Non-executive board members are being attacked from two sides. From one side, shareholders and legislators have been criticising non-executives for failing to effectively monitor their companies. Corporate governance scandals such as Marconi, Vivendi, Ahold and Enron are used as evidence that non-executives are not keeping a close enough watch on executives.

From the other side, managers have been criticising non-executives for failing to add value to the company. Traditionally, managers have been less noisy than shareholders because, after all, the board is the centre of power in a hierarchy. But the concerns are just as deeply felt. Non-executives, it is claimed, challenge strategies and probe performance results. But because they do not put in enough time to be able to understand the specific issues the company is facing, they frequently distract managers or interfere in a way that delays decisions, creates extra costs and sets inappropriate priorities.

In this article, I will use the term non-executive to cover both the Anglo-Saxon version of an independent director, who is a member of a unitary board including executive and non-executive directors, and the European version of a supervisory board member, who sits apart from the executive board.

Parenting Theory

With the increased focus on corporate governance and increased duties for non-executives, it is worth looking at the role from first principles. The main theory that covers roles in a hierarchy is parenting theory. This observes that each layer in the hierarchy has the potential to both help and hinder the work of the layers below. Thus, success depends on the layer being able to be more of a help than a hindrance. In other words, a good hierarchy is one in which the higher layers add something significant to the layers below.

This value adding challenge is of particular interest in highly decentralised companies. In these companies, the layers below could operate as independent businesses. For example, it is common that a business unit within a larger company was previously an independent company and it could, through a management buy-out, return to that state. The layer above the business unit – the parent layer – will be a net drag on performance unless it adds something to the business unit that is greater than both its cost and any inappropriate interference.

Research into the value added by corporate levels in decentralised companies has shown that many add little. Even worse, they are often net destroyers of value. This may seem rather surprising. Take the most successful managers, promote them to the corporate headquarters, give them incentives to work hard for the benefit of the company, and you would expect the net result to be positive not negative.

The reason for this seemingly odd negative outcome is the 10 per cent/100 per cent paradox. As parenting theory explains, it is hard for managers who spend 10 per cent of their time on the issues facing a business to give useful guidance to managers who spend 100 per cent of their time on the company.

Research suggests that parent managers can only expect to add value to a decentralised business unit if they meet two conditions. First, they must possess some rare resource or capability that is needed by the business managers. Often this is in the form of an insight that is held by the parent managers about how the performance of the business unit can be improved. In these circumstances, parent managers can use their unique position as hierarchical superiors to influence the managers in the business.

Second, parent managers must understand the business in question well enough to be able to avoid doing it harm inadvertently. Think of a specialist doctor who knows how to cure a particular health problem. The doctor’s insights and skill are valuable to the patient, but only if the doctor knows enough about the patient to be confident that the treatment will not have negative side effects. This “sufficient understanding” condition is like a doctor’s Hippocratic oath: first do no harm.

Both conditions are challenging. It is tough for parent managers to know more about a business than the managers who all of their time on it. It is also tough for them to understand a business well enough to be certain that a particular intervention will not have negative side effects.

Consider the following example. Suppose the CEO of an electrical and electronics group decides that some of his businesses need to invest more on innovation. He is concerned that their product lines are ageing, and he has heard about the new product plans of competitors. As a result, he questions their new product plans at the next quarterly review meeting. His intervention causes some reassessment by the managers in the businesses, who adjust their priorities to take account of the concerns of their boss.

The CEO can be confident that innovation is now higher up the agenda of the businesses, but he is cannot be sure what this has forced off the list of priorities. Maybe his intervention has caused the managers to delay work they were going to do on upgrading the IT system. Maybe it has caused them to delay a project on service improvement. Maybe it has not changed any priority, and has merely energised them to work harder and achieve more.

Unless the CEO understands the previous priorities of these businesses and the likely readjustment that his intervention will cause, it is hard for him to know that his guidance will have a positive net influence. In other words, the condition of “sufficient understanding” is a difficult one to meet. Bosses need a close relationship with their subordinates to be able to predict the response to a particular intervention.

Can non-executives add value?

So what has all this to do with non-executives? Quite simply, the board itself is an extra layer in the organisation. This is particularly true of supervisory boards, but it is also the case for unitary boards. In the latter hierarchy, senior managers normally have an executive committee that acts as an advisory group and decision support to the CEO. Thus, the main board is a layer above the CEO. Since some senior managers are on both the executive committee and the main board, it is the non-executives who most clearly represent the extra layer. Therefore, the principles of parenting theory certainly apply to the role of non-executive directors.

These principles state that, if the extra layer is to add value to the company, the non-executives must:

• possess some rare resource or capability that is needed by the executive managers

• understand the businesses in the company well enough to ensure that their advice and guidance does not inadvertently do the businesses harm.

As mentioned above, we know that it is difficult for a full-time executive to add value to business units that report into him or her because of the 10 per cent/100 per cent paradox. Logically, it is doubly difficult for a non-executive who spends as few as ten days a year on company business. It is highly improbable that he or she can meet the conditions of both having some rare contribution to make and understanding the businesses well enough to know that the contribution does not have toxic side effects. It is not impossible but, since the hurdle for non-executives is more like 1 per cent/100 per cent, few succeed in getting over it.

