In the past, companies were run in line with the objectives of the shareholders, maximising their investment for a greater return in profit. The increased responsibility and globalisation of companies has led to intensified measure of supervision and protection towards other stakeholders, including the general public and an added sense of corporate social responsibility. At the outset, one must understand that the conventional board of directors structure in Malta is the unitary system run by the executive directors. This is in contrast to the two-tier system in Continental countries (such as Germany) which operate under two board structures to effectively manage and supervise the decisions being taken. Both types of systems have their benefits and drawbacks, however, the unitary system, as adopted in Malta, has given less consideration towards the importance of NEDs. With increased regulations, company objectives and specialised and diversified trends in technologies, one must look towards the introduction of NEDs as a customary role within our board structure and thus effectively add to the experience, increased expertise and overall supervision of the executive directors.
The pressure on directors to achieve their objectives, whether personally or for the company shareholders is an undeniable fact. Daily company tasks are constantly added to the executive directors’ agenda – at the expense of having certain decisions taken in a hasty, less informed manner. The use of NEDs as objective, independent directors to monitor the executive and to encourage innovation within the board structure would help mitigate these growing issues within the unitary system. Undoubtedly, NEDs would take a proactive approach towards holding executives accountable for their decisions while also introducing increased expertise on the board for decisions to be taken in a more informed manner.
In Malta, the prevailing number of companies are SMEs, hence, the increased cost of ‘extra’ directors within the company structure may prove to be an unnecessary cost in operations. However, the way business is conducted continues to develop, with new technology, new legislation and rules being introduced at a fast pace – therefore, the introduction of an NED can no longer be put aside simply because of this added ‘expense’. An experienced and specialised NED can add flexibility to your boardroom, explain certain innovative techniques and in turn lead to a more effective Board of Directors and increased efficiency in company operations.
It is vital to distinguish between the two types of directors, because while non-executive directors are de jure appointed directors, they do not carry out any executive managerial responsibilities and only devote part of their time to the company. Although NEDs sit on the same board in the unitary system, their roles are not the same as executive directors, who are in charge of the day to day running of the company. Nonetheless, despite having a different role within the company, Maltese law, and other European jurisdictions, place the same statutory obligations and duties on NEDs as is placed on executive directors. The Court may possibly impose a lower standard to NEDs with regards to the duty of care and level of skill expected, however, there is still no guarantee that the courts would adopt such a position. With greater importance being given to the NED’s role, such guarantee should definitely not be expected.
Taking into consideration the current pandemic, while no individual could have foreseen or expected such a situation, the flexibility of having NEDs could help companies adapt to the new norm, provide insightful ideas, push executive directors towards innovative techniques, as well as monitor new company measures that are put in place post-Covid19. An NED would supervise the executive directors and monitor that the work is being carried out within the legal framework and abiding by all regulations, providing reassurance to all stakeholders and the general public.
While the Maltese Companies Act does not distinguish between the two types of directors, emphasis in Corporate Governance codes and recommendations is however put on having the right balance between the two types of directors and the independence and integrity of an NED. Such independence is vital for the proper functioning of the Board, and the lack of strong, independent NEDs could lead to disastrous situations as was seen in the failures of the NEDs during the Financial Crisis and the Enron case, amongst others.
Ultimately, both types of directors bring different but essential skills to the boardroom. An effective board should try to attain a balance between the two in order to maximise the overall performance. An independent and specialised NED can help increase the operational efficiency and flexibility within any company. Such an important role can no longer be put aside and must be valued within the whole corporate governance framework.