Essentially the non-executive director's role is to provide a creative contribution to the board by providing independent oversight and constructive challenge to the executive directors.
Non-Executive Directors and SMEs
Business owners can feel isolated, and a non-executive director can act as a useful sounding board, as well as offering support and contacts
In the UK, non-executive directors have the same legal duties, responsibilities and potential liabilities as their executive counterparts but involvement levels vary, with commitment usually amounting to a couple of days a month. There is no legal distinction between an executive director and non-executive director.
Most non-executive directors are paid but some do it on a voluntary basis to gain experience in a sector or to give something back, or in return for a stake in the business.
Non-executive director earnings are negotiable and can earn anything from £6,000 to £25,000 per year in non-listed or small businesses.
UK Corporate Governance an Overview - Non-Executive Directors
The 1992 Cadbury Report initiated a debate about the main functions and responsibilities of non-executive directors.
Today, it is widely accepted that non-executive directors have an important contribution to make to the proper running of companies and, therefore, more widely to the economy at large.
As the Cadbury Report said, they
“should bring an independent judgement to bear on issues of strategy, performance, and resources including key appointments and standards of conduct”.
There is no legal distinction between executive and non-executive directors.
As a consequence, in the UK unitary board structure, non-executive directors have the same legal duties, responsibilities and potential liabilities as their executive counterparts.
Clearly, it is appreciated that they cannot give the same continuous attention to the business of the company. However, it is important that they show the same commitment to its success as their executive colleagues.
It follows that non-executive directors are subject to the codified duties of directors contained in the Companies Act 2006 in the same way as executive directors.
Prior to accepting a non-executive appointment, the prospective appointee must ensure they have a comprehensive understanding of the company they are about to join and have undertaken their own due diligence.
Once appointed a non-executive director should ensure that an appropriate induction programme is put in place; they participate in on-going training and keep up to date with developments in the company and the relevant business sector.
The UK Corporate Governance Code states:
"Non-executive directors should have sufficient time to meet their board responsibilities. They should provide constructive challenge, strategic guidance, offer specialist advice and hold management to account."
The Main Functions of Non-Executive Directors
Non-executive directors are expected to focus on board matters and not stray into ‘executive direction’, thus providing an independent view of the company that is removed from the day-to-day running. NEDs, then, are appointed to the board to bring:
The Key Responsibilities of a Non-Executive Director
Chairmen and chief executives should use a non-executive director to provide general counsel – and a different perspective – on matters of concern. They should also seek their guidance on particular issues before they are raised at board meetings. Indeed, some of the main specialist roles of a non-executive director will be carried out in a board sub-committee (particularly the remuneration and audit committees), especially in listed companies.
The key responsibilities can be said to include the following:
As ‘an outsider’, the non-executive director may have a clearer or wider view of external factors affecting the company and its business environment than the executive directors. The normal role in strategy formation is therefore to provide a creative and informed contribution and to act as a constructive critic in looking at the objectives and plans devised by the chief executive and the executive team.
Non-executive directors should take responsibility for monitoring the performance of executive management, especially with regard to the progress made towards achieving the determined company strategy and objectives. They have a prime role in appointing, and where necessary removing, executive directors and in succession planning.
Non-executive directors are also responsible for determining appropriate levels of remuneration of executive directors. In large companies, this is carried out by a remuneration committee, the objective of which is to ensure there is an independent process for setting the remuneration of executive directors.
The company and its board can benefit from outside contacts and opinions. An important function can be to help connect the business and board with networks of potentially useful people and organisations. In some cases, mon-executive directors will be called upon to represent the company externally.
Non-executive directors satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible.
It is the duty of the whole board to ensure that the company accounts properly to its shareholders by presenting a true and fair reflection of its actions and financial performance and that the necessary internal control systems are put into place and monitored regularly and rigorously.
A non-executive director has an important part to play in fulfilling this responsibility, whether or not a formal audit committee (composed of non-executive directors) of the board has been constituted.
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