What is an iNED?
iNED stands for independent, non-executive director. You will often find them referred to as independent directors or non-executive directors (NEDs).
Aon.com defines iNED as,
an individual who is a director (member) of the board of directors who does not have a material or pecuniary relationship with the company or related persons” with the role of providing “independent oversight and constructive challenge to the executive directors.
Aon.com
iNEDS have unique attributes that strengthen boards, protect minority shareholders, improve corporate governance, and lead to better outcomes.
The Attributes of an iNED
Independence
There are many competing interests within a company. While all parties might want the company to do well, personal bias and groupthink can influence decision-making. Sometimes, boards simply lack the clarity needed to move forward. The details and stresses of day-to-day management can make it difficult to see the bigger picture.
Independence is the defining characteristic of an iNED. While no one is completely without bias, the iNED is further removed from the myriad of factors influencing executive directors. The well-being of the company should be the chief concern of the independent director.
This impartiality enables iNEDs to focus on the bigger picture and empowers them to fulfill their role as “the custodians of corporate governance.”
Expertise
iNEDs can fill gaps in company knowledge. For instance, a start-up might have a strong tech background but lack marketing experience. An iNED can act as a mentor and advisor in this area:
With an independent, you get the chance to select an expert in a specific area where your company wants to grow, or an area that has become more urgent due to market changes, new opportunity or an adverse situation.
theBoardlist
Depth of experience is vital for addressing weaknesses, but independent directors can do more than just fill isolated gaps. An effective iNED accounts for multiple moving parts to help form a cohesive strategy:
The complexities of today’s commercial world require that an independent board member must be comfortable assessing the firm in the context of strategy, technology, social responsibility, reputation and ethics. Having a broad breadth of experience allows INEDs to advise on a range of commercial issues.” Sylvia Cronin,
Central Bank of Ireland.
The depth and breadth of experience provides boards with a steady stream of quality information at relatively low cost. This knowledge is vital for SMEs facing complex environments and start-ups balancing high failure rates with shareholder demands.
Network
An experienced independent director brings more than just personal experience to the board. A good iNED combines their expertise with the connections that he or she has made over the years:
Most NEDs have usually helped several businesses find their feet, grow, or survive tough times. And, if a NED is faced with a situation they have never dealt with before, they’ll probably know someone who has.
Ian Ashforth, CRSI
While this network effort is a cost-effective opportunity for young companies that need to establish their place in the market, the EACTP warns against appointing a director for their connections alone: “it is not advisable to appoint NEDs to the board solely for their little black book. There needs to be wider commercial input.”
An iNED is not a means to force cheap introductions. Instead, the iNED calls on resources as needed to ensure the sustainability of the company and maintains a network of mutually beneficial relationships.
Good Governance
Independent directors make companies more balanced and accountable in the eyes of investors and regulators. Increasingly, new regulations require independent directors to make sure high standards of governance are met. However, companies should not wait for regulation before adding an independent director as iNEDs can help raise standards across the board:
In some jurisdictions an iNED is compulsory, but whether legally required or not, an iNED will help ensure all corporate governance and compliance requirements are met, and help demonstrate to the local regulator that the captive takes its governance requirements seriously.
Aon.com
Not only does this help companies stay ahead of regulation, but the focus on governance makes companies more investable. Investors want to know that there is an independent and impartial expert(s) that helps guide the company towards better performance and valuation. This is especially true of minority shareholders who require greater board representation and deeper insights into their investments.
Building a Better Board
A board with experienced, non-executive independent directors is capable of making better business decisions while protecting minority shareholders. In Part 2 of Why iNEDs Matter, we discuss the direct benefits of appointing an iNED.
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