Panel discussion: "Non-Executive Directors in Luxembourg, a focus on NEDs, iNEDs, and the concept of Independence"
Speakers: David Barth, Thierry Flamand, Jane Wilkinson, Tom Loesch

 Non-Executive Directors and the concept of independence

Important thought-leadership on the nature of non-executive directors and independence has been a highlight of ILA’s recent work. There is no legal definition of independence, so an ILA task force sought to add some clarity, with a paper published before summer. This work was discussed by a diverse panel of experts.

The key take-aways for the “Non-Executive Directors in Luxembourg - NEDs, iNEDs and the concept of independence” discussed were highlighted. They began with an affirmation of the importance of external non-executive directors (NEDs) bringing fresh perspectives to how issues are addressed and solved. Diverse industry and regulatory expertise and skills are added, whether the NED is independent or not. Also according to the paper, independent non-executive directors (iNEDs) bring additional value as they have additional capacity to challenge the management due to an absence of conflict of interest. 

The report insisted that a one-size fits-all approach to this question is inappropriate. Hence the board should be responsible for setting clear policies and criteria to assess independence. Ideally there would be no “red-lines” which would exclude an individual without consideration, but attention needs to be paid to regulation when setting practices and criteria. This process and assessments of individuals and their potential conflicts of interest needs to be on-going. And ultimately the board is responsible for decisions taken collectively. 

Jane Wilkinson, who is herself a NED said that assessing the meaning of independence for a private equity fund is to a large extent about understanding what a client expects. “There are situations where having somebody here in Luxembourg on the ground, who will ask the tricky questions, is important to them,” she said.

Thierry Flamand, president of the executive committee of the insurance regulator the CAA described the aspects related to NEDs and iNEDs in their circular 22/15. This set out regulatory requirements for the composition and functioning of the board of directors of insurance and reinsurance undertakings. “We collected elements from different regulations that should be understood by the board. During this exercise we decided to try to define what we think an iNED is in financial terms, but for the rest we have no ambitions in term of iNED definition,” he said. 

He said that the arrival of 12 insurance and reinsurance companies in Luxembourg post-Brexit had made iNEDs particularly relevant in these cases. “It is important to have someone who is aware of local specificities,” he said. Another advantage is that iNEDs can act as a direct channel between the insurance company, the board and the CAA. 

Panel moderator Tom Loesch asked if there is an optimal number of NEDs/iNEDs on a board. Restructuring and Turnaround specialist and Non Executive Director David Barth said, speaking about family owned, non-regulated companies, that: “at least one NED is good, but the best is two, and can be more if the necessity is identified by the company.” Yet to receive the full value from these appointments, NEDs “need to be heard and not excluded from decisions. It’s a balancing act for the NED as well as for the Chairman of the Board of Directors.”

When making assessments of NEDs and iNEDs, boards must document clearly why recruitment and retention decisions are made. The panel said it is good practice to list not just to industry experience but also details of training designed to keep the NED up to speed with the latest trends. “Ideally assessments should be every three years, or when the firm’s business model changes,” said Tom.

There was a discussion of how remuneration could affect independence. Variable remuneration can put this in question but not always, and relatively high fee levels can also contribute to bias. Similarly for tenure. If a director has been on a board for ten years then in many cases this starts to become an issue. But if this person clearly brings valued insight and expertise to the collective then there need not be a limit.

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