Lawyers as Independent Non-Executive Directors?
In two highly successful economies, Germany and the US, the picture is quite different. Over 50 per cent of DAX 30 and Fortune 100 companies have at least one qualified lawyer on their unitary or supervisory boards. - Spencer Stuart, July 2013.
Firstly, what is an Independent Non-Executive Director ("INED")?
An INED is an independent director or external director who is a member of the board of directors ("BOD") of a company who does not form part of the executive management team.
He/she is not an employee of the company and is differentiated from internal directors, who are members of the board and also serve as executive managers of the company (most often as officers of the company). However, an INED does not have the same legal duties, responsibilities and potential liabilities as their executive counterparts.
INEDs are usually paid a fee for their services but are not regarded as employees.
All directors should be capable of seeing company and business issues in a broad perspective. Nonetheless, non-executive directors are usually chosen because of their independence and are of an appropriate calibre and have the necessary experience to carry out the role.
Secondly, what role does an INED play as part of the BOD?
Fundamentally, the INED role is to provide a creative contribution and improvement to the board by providing dispassionate and objective criticism. Their role may change depending on the organisation, though they are usually not involved in the day-to-day management of the company but monitor the executive activity and contribute to the development strategy.
INEDs are usually people of stature and experience who can act as both a source of wise independent advice and a check on any wilder elements on a board.
Thirdly, should lawyers be part of the BOD as INEDs?
Lawyers are uniquely qualified to educate fellow board members on a board’s overarching legal responsibility to manage a company's objectives.
In general, these are the main reasons why lawyers should be part of the BOD:
Lawyers possess a range of skills and legal knowledge that complement existing directors.
Lawyers are comfortable dealing with complexity and bring an important perspective to the aspect of legal grey area. It is also reassuring for board members to have among them a non-executive who is familiar with the pitfalls of a complex regulatory landscape.
Lawyers in professional practice have plenty of exposures to clients’ business challenges and belong to sizeable commercial enterprises of their own.
Lawyers could contribute diversity and insight to boardroom debate and decision making.
Lawyers know how to run successful commercial operations too. In the course of their work, corporate lawyers encounter countless companies operating internationally on a large scale and in the midst of complexity.
Moreover, having a lawyer on board apparently goes hand in hand with differences in corporate performance. Companies with lawyer directors seemed to pay their chief executives more, but have less volatility in pay, due to lower levels of corporate risk-taking and default. Litigation risk declines too: stock option backdating litigation, for example, was 94 per cent lower at companies with legal directors. Conversely, when there were no lawyers on the board, there was “a 308 per cent increase in the effect of accounting malpractice litigation on firm value”. - Financial Times, February 22, 2013.
Fourthly, should a private limited company get an INED too?
A non-executive director is a director who does not work for the company on a full time capacity and receive a relatively smaller director's fees. The function of a non-executive director is to determine the overall policy of the company and to assist and advice the company based on his/her relevant expertise.
For many small businesses, members of the company (shareholders) who have come up with their own capital to fund their businesses are often involved in the day-to-day management of the company. These members usually appoint themselves to be the directors of the company.
Unlike public limited companies, private limited companies are not subject to corporate governance code of conduct (except as what may have been prescribed by the Companies Act 2016) and thus appointing a non-executive director is usually unnecessary.
However, this does not mean you should not appoint an INED to part of your BOD. INED is very useful in advising and assisting a company towards a better corporate path.
Fifthly, what type of company should hire a lawyer as an INED?
There is no definite answer to this question. In general, any kind of company can appoint a lawyer to be part of their BOD as an INED.
However, to appoint a lawyer as an INED, it is better to see the type of risk the company is dealing with. For instance, if the company is a fintech-related company, it is good to have a lawyer who has good understanding about the Financial Services Act and Capital Market and Services Act as your INED.
Considering that fintech is a new area of business in Malaysia and there still many legal uncertainties regarding fintech-related products and services, it is good to have a lawyer as an INED. The lawyer (as an INED) should be able to make sure that whatever decision made by the BOD will be as according to the law and to certain extend, find a loophole to the existing law.
As a fintech-related company (especially crypto-related), many Malaysians are stigmatised about the company being a scam company. Having a lawyer as part of your BOD will somehow indirectly convince the public that your company is genuine and not a scam.
Sixthly, are all lawyers qualified to be INEDs?
Generically, no law that prohibits lawyers from being INEDs. However, it is pointless to appoint lawyers who have no corporate and commercial background and experience as your INEDs.
For instance, if the lawyer is someone whose specialisation is in medical negligence or personal injury, and your company is a real estate company, it is irrelevant to appoint such lawyer as your INED. He/she might not be able to fully contribute to your company as he/she has no knowledge about real estate and might not be able to fully understand how your company works.
It is advisable that you appoint a lawyer as an INED based on his/her background and specialty that are consistent with the nature of business of your company. A corporate lawyer usually is the best choice to be appointed as an INED in a corporation as they are already exposed to commercial and corporate exercises everyday.
A lawyer who is also a registered company secretary is a plus point to be appointed as an INED.
However, again, you should also take into consideration whether such lawyer is a 'business-minded' lawyer. A business-minded lawyer should be able to see things not only from the legal perspective, but also from the commercial perspective.
If your require further assistance from us, please do not hesitate to contact our partner-in-charge, Haeme Hashim at firstname.lastname@example.org.