This conclusion is supported by most research on the topic. Academics who have studied boards have been unable to identify significant sources of value added. Moreover, executives in companies frequently complain about the levels of understanding and the quality of interventions made by non-executive boards.

Of course, there are exceptions. Directors with special insights into an industry, a region or a particular function can contribute significantly to companies lacking this knowledge. Similarly, directors with knowledge of the capital markets or of acquisition tactics can help executives without this experience. But these are special situations. Normally, the experience that directors have is partly outdated by the time they take on non-executive positions. Moreover, the special insights and knowledge possessed by a non-executive can often be acquired from consultants or advisers who pose a lower risk of inappropriate interference. In fact, it may be better for both the company and the individual for this value to be provided from the position of adviser rather than that of non-executive. Jack Welch, ex-CEO of GE, is an example. Rather than accepting a number of high profile board positions, he chooses to offer his services as an adviser to companies willing to pay his high rates.

Of course, individual directors will refute the broad conclusion that they do not add value. They will point to situations where their interventions have encouraged companies to explore new opportunities or stop foolish projects. They will describe situations where they have been able to offer coaching to an executive. They will point to the important work of the audit committee or remuneration committee.

The research suggests, however, that these directors are being blinded by their perspective. The opinions of executive managers are not usually as positive. Moreover, even if the examples are justified, they are usually swamped by negative cases that executives can list of interventions that led to delays, higher costs and worse decisions.

The conclusion, therefore, is that non-executives are unlikely to add value except in special circumstances. In fact, the more independent they are, a quality demanded by the most recent governance recommendations, the less chance they have of adding value. Moreover, the special circumstances in which individuals are able to add value – unique insights and rare knowledge – are such that the individual will probably be more useful to the company as an adviser than as a non-executive.

Implications for the role of non-executives

Instead of seeing themselves as advisers of or partners with management, I propose that non-executives recognise that in most cases they are unlikely to add value.  Hence, they should focus on their role as an independent supervisor. This is easier for directors in two-tier boards where the role of the supervisory board is explicitly supervisory. It is harder for those in a unitary board, where the expectation is that non-executives should be equals of executives in guiding the company.

What constitutes good supervision?

 In practice, the supervisory role of the non-executive boils down to one thing: assessing whether the executives are capable of running the company well and are appropriately incentivised to do so. Other supervisory tasks such as ensuring that there is no fraudulent behaviour or that the organisation does not expose itself to undue risks are unrealistic given the time non-executives spend on the business.

On the issue of fraud, a story about the Enron audit committee is striking. At the time of the company’s collapse, the agenda of one of the audit committee meetings was made public along with the information that the meeting lasted only one hour. With hindsight, it was apparent that at least half of the 15 items on the agenda contained tricky issues, each of which might have warranted a discussion of an hour or two. When asked why the meeting was so short, one non-executive responded: “We had a hard time stringing it out for an hour. Against item one, we asked the auditors whether there were any issues we should discuss and they said no. We then asked whether there was anything they would like to talk to us about that they would not want to raise in front of executive directors. Again they said no. So we were on to item two.”  With this example in mind, it seems unrealistic to expect the audit committee to effectively supervise the work of auditors.

Returning to the issue of management capability, non-executives have some important tasks. They must agree performance measures with executives. They must ensure that the information coming to them is unvarnished and appropriate to their responsibilities. They must ensure that the incentives for executive managers do not encourage them into foolish investments or make them too risk averse. Finally, they must ensure that their group of non-executives is ready, willing and able to organise themselves to act when concerns are raised.

For the unitary board, this final task is probably the hardest one. Because the concept of the board is unitary, giving the executives and non-executives equal status, it can feel insidious to “organise” the non-executives in any separate way. Hence, the latest thinking about governance advises that a non-executive chairman and a senior non-executive director should act as the organising individual.

Are non-executives worth it?

So are non-executives of any use? The answer is yes. Even in their limited supervisory role, they can have a big impact on the market capitalisation of the company. Even if this only involves an intervention once every decade, it will be an intervention that can add 10 per cent, 20 per cent, even 50 per cent to the market value of a company, or at least it can stop the market value from falling by these amounts due to misguided managers remaining in a post for too long.

Moreover, by avoiding the risks associated with a more ambitious role, non-executives can focus their energies and reduce the costs they impose on the organisation. They do not need to debate the company strategy, get involved in the turn-around plans for the Asian division or advise executives on which company to use for IT outsourcing (all topics raised at recent board meetings with which I am familiar). By stepping back from these managerial issues, and concentrating on assessing the capability of the executive managers, non-executives can serve both shareholders and executives better. While they may not be able to do all the monitoring tasks that shareholders and regulators would like, they can serve their needs by assessing executives and acting promptly when changes are needed. While they may not be able to add value in the way executives would ideally like, they can at least be less interfering and avoid value destruction. The resulting role may be less attractive to some, but is more in line with the time they have available and the amount they get paid.

Andrew Campbell is director of Ashridge Strategic Management Centre. He is author of more than ten books on strategy and corporate-level issues, most recently “The Growth Gamble: When leaders should bet big on new businesses and how to avoid expensive failures” (Nicholas Brealey Publishing, 2005).