In the prior article we looked at how the VOC, the Dutch East India Company, shareholders waged a twenty-year campaign to get some influence on the governance of the business that their funds had created and ended up importing an abbreviated version of the EIC, the English East India Company’s two-tier Board. An episode so forgotten over the intervening centuries that business schools these days teach that two-tier Boards reflect “continental” attitudes to Governance in comparison to the allegedly Anglo-Saxon single-tier Board. It is at times like those that I look to the title of a book on my shelf by David Loy, a Zen Professor in Japan, entitled “The World Is Made Of Stories”. In this case the story literally inverts the historical actuality.

Another much more recent tale is all but forgotten. Boy do we shred our business history in our never-ending “Whig History”/”progressive” attitude to time. A process of historical uprootment which is causing governance issues right now well above the level of the company – another tale entirely. But confining ourselves to company governance and sticking with literature as per the Memoirs of Sherlock Holmes the dog that doesn’t bark is hardest to spot. The dog that did not bark in the case of the VOC shareholders was the total absence of non-executive or independent Directors. They had no demands for such to improve governance and indeed they, and the EIC, had no concept thereof.

For Sherlock Holmes the non-barking dog was instructive. In a similar way the non-non-executive role in the 17thC debate points us to other actualités that are all too easily forgotten in our rush to compost the past on our alleged drive to a New Utopia. The following is snipped from Chapter 7 of Realpolitik…


Non-Executive-Directors are ubiquitous and de rigueur these days but in our myopic times the long view is poorly understood. So we start this chapter with a look at NEDs over the past five centuries. Actually the first four are easy – there was no such thing as a NED. They first appeared in the 19thC in the V2, Company Law Company and didn’t exactly – er – “command the highest respect”. In the late 20thC, almost out of the blue, “independent NEDs” suddenly became the panacea [1] of Listed Corporate Governance, the remedy that cures all known ills. Allegedly.

So far we have used the abbreviation NED to cover a whole host of different terms – external Director, outside Director, independent Director, investment Director and any other such nomenclatures – there have clearly been many concepts of the NED over the past century. The Holy Grail in the V3, Corporate Governance Company Board for a NED is the sacred “independence”, which label obviously confers magical powers beyond those of normal men/women. If it did not then such a NED might be “just human” after all and not capable of bandaging the V2 Company wounds sufficiently to staunch its genetically-caused bleeding all over society and the economy. What does “independent” mean according to the Holy Writ of the Corporate Governance Bible? What is the realpolitik, or indeed relevance, of “independence” to the SmallCo Board? …


“NEDs” in the simplest sense are Directors who are not executive Directors, who come to the company rarely and have no place in the day-to-day management of the organisation. Their powers/authority derive from their position on the Board.

The English V1, Chartered Company was governed by a legislature, a Court of all the members/owners on top of an executive, a Court of a tiny subset of members/owners who had been committed to do something specific (ie managerial). There was neither any concept nor any possible role for any kind of NED. The very idea would have been incomprehensible and in a sense against the Company’s constitution (as you had to be a member to gain admittance). What business (ha!) would anyone have being in your Courts who was neither member nor owner?

The first NEDs appeared on V2 Company Boards. Their function in the 19thC was simply to add credibility and help attract funds:

“It was in the last two decades of the nineteenth century that it became the fashion for many companies to seek a titled person to sit on the board as a non-executive director, on the basis that this would add tone or lustre, attracting the investors.” [2]

As we shall see later in this chapter this type/role of NED still exists today (unsurprisingly as SmallCo is a V2 company). Professional advisers – solicitors and accountants [3] were also amongst the first NEDs (and once again this also exists today in some early SmallCos).

For almost the entire history of NEDs they commanded minimal to negative respect. In the 19thC they were known as “guinea-pigs” [4] and were similarly regarded well into the 1980s: “Christmas tree decorations”[5].

Being a NED was less demanding back in the day. If you are a hard-working NED look away now as Agatha Christie outlines the essence of NEDing in the ’20s:

“(Coote) got me in as a director of something or other. Very good business for me – nothing to do except go down to the City once or twice a year to one of those hotel places – Cannon Street or Liverpool Street – and sit around a table where they have some very nice new blotting paper. Then Coote or some clever Johnny makes a speech simply bristling with figures, but fortunately you needn’t listen to it – and I can tell you, you often get a jolly good lunch out of it.” [6]

It is a great irony, and some phenomenal rebrand, that:

“…a role that has traditionally attracted so little respect has now become a cornerstone of best governance practice.” [7]

Now the NED is the central feature in the newly developing V3 Company. The independent NED is the panacea for all known Company Governance ills. I raised the question: “If you are the panacea then surely you are being set up as the fall guys?” with an experienced listed/unlisted NED who replied: “Yes we are.”

Every corporate collapse, every study (there have been many [8]) showing that there is zero empirical evidence that they help, is followed by a doubling-down or a redefinition of “independence” by supporters [9]. All of which leads to an ever-more robotised and systematised role for BigCo NEDs who are becoming nigh on off-balance-sheet civil servants, in effect auditing processes and policies according to paint-by-number guides.

How did we get here? How did the NED go from laughing stock or, at best, a good chap who wasn’t going to rock your boat, to panacea? How did the NED go from zero to hero?

In any sense remotely similar to how the concept is used today, independent NEDs date from the 1970s with the dawn of Corporate Governance in the US, post the collapse of Penn Central. In the UK the first straw in the wind was the 1973 Watkinson Committee [10] which was the first to suggest that ListedCos should have NEDs on the Board to monitor the executives – a novel concept at the time. Government white papers in 1973 and 1977 suggested that NEDs could benefit Boardrooms but held back from mandatory recommendations. These white papers led to the Bank of England, along with eight other bodies, leading the 1982 creation of ProNed, an organisation to promote NEDs. At that time only around half of UK ListedCos had NEDs at all and only one-fifth of those were independent. The Reagan/Thatcher decades of the 1980s moved the governance focus back to the shareholder during hostile M&A activity and there was something of a pause in the rebranding of NEDs.

This is a first-hand (emailed) report of one of my interviewees experience of UK Plc Boards at the end of the ancien regime:

“I remember the conversation surrounding our selection of the new round of NEDs in the early ’90s as being focused on broad business-helpful connections rather than any modern notion of ‘effective challenge’ or ‘oversight’ – and the surprise/shock that arose when some of these individuals had the temerity to question the executives’ views re pay. My earlier experience outside FS left some of the same impressions. That said I think the ‘avuncular’ factor (as in your podcast [11]) was also present and probably listened to (but not necessarily admitted to). From a personal perspective I saw NEDs as people that I had to secure alliances with as they were part of the support structure for seeking to take a principled but unpopular line.”

UK BigCo NEDs as we know them today were created by the Cadbury Report in 1992. Cadbury himself chaired ProNed from 1984–9512 and was thus rather pro (sic) the whole NED thing. Given that the Bank of England had driven the creation of ProNed and the Administrative State is always most careful to pick the right Chair for any given report we can assume that the Powers That Be had long before decided that NED-centricity was The Answer They Wanted [13]. In 1994, ProNed, by now unsurprisingly worth rather more, was sold to headhunters Egon Zehnder.

But, vitally, what role would a redefined NED play? The CBI in its response made clear its concern over turning NEDs into PC Plods:

“We support the view of the committee that non-executive directors have an important role to play in companies. Perhaps because of its terms of reference, the committee has focused narrowly on their monitoring role. We think this is unfortunate, because it understates the contribution which the non-executives can make to the growth of a business: their different experience brings a fresh eye to problems and the development of strategy. Moreover the concept of the unitary board is based on all directors being equally responsible for its actions; its effectiveness depends on members of the board as a whole working together. It is for the board to distribute functions to its members; attempts to reserve tasks to one class of directors will create the danger of opening the way to a two-tier system.” [14]

As we saw earlier this has led to an utter phase shift in the V3 Board which is by now almost entirely a “Conformance Board” with Advisory Boards surfacing as “Performance Boards”. The V3 Board has, as feared by the CBI, split within itself into “angels and (potential) villains” [15] as it has been described but more fundamentally the Board’s role has shifted dramatically towards Corporate Control and away from Corporate Creativity. But are the angels (in the heavenly not investment sense) that much more angelic than the villains? A US study measured this:

“Moreover, and perhaps even more troubling, our data also shows that independent directors themselves are not necessarily immune from the temptations of financial fraud, particularly with the gains to be had from backdating stock options. SOX’s reliance on them may simply have transferred oversight responsibilities from compromised executives to compromised and ill-informed board members.” [16]


The SmallCo takeaway here is that in V2 Companies the NED position has existed right from the start but only as “NED as someone adding some special sort of value to the Company” not as a warden overseeing inherently untrustworthy individuals. Unlike, however, in the days of Agatha Christie’s clever Johnnys, no SmallCo is going to blow good money on someone turning up to just to warm seats and have a good lunch. SmallCos need something far more value-adding in return and fortunately do not have to worry about the BigCo NED mentality until they get near the pre-IPO “Two Tribes” stage. At which point as we saw ideally they hire NEDS who are not just “compliance robots” but also understand business, Corporate Creativity and the realpolitik of SmallCo land. This hiring task does not get easier as the divide between the two types of NEDing continues to widen.



[1] Just to keep the Olympian motif going, Panacea was the Goddess of universal remedy

[2] Slinn Spira “A Jolly Good Lunch: the evolution of the role of the non-executive director in the UK” 2002

[3] In the inter-war years with mergers creating ever-larger companies these faded away to be replaced by a full-time in-house accountant who later turned into the modern CFO

[4] Websters 2013 “A director (usually one holding a number of directorships) who serves merely or mainly for the fee (in England, often a guinea) paid for attendance.” Traders were paid in pounds but Gentlemen in guineas (£1.05)

[5] Tiny Rowland CEO Lonrho

[6] Agatha Christie “The Seven Dials Mystery” Collins 1929

[7] Spira, Bender “Compare and Contrast: perspectives on board committees” 2004

[8] See eg Baum “The Rise of the Independent Director: A Historical and Comparative Perspective” 2016

[9] There is a whole industry out there – consultants, academics et al whose livelihoods are intimately tied up with “Corporate Governance” being A Big Thing

[10. Chaired by Cadbury Schweppes Chairman Lord Watkinson. Anyone spotting a Cadbury thread?

[11] I’d referred to the role of NEDs that week. Avuncular as in “arm round the shoulder support/advice”

[12] In governance terms this would appear to be quite some conflict of interest. However even if the Administrative State moves glacially, as we can see, the glacier had been moving, albeit slowly, in this direction for twenty years

[13] And I guess at the time if you were an important part of the Administrative State and did not understand the history of governance then maybe you might have thought this a useful step yourself, especially if you did not have a remit to repair the genetic flaws in the Company V2

[14] CBI “Summary of the CBI Response To The Cadbury Committee Draft Report On The Financial Aspects Of Corporate Governance” July 1992

[15] As per FTSE CEO Corrin in “Accountancy” April 1993

[16] Schipani “Do Independent Directors Curb Financial Fraud? The Evidence and Proposals for Further Reform” 16/4/17