The Importance of Non-Executive Directors

Non-executive directors play a crucial role in many companies of all sizes and sectors. So what exactly is their role, how do they differ from executive directors and how can a limited company benefit from having a NED on their board?

What is the role of non-executive directors?

Non-executive directors (NEDs) sit on the board of limited companies but they are not considered part of the executive management team. Although they have the same legal duties and responsibilities as executive directors and regularly attend board meetings, they are generally not involved in the day to day management of a company and they cannot make any executive decisions.

The role of NEDs is primarily advisory and they act more like consultants, bringing their specialist skills and experience to the board. They use their know-how to help steer company strategy, improve processes or consider specific areas of company policy. Because they are not involved with everyday management duties, non-executive directors can often think ‘outside the box’ and provide a valuable sense of perspective to help guide executives when they make key decisions.

According to the Institute of Directors (IoD) the role of NEDs is essentially: “to provide a creative contribution to the board by providing independent oversight and constructive challenge to the executive directors.” There is a particular emphasis on their independence: “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.“ Meanwhile, the Association of Chartered Certified Accountants (ACCS) states that the role of NEDs “is to bring independent judgement on issues of strategy, performance and resources including key appointments and standards of conduct.” It also notes that, despite their non-executive status, they nevertheless form a crucial part of the board: “While not involved in the day to day running of the organisation, the role of a NED is important and professionals occupying this role must show the same commitment to the success of the organisation as their executive colleagues.”

What are the key responsibilities of non-executive directors?

The responsibilities and involvement of NEDs will very much depend upon the particular company and its situation. Occasionally they will provide a vital steering hand and their input will be relied upon by all the executive directors, which is especially the case for a start-up where the rest of the board may have little or no experience of running a company. In larger, more established companies, the role of a NED may be somewhat peripheral and they might only be called on from time to time to provide their expertise in a specific area. Some of the general responsibilities of non-executive directors can include:

Strategy
Non-executive directors are able to help guide the management team in terms of making strategic decisions by providing input on the overall goals and business direction. Their greater sense of perspective can help them ‘see the wood for the trees’ and notice any blind spots which the executive directors might have missed out when devising business plans. And since they are more external to the company and have a greater degree of independence compared to executives, NEDs are often better able to provide constructive criticism where necessary.

Monitoring performance of executive board
As a result of their impartial footing, NEDs are well placed to assess the performance of the executive management in relation to the success or failure to reach company targets and realise any pre-defined goals. On occasion, they will be called upon to advise in relation to the appointment (or removal) of executive directors.

Salary
Larger companies will often have a ‘remuneration committee’ which sets the salary levels of executive directors. Non-executive directors will sometimes be asked to guide the decisions made by these committees. In smaller companies, NEDs may similarly advise on appropriate salaries, although they may have less sway where there are only one or two shareholders who are also company directors.

Connections
NEDs will have normally built up an extensive network of business contacts and associates. The company may call upon them to connect the business and board with these contacts or leverage any external skills or expertise. Occasionally, a non-executive director may be asked to represent the company and meet up with third party organisations in order to test the waters or secure a deal.

Audit and risk
Company directors have a range of duties set out by chapter 2 of the Companies Act 2006, which include:

Duty to act within powers
Duty to promote the success of the company
Duty to exercise independent judgment
Duty to exercise reasonable care, skill and diligence
Duty to avoid conflicts of interest
Duty not to accept benefits from third parties
Duty to declare interest in proposed transaction or arrangement

NEDs can help to ensure that these duties are upheld, either via a formal audit committee, or by conducting audits themselves and generally monitoring the conduct of the board and individual executive directors. This also extends to upholding the integrity of financial information and ensuring that controls and systems of risk management are suitably robust.

What are the benefits of having NEDs on the board?

A company with an experienced non-executive director often has a significant advantage compared to competitors which do not have the skills and know-how of a NED at their disposal. Some of the many advantages of having a NED on the board include:

An independent and impartial voice
Valuable skills and experience to help with company strategy and management
The provision of objective input to the executive team regarding any business plans and policies, with constructive criticism offered where needed
Specialist knowledge which can be applied to specific projects or where a business needs insight into a certain sector
A large bank of useful business contacts

Aside from providing input at board meetings, the company chairman and chief executive can call upon the NED at other times to provide general advice and bring a different perspective to their decision making process.

Are there any potential downsides to having NEDs on the board?

In general, non-executive directors can help companies to improve any governance issues and resolve issues at board level. However, if there are already intractable problems in terms of deteriorating relationships between executive directors, it can prove tricky even for a very experienced NED to improve the situation.

If a NED has been brought into the company against the will of any existing board members, their appointment can serve to fan the flames of tensions. Certain directors may end up resenting their advice or feeling that an ‘outsider’ is frustrating the board dynamic even further, which can eventually lead to an even more serious breakdown in relations. So it’s important that existing board members are unanimous in a decision to appoint a NED.

How can I find the right NED?

When a company decides to appoint a non-executive director to its board, it should spend some time selecting the right one. It’s important to first consider all the strengths and weaknesses of the existing leadership team and understand what exactly is missing and who would be the right person to balance things out and fill any gaps. In particular, have a think about the following:

Are there any specific skills and know-how which could benefit the company?
Would a NED with particular industry experience be able to help with company strategy (eg if there is planned expansion into a new sector)?
Who might have the most relevant contacts and be able to connect the company with key figures in a certain field?
What sort of personality would ensure that any board tensions are not exacerbated?
Are there certain characteristics which are required to change the dynamic of the board, such as someone who is perhaps more flamboyant or reserved?
Would having a particular NED on the board provide a good impression to potential investors?

Appointing a NED is unlike taking on a regular member of staff. Normally an employer would want to make sure that a new employee would be able to fit in with the other members of staff and they will be looking for certain characteristics which will not disturb the general dynamic of the company. But when it comes to a NED, often their raison d’être will be to shake things up and provide an alternative approach. So it’s often a good idea to find someone with quite a different personality who is willing to challenge the status quo.

Why should start-up companies consider appointing a non-executive director?

Although NEDs are often more associated with larger companies, they can have a very important role to play in start-ups. They can be especially useful if the existing directors do not have much business experience, as the NED can guide them through some of the basics of strategy and provide lots of valuable tips. Furthermore, their contacts can prove invaluable to businesses just starting out, and a good NED will be able to make crucial introductions and connections which will stand the company in good stead for years to come.