UK: An Overview Of The Higgs Report On The Role And Effectiveness Of Non-Executive Directors

Last Updated: 14 March 2003
Article by Caroline Pearce


In April 2002 the Government commissioned Derek Higgs to undertake an independent review of the role and effectiveness of nonexecutive directors. It was published on Monday 20 January 2003 at the same time as the Financial Reporting Council’s report on Developing the Guidance on Audit Committees (the Smith Report).

The review was initiated as part of a systematic re-appraisal of the adequacy of corporate governance arrangements in the wake of recent corporate failures, most notably in the United States. It follows the existing framework of corporate governance which began with the publication of the Cadbury report followed by the Greenbury and Hampel reports, all of which were combined to form the Combined Code.

Higgs’ view is that tighter corporate governance is preferable to legislative intervention which is the alternative that the United States has chosen in passing the Sarbanes-Oxley Act. He makes recommendations to build on the existing corporate governance framework (most notably the Combined Code), and what he describes as the ‘comply or explain’ nature of the Combined Code.

The review sets out significant changes to the Combined Code and also makes a number of non Code recommendations. It concentrates on corporate governance arrangements for UK listed companies. However, many of the Combined Code’s principles and guidelines are adopted by AIM companies (and, in some cases, large private companies). As a result, Higgs recognises that a number of his recommendations may be relevant to AIM and other companies and organisations.



Half of the Board, excluding the chairman, should be "independent" non-executive directors. The current position under the Combined Code recommends that not less than one third of the directors should be non-executive. The issue of independence is at the heart of any debate on nonexecutives. It is suggested that a definition of "independent" be included in the Combined Code. A non-executive director is to be considered independent when the Board determines he is independent in character and judgment and where there are no relationships or circumstances which might affect that director’s judgement. A director will not be independent if he:

  • has been an employee of the company within the last five years;
  • has had a material business relationship with the company within the last three years;
  • receives remuneration from the company beyond the non-executive director’s fee;
  • has close family ties or cross-directorships;
  • is a significant shareholder or has served on the Board for more than ten years.

Those non-executive directors deemed to be independent would have to be listed as independent by the Board in its annual report.


The Higgs review does not propose to introduce a legal distinction between the duties and responsibilities of executive directors and non-executive directors; however, a clarification of the role of a nonexecutive director was viewed as being useful and it has therefore been proposed that a description of the role be included in the Combined Code.

The role is defined under the following headings: (i) strategy (to constructively challenge and contribute to the development of a company’s strategy), (ii) performance (to scrutinise and report on the performance of management), (iii) risk (to be satisfied with the reliability of financial information and the adequacy of financial controls and systems) and (iv) people (to have responsibility for determining appropriate levels of remuneration for executive directors and a prime role in the appointment, remuneration and removal of management and in succession planning).

Under the proposals, non-executive directors would be required to meet as a group, on their own, at least once a year and the annual report should contain a statement as to whether or not this has happened.

The review further suggests that, prior to appointment, potential non-executive directors should carry out due diligence on the Board and company to satisfy themselves that they have the knowledge, experience and time to make a positive contribution to the Board. A suggested checklist has been proposed so that nonexecutives can assess this.


The review proposes that each company should have a senior independent director (endorsing a provision already in the Combined Code). He must meet the independence test and be a non-executive who is to be available to shareholders if they have any concerns that are not resolved through the normal channels of contact with the chairman and/or chief executive.


There should be a nomination committee. By comparison, the current position under the Combined Code is that unless a board is small, there should be a nomination committee. Under the Combined Code the nomination committee should be made up of a majority of non-executive directors but the review refines this by requiring the majority to be made up of "independent" non-executive directors. Further, the committee should be chaired by an "independent" non-executive director.

As far as the appointment of non-executive directors is concerned, the review emphasises the desirability of using a wider pool from which to choose non-executive directors. It coyly notes that "a high level of informality" surrounds the process of appointing non-executive directors at present. This was widely criticised in responses to the consultation and Higgs notes that it can "lead to an overly familiar atmosphere in the boardroom". To address this, the review suggests that a greater use of formal recruitment processes should be employed and that the nomination committee should consider the skills, knowledge, experience of the candidate and role which is required of him before making appointment recommendations to the Board. Importantly, the Board should also set out to shareholders why an individual should be appointed as a nonexecutive director.

It is suggested that non-executive directors should always be appointed on written appointment terms (not a novel suggestion) and a specimen letter of appointment is appended to the review. A non-executive director should also be obliged to confirm that he has time available to undertake his role. Lack of time commitment was one of the main criticisms made of non-executive directors.

One area which has caused controversy is the recommendation that a limit be placed on how many non-executive appointments an executive director can hold. The report states that a full time executive director should not take on more than one nonexecutive directorship nor become chairman of a major company (defined as a FTSE 100 company). Furthermore, no individual should be chairman of more than one major company. It is suggested that this best practice be incorporated in the Combined Code. Significantly, the review does not limit the number of non-executive directorships that an individual (as opposed to a full executive director) may hold over all.


The report does not consider this area in great detail. Payment on the basis of fixed fees (i.e. annual fees and meeting attendance fees etc) is endorsed, as is part payment in shares in lieu of cash provided that the non-executive director’s shareholding does not represent a large proportion of his wealth. Granting options to non-executive directors, however, is disapproved of due to the "risk of undesirable focus on share price rather than the underlying company performance".


This is a new concept but is part of the overall theme that non-executive directors should be appointed on a more "scientific" basis and non-executive directorships should not be undertaken lightly. The suggestion is that all new non-executive directors should undergo an induction programme and a suggested checklist is appended to the review.

The performance of the Board, its committees and each individual member should be evaluated once a year and the process should be reported on in a company’s annual report.

The view is that although a non-executive’s relevant skills and experience will have already been tested upon appointment, it is important that the knowledge and skills of non-executive directors are extended and "refreshed". It is suggested that updates on legal, regulatory and other obligations would be helpful as well as "revisiting the effective behaviour of a director such as influencing skills, conflict resolution, chairing skills and board dynamics".


The role and responsibilities of the chairman are considered in some detail, the salient point made being the endorsement of the separation of the roles of chairman and chief executive, as well as the corresponding suggested changes to the Combined Code.


The response from major companies who are likely to be affected by the proposals has not been altogether favourable. It has been estimated that companies would collectively have to find up to 1,000 new non-executives to comply with the recommendations, which is too demanding to meet. Chairman, particularly, are unhappy with an enhanced role for the senior independent director in relation to dealings with major shareholders.

However, whilst many of these proposals have been seen before in some guise or other, there is a chance of greater universal acceptance amongst listed companies if they are incorporated into the Combined Code (which could be as soon as July of this year), especially given that in many instances, non compliance is a disclosure issue in a company’s annual report. One less happy consequence is that we may see a marked difference in the level of detail and prescriptiveness creeping into the Combined Code. Until now, it has been refreshingly short and succinct.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions