A non-executive director (abbreviated to non-exec, NED or NXD), independent director or external director is a member of the board of directors of a company or organisation, but not a member of the executive management team. They are not employees of the company or affiliated with it in any other way and are differentiated from executive directors, who are members of the board who also serve, or previously served, as executive managers of the company (most often as corporate officers). However they do have the same legal duties, responsibilities and potential liabilities as their executive counterparts.
Non-executive directors provide independent oversight and serve on committees concerned with sensitive issues such as the pay of the executive directors and other senior managers; they are usually paid a fee for their services but are not regarded as employees.
All directors should be capable of seeing company and business issues in a broad perspective. Nonetheless, non-executive directors are usually chosen because of their independence and initiative, are of an appropriate caliber and have particular personal qualities.
Fundamentally, the non-executive director role is to provide a creative contribution and improvement to the board by providing dispassionate and objective criticism. Their role may change depending on the organisation, though they are usually not involved in the day-to-day management of the company but monitor the executive activity and contribute to the development strategy.
Non-executive directors can also be referred to as external directors; they are usually people of stature and experience who can act as both a source of wise independent advice and a check on any wilder elements on a board.
According to the UK Institute of 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 day-to-day running. Non-executive directors, then, are appointed to bring to the board:
In addition to the above five key qualities an effective non-executive director would influence the achievement of balance of the board of directors as a whole as well as commitment, perception and a broad perspective of the area or industry. More key responsibilities may include:
- Contributing to the strategic direction of the company;
- Efficiently solving problems that arise;
- Communicating with third parties;
- Ensuring all the audit requirements are satisfied;
- Remuneration of the executive directors;
- Appointing the board of directors.
Non-executive directors have responsibilities in the following areas, according to the Review of the role and effectiveness of non-executive directors (the Higgs report), published by the British government in 2003:
- Strategy: Non-executive directors should constructively challenge and contribute to the development of strategy. As an external member of an organisation, the NED may have a clearer or wider view of possible factors affecting the company and its business environment, more-so than executive directors.
- Performance: Non-executive directors should scrutinise the performance of management in meeting-agreed goals and objectives and monitoring and, where necessary, removing senior management, and in succession planning.
- Risk: Non-executive directors should satisfy themselves that financial information is accurate and that financial controls and systems of risk management are robust and defensible.
- People: Non-executive directors can benefit the company's and board's effectiveness through outside contacts and opinions. Helping the business and board connect with networks of useful people and organisations become an important function for the NED to fulfill.
NEDs should also provide independent views on:
- Standards of conduct
Boards (and the non-executive directors on them) also have a responsibility to evaluate their own performance. Reasons for undertaking a board evaluation might include:
- to address specific issues;
- to benchmark performance against other companies;
- the need to ensure that the board is doing the best it can; and
- the need to be seen to be doing something.
Negative and positive contributions
The Institute of Directors in New Zealand outlines ten clear benefits that independent directors can bring to a start-up and high growth business. These are
- They bring an objective viewpoint to the board
- They are unlikely to have any family or majority ownership ties to the business
- They can cast a critical eye over the business without preconception or prejudice
- they are also able to act in the capacity of counselor, sounding board and devil's advocate
- They bring a one-off business knowledge and experience in many areas
- Many start-ups and high growth businesses tend to operate in a vacuum without looking at outside forces
- Outside directors introduce a fresh, and usually innovative, perspective
- They may compensate in some of the key areas where management may be weak
- The outside director may act a bit like a consultant
- They bring input and the ability to assist with objectivity
Having a non-executive director in a business may seem necessary due to the benefits having one can provide, however it is possible a NED may contribute to a dynamic of deteriorating board relationships. Executives could come to resent or be frustrated by non-executive contributions that they perceive to be either ill-informed or inappropriate. This in turn can contribute to a dynamic of deteriorating board relationships, characterized by withholding of information and mistrust. As one executive described it:
‘When a non-executive director displays insight and real knowledge and undertakes a role in a very serious fashion, asks brave questions, takes an interest in issues the directors know that they are going to be kept on their toes in relation to these issues, and the respect level rises. Then that person becomes an approachable person … it is actually cumulative in terms of the benefits that can come from that … it can go completely the other way because it is just, “well, they don't know anything about the business, they had to ask the obligatory three questions” and then the respect gets lost between the parties and you do not have a relationship that is built. It gets back down to what is the ability of the person and what is driving them to become engaged … When that engagement actually adds value and can be seen to add value, then very quickly you get a dynamic where you improve the situation.’
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.
According to NEDonBoard, 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). Research points to an average remuneration of £60 to 80k for FTSE 100 NEDs and £50 to 60k for FTSE 250 NEDs. SMEs remunerate their non-executive directors at lower rates, in the £20-30k range. Most roles in the not-for-profit sector are voluntary roles. There are a few factors that determine the level of remuneration of a NED:
- Company type
- Financial resources
- Time commitment
- Responsibilities including being a member of a sub-committee of the board, being the SID, the chair of the board or a sub-committee.
Training and education
It is vitally important that all non-executive directors are aware of their duties and liabilities as well as developing the softer skills associated with the role such as board behaviour and effective challenge. There are a number of organisations who provide this type of training such as NEDonBoard, the Institute of Directors and Financial Times.
Types of organisation
A non-executive director can be appointed in different organisations:
- The Private Sector
- The Public Sector
- Academic Sector
- Third Sector
Duties will depend on whether they represent the interest of shareholders, in the private sector, or the interest of the society in public organisation.
Some organisations appraise non-executive directors on general overall performance criteria such as in the Higgs Report, whereas others in addition set specific individual objectives, which may be specifically linked to the overall organisation goals.
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- NACD, US professional body for non-executive directors and board members
- Institute of Directors, a UK business organisation for company directors, senior business leaders and entrepreneurs
- Nurole, technology company operating the Nurole platform, an online global marketplace for non-executive independent director and senior executive roles
- ICSA, Institute of chartered secretaries and administrators trains, informs and represents the interests of governance professionals across all sectors
- 30 percent club, collaborative campaign group focused on getting more women on boards
- NEDonBoard, Institute of Board Members. Professional body for non-executive directors and board members