A non-executive director is a person in your company who is the one on the board of directors who does not have any executive powers. This person does not take part in the everyday management of the company. The role of a non-executive director is to contribute to policy-making and planning, to work as another pair of eyes watching the development of the company and also to challenge where and how the performance of the company’s team moves. Non-executives are paid a fee for their work but are not the employees of the company.
A non-executive director can be also called a NED, an external director, an independent director or an outside director.
Here are the main pillars that non-executive directorships stand on:
- Wide experience
- Special skills & knowledge
- Personal qualities
What are a NED’s functions?
Basically, the non-executive director’s job is to overview a company’s activities, to monitor the executive directors and to act in the interests of the stakeholders. Here is a list of what a NED is usually for in a company:
- Help with strategic direction. As an outsider of the company, to be less biased and sometimes even more creative is what is expected from a NED when they take part in analysing plans and objectives set by the executive team.
- Performance monitoring. Overviewing the work of the executives and looking at how efficient they are achieving their goals is also what a NED does. NEDs can even have a right to vote out or appoint members of the executive staff.
- A say on the executive directors’ salaries. If there is no special committee to define the amount of remuneration for the executives, it is for a NED to ensure the sum is set appropriately.
- Outside communication is also a NED’s responsibility. They build bridges between your business and other companies and organisations that can be helpful for you in any way. NEDs are sometimes asked to be a company’s representative in any outside talks.
- Audit is what a NED also takes part in, ensuring that the company keeps its records properly and the information is presented to the shareholders fairly and truly.
- Risk-assessing. NEDs also make sure that the financial information of the company is kept neat. And to make risk-management schemes work properly is key in this.
This list of a NED’s functions is not exhaustive — the exact responsibilities are unique in each case and specified in a particular contract.
Executive director vs non-executive director
There is no legal distinction between an executive and a non-executive director — the main difference lies in their functions in the company. Neither of them is seen to carry a higher status than the other.
CEOs and NED similarities
- A place on the board of directors
- Same liabilities and legal duties
- Same fiduciary duties, meaning they must place the company’s interests ahead of their own
- Support the implementation of the general board’s decisions (regardless of whether they voted for or against them)
CEOs and NED differences
|Involved in the management of the company||Has no role in the management of the company|
|A full-time employee with a salary||Not a representative or a shareholder of the company|
|Has a direct interest in the company||Doesn’t have a direct interest in the company|
|Gets remuneration||No remuneration|
An executive director can be a non-executive director in another company, but a person can never have two positions in one company.
Independence as the key trait of a NED
A key trait of a NED is to be independent of the executive directors. The Cadbury report that defines the basic recommendations on the corporate governance states that NED should “bring an independent judgement to bear on issues of strategy, performance, resources, including key appointments, and standards of conduct” and “The majority should be independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgement apart from their fees and shareholding”.
There are other recommendations that have been brought up, for example, by the Association of British Insurers and the National Association of Pension Funds. They state that the following things can compromise a NED’s independence:
- The person was a former executive of the company
- The person has any current or past contracts with the company
- The person was selected informally
- The person has share options or a pension with the company
- The person is a significant shareholder
- The person is seen not independent for any other reason
None of these recommendations is legally-binding and there might be exceptions to them. For example, appointing a company’s former accountant as a NED might be even seen as to the advantage of the company and thus totally ok.
How much do NEDs earn?
There is no fixed rate of pay for non-executive directors — it can vary depending on certain factors, for example:
- Your company’s size
- How long you expect a NED to stay committed to your company
- How valuable you estimate a NED to be for your business, judging