What is the role of the Non-Executive Director?
Essentially the non-executive director’s (NED) role is to provide a creative contribution to the board by providing independent oversight and constructive challenge to the executive directors.(Source IoD)
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 1992 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, NEDs have the same legal duties, responsibilities and potential liabilities as their executive counterparts. Clearly, it is appreciated that NEDs 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 NEDs are subject to the codified duties of directors contained in the Companies Act 2006 in the same way as executive directors.
All directors should be capable of seeing company and business issues in a broad perspective. Nonetheless, NEDs are usually chosen because they have a breadth of experience, are of an appropriate calibre and have particular personal qualities. Additionally, they may have some specialist knowledge that will provide the board with valuable insights or, perhaps, key contacts in related industries.. Of the utmost importance is their independence of the company management and any of its ‘interested parties’. This means they can bring a degree of objectivity to the board’s deliberations, and play a valuable role in monitoring executive management.
The UK Corporate Governance Code advises that the, “board should include an appropriate combination of executive and non-executive (and, in particular, independent non-executive) directors, such that no one individual or small group of individuals dominates the board’s decision-making. There should be a clear division of responsibilities between the leadership of the board and the executive leadership of the company’s business”.
While much of the comment and discussion on NEDs tends to focus on listed companies, it is important to note that they can also make a valuable, albeit somewhat different, contribution to private companies. Indeed, there are a growing number of private companies, including relatively small ones, which are now actively searching for the ‘right’ non-executive director.
The functions of NEDs
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:
- wide experience
- special knowledge
- personal qualities