INDEPENDENT NON-EXECUTIVE DIRECTORS

Explain why it is important for at least half of the board (excluding the chairman) to be independent non-executive.

Board Structure

It is important that no one director or group of directors is able to dominate the board of directors. There is a real danger that the executives, who are working with each other in close contact on a daily basis, become familiar with each other and start to work as a team. Whilst this has obvious benefits, they may try to force their opinions through by voting as a group at board meetings.

The NEDs should be independent. If they are, then there is no obvious reason why they would form a similar group and all vote together by arrangement. Therefore, if more than half of the board are independent NEDs, there should be only minimal risk of them trying to dominate. 

Even if the NEDs do try to dominate, this may not be a bad thing. They are there to represent the shareholders and monitor the board, so many would argue that it is a benefit if they are in a powerful position. However, a risk remains that a large group of NEDs could, if they are not careful, stop a small group of executives from being able to run the company effectively. 

Having exactly half of the board as independent NEDs should be sufficient, because if this results to boards being equally split on decisions, the chairman (who is not part of the 50% calculation) will act as the casting vote. Given that the chairman should be non-executive by nature, and has a responsibility to represent shareholder wishes, this should result in the right decisions being made for the shareholders.