The Increasing Use of Non‐Executive Directors: Its Impact on UK Board Structure and Governance Arrangements

Abstract

The last decade has seen a sharp increase in the number of non‐executive directors (NEDs) on the boards of UK listed firms. Using a sample period spanning the publication of the Cadbury Report (1992), this paper evaluates the implications of this increase. The main findings can be summarised as follows. First, the increased demand for NEDs has been more pronounced for firms classified as having proportionately too many executive board members in the pre‐Cadbury period. Secondly, the probability of compliance with the Cadbury Report's proposal for a minimum of three NEDs is positively related to the magnitude of the expected net benefits of adding further non‐executives to the board. Finally, there is little evidence that the increased use of NEDs caused firms to make costly adjustments to other elements of their control systems in an attempt to re‐equilibrate their governance portfolios. These findings are consistent with claims that the recent trend towards greater NED representation on UK boards may have helped to raise general governance standards.