quality of governance and the intensity of our previous supervisory assessment of it did not adequately reflect its importance.” Now, as part of their new more intrusive regulatory regime, the FSA intends to put past lapses right.
But are their proposed changes to what the FSA expects of the NED role of relevance only to the financial services sector? Almost certainly not –what they say about the quality and time commitment of non-executive directors is bound to have a wider application and to influence the debate for all companies.
Vetting process The FSA certainly sees itself having a greater role in relation to the appointment of NEDs in regulated firms. At the moment, the role of a non-executive is a ‘controlled function’ which means appointees need to be approved by the FSA, but the approval doesn’t distinguish between the different roles they may perform. In future, the FSA wants to be able to vet and regulate individuals according to their specific roles, so they have the opportunity to assess an individual’s competence and capability for a particular job.
These new controlled functions for non-executives, each requiring separate approval, will be: › chairman of the board › senior independent director, and › chairman of each of the risk, audit and remuneration committees.
SPRING 2010
WEBSTER
Partner,
MARTIN
Pinsent Masons
For those already in the job, the only requirement will be for the FSA to be notified of who does what, with no need to get a new approval. Nonetheless, it is made clear that even those individuals will be subject to assessments of their continuing capability as part of normal supervisory activities.
Examination by interviewWhere the larger, more
complex or risky finance businesses make appointments to these roles, the candidates are likely to be called for interview by the FSA. Whereas in the past the emphasis was on the need for honesty, integrity, reputation and financial soundness, now the FSA is giving equal weight to competence and capability. And firms need to show that they have done their own due diligence in advance to ensure these qualities are present. Other, non-technical skills may also be relevant. The chair of the audit committee, for example, will need to be what the FSA calls a “highly authoritative individual”.
The FSA will use an interview as an opportunity not only to assess the candidate NED, but also to alert him or her to areas where further work is needed to meet the regulator’s standards of fitness. The claim is made that many candidates have found this interview process “helpful and constructive”.
The FSA are
admirably frank in what they say. Indeed, there is an
admission from the regulator that it was
caught napping
Taking the necessary time The FSA’s assessment of an individual’s suitability for an NED role will also refer to the time he or she is able to commit to the job. Sir David
The consultation paper also comments on the debate initiated by the Walker Review on the level of experience a non-executive ought to have of the company’s business. Should a bank’s board be packed with retired bankers as NEDs? How much detail do non-executives need to understand as to what the company does and how it makes its money?
The FSA say they would generally expect a good level of market knowledge and, where that is lacking, they will want to see that other non-executives have enough industry knowledge, plus a structured development plan to bring the new director up to speed.
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