The appointment of an executive di-
rector or CEO of one company (a primary company) to the office of non-executive director of another company, (an external company) will usually be in the interests of all parties concerned.
1) From the executive directors’ perspective they stand to broaden their knowledge and experience through exposure to wider range of ideas and practices, and make new personal contacts. All of which should assist in advancing their own individual development as directors and be of particular benefit if they propose furthering their careers as directors following their retirement as an executive.
2) From the primary company’s perspective it will gain from the executive director’s own individual development through the director’s enhanced contribution around its board table, and from its introduction to the characteristics of other industries.
3) From the external company’s perspective it will acquire director who, because of his or her executive position with the primary company, will be familiar with management concerns, and bring new and independent viewpoint to the board.
Appointments of this nature are also in the interests of general good corporate governance as they increase the pool of competent directors available for board positions.
The basic premise nevertheless remains that an executive director, particularly if he or she is also CEO, is there to run the primary company and to do so in highly focused manner.
With any external appointment care will therefore need to be taken, by the primary company in particular, to ensure that:
? no conflict of interest exists between the activities of the primary and external company
? the executive director’s time commitment doesn’t interfere with the proper and effective discharge of duties to the primary company. If such conflict occurs, then the interests of the primary company should prevail.
Because circumstances of companies and their directors can vary so greatly it’s not practical to define specific actions in the case of every external company appointment. This can only be through negotiation between the parties.
Having regard to the benefits of external appointments, but remaining conscious of the potential drawbacks, issues that may need to be considered and resolved during these negotiations are:
a) Should the primary company adopt policy that relates the number of external appointments an executive director may accept to the stages of the director’s career with the primary company?
Subject to directors’ time commitments there is merit in permitting greater number as directors approach retirement; for example, one external appointment up to two years before retirement and, thereafter, two until retirement.
b) Should the primary company be entitled to the fees from an external appointment?
Fee or free
If the primary company considers its executive director’s time with the external company might otherwise be productively devoted to the primary company, time for which the primary company is already paying through the director’s salary, the primary company may feel some justification in expecting the fees.
On the other hand, the external appointment will carry personal risks for the director arising from the director’s legal duties to the external company, risks for which the director could reasonably expect to be compensated.
On the other hand again, if the external appointment also helps the director in his or her future career, then there are grounds for regarding the relinquishing by the director of personal fees as “trade-off”.
? Would the answer to the preceding issue be different if the external appointment was attributable to the director’s position with the primary company rather than to the director’s own personal skills and qualities?
? If the fees from the external appointment are paid to the primary company, should it indemnify that person against any claims made against them in their capacity as director of the external company (wilful default or negligence on the part of the director excepted)?
? Should similar indemnity be given by the primary company in the event of the external appointment being taken up by the director at the express request of the primary company irrespective of which party receives the fees?
Should the primary company adopt guidelines limiting the number of community/not for profit appointments its executive directors may hold?
Although not financially rewarding directly, community/not for profit appointment can benefit both the primary company and the director, especially through the reputation it may carry or the contacts it brings, as well as adding to the director’s personal development.
If the time commitment for community/not for profit appointment is outside work hours then it should only become an issue if it impinges on the director’s performance.
Any ongoing time commitment inside usual work hours should require the approval of the primary company’s board.
In the end it’s case of weighing up the advantages and drawbacks for each and reaching solution where everyone is comfortable.
If the various issues can be negotiated and resolved at the time or before the executive director is appointed to the primary company’s board it will help prevent difficulties arising in their relationship at later date.
Peter Webb is director research and policy at the Institute of Directors in New Zealand (Inc).