Effectiveness of Non-Executive Directors Essay example

1024 Words 5 Pages
The effectiveness of non-executive directors is becoming to be seen as critical for the contribution to the effectiveness of corporate governance in providing investor protection.
Relevant situational and sectoral experience enhances the effectiveness of non-executive directors. Jebb (1998) cited in Ahwireng-Obeng, Mariano and Viedge (2005) suggests that it is a better strategy to hire non-executive directors who have experience in similar as well as other sectors and situations that the company is likely to face than search for a particular expertise in a director. According to Pincombe (2000), this enables the utilisation of specialist skills in different fields and the broadening of experience (Ahwireng-Obeng, Mariano and Viedge,
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King II contends that there should be a clearly accepted division of responsibilities at the head of the company to ensure a balance of power and authority, such that no single individual has unfettered powers of decision-making. Single individual with unfettered powers of decision-making could prevent non-executive directors from playing their role effectively.
One of the major factors that affect the effectiveness of non-executive directors is independence. The Higgs report states that “A non-executive director is considered independent when the board determines that the director is independent in character and judgement and there are no relationships or circumstances which could affect, or appear to affect, the director’s judgement”. Both managerialist and agency perspectives support the view that the independence of the board is essential for effective monitoring of management performance (Clifford and Evans, 2002).Independence is more likely to assured a better position to promote the interests of shareholders and other stakeholders.
The independence of non-executive directors is primary influenced by two factors (Ahwireng-Obeng, Mariano and Viedge, 2005). The first factor is compensation in the form of equity. Byrne, Grover & Melcher (1997) cited in Ahwireng-Obeng, Mariano and Viedge, 2005 suggest that by holding stock, non-executive directors tend to align their interests with those of shareholders. Thus,

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