2.4.7 Board balance and independence

At least one half of the board as a whole, excluding the chairman, should be non-executive directors (NEDs), all of whom should be independent (discussed below at the end of this item).1

However, there should be a balance of executive and non-executive directors2 and "to ensure that power and information are not concentrated in one or two individuals, there should be strong presence on the board of both executive and non-executive directors". The board should not be too large, but also not too sma11.3 The ideal size is about 2 to 4 executives, 1 chairman and 5 to 7 outside directors. The number of executive directors should be sufficient to ensure that the board receives balanced information and the number of outside directors should not be so great as to prevent good debate.

It is all about the balance between executive and non-executive directors and creating the possibility of good communication and creative debate in a strong unitary board. The general opinion is that NEDs can have more in-depth knowledge and influence if they experience the cut and thrust of debate among the executive directors and are not simply fed the one-sided view of the CEO. This differs from the US idea of counterbalance, which envisages boards with one or two executive directors and about eight non-executive directors. The British idea is based on creating a team that communicates optimally with each other.

Balance also demands a balance of variety of experience.4 The reason for a wider variety of backgrounds is that they will bring different perspectives to the work of the board. As for specialisation, there is an argument that banks ought to have a number of NEDs who know the banking and finance business: "financial experience and deep experience from elsewhere".5 The same may apply — possibly to a slightly lesser extent — to other industries.

There are two further balances:6 international diversity and age and gender diversity.7 The average age of NEDs is 59 and of chairmen is 62. Very few are women (only 7% of NEDs and only 2 chairpersons), although the percentage of women managers is much higher.8 The Higgs Review called for the pool of candidates to be widened in order to escape the influence of the old boys' network and Walker repeats the point about women board members.

As with the board as a whole NEDs have a role in "setting the strategy and supervising its implementation, which includes monitoring".9

Or worded differently "constructively challenge and help develop strategy …Scrutiny … management".10

The CC8 and CG10 define the term independent.11 The essence is that a NED is to be independent from management and the company. This means that a person who has been an employee of the company within the previous five years or has had a material business relationship with it in the previous three years is not independent. It is interesting to note that a director representing a shareholder is not independent. Such appointments are therefore avoided. This is described in more detail below in sub-section 2.5.7. There is only a minor difference with the Dutch Code. The material business relationship point relates to the past 3 years in the UK and the past one year in the Netherlands. Furthermore, in the UK especially a director becomes not independent if he has served for 9 years on the board and a chairman becomes not independent upon his appointment.