A non-executive director (NED, also NXD) is a member of the board of directors who does not form part of the executive management. NEDs usually stand back from the day-to-day running of the business. The NED must however be careful as there is no legal distinction between executive directors and non-executive directors under company law. As a result NEDs have the same legal duties, responsibilities and potential liabilities as the executive management.
The role of the NED has changed in the last 25 years when Tiny Rowland notoriously compared non-executives to trinkets on Christmas trees. Board meetings were amiable in nature and were often followed by a good lunch. The role today is much more professional. NEDs must challenge; to do so they must gain a detailed understanding of the company.
NEDs are the custodian of corporate governance.
The role of non-executive directors is broad. Non-executive directors are not employed by the company but appointed through a letter of appointment. They challenge, question and monitor the CEO and senior management; they bring an independent perspective to decision-making; they hold senior management to account; they also support and mentor the CEO and senior management. They are a critical friend and must act in the interests of the company's stakeholders (e.g. shareholders, employees, pensioners, suppliers).
Non-executive directors typically sit on the main board and have responsibility on the board sub-committees (e.g. Audit Committee, Risk Committee, Nomination Committee, Remuneration Committee, etc.).
A key role is being able to challenge as well as support. The NED must be prepared to ask difficult questions and be persistent and stimulate debate. The NED must spend the time to understand the business and be well prepared for meetings. That is not just reading the board papers but possibly asking questions in advance of meetings. In fact they can often assist by ensuring the board pack is fit for purpose and thereby guide the board to focus on the issues that are important and require input from the directors.
1. Key responsibilities
The key responsibilities of non-executive directors are:
a. Strategy: constructively challenging and contributing to the development of
strategy.
b. Performance: monitor and scrutinise the performance of management in
meeting agreed goals and objectives.
c. Risk: satisfying themselves that financial information is accurate and that
financial controls and systems of risk management are robust and defensible.
d. People: determining appropriate levels of remuneration of executive
directors; having a prime role in appointing; where necessary removing senior
management; and planning for success
2. Time Commitment
Non-Executive Directors will be required to:
a. Undertake that they will be able to allocate sufficient time to meet the expectations of the role, as set out in their letter of appointment, or as agreed from time to time.
b. Disclose their other significant commitments to the Board before appointment, with a broad indication of the time involved.
c. Inform the Board of any subsequent changes.
Non-executive directors receive compensation, which tends to be a function of the size of the company, time commitment and complexity of the role. The demand for non-executive directors has increased in recent years and so as the demand for business leaders to transition to non-executive roles.
3. Duration of appointment
Non-Executive Directors are typically appointed for an initial term of three years. The term may be renewed if both the director and the Board agree. Appointments are subject to the provisions of the Companies Act and the articles of association, including those relating to election/re-election by the Association Members at annual general meetings and the removal of directors.
4. Independence
The Board will determine whether the director is independent in character and judgement and whether there are relationships or circumstances which are likely to affect, or could appear to affect, the director's judgement. The Board will state its reasons if it determines that a director is independent notwithstanding the existence, of relationships or circumstances which may appear relevant to its determination
If you are appointing a non-executive director, you need to articulate why, and assess what skills and experience you need on the Board to help you grow the business. Make sure you take the appointment process seriously and understand the value the right NED can bring to you as a management team (this includes personal development) as well as the business as a whole.
Appointing the wrong person as an NED can have a terrible impact on both the individual and the company. The appointment of an NED should be seen by the board as a valuable, strategic appointment, not a box ticking exercise.
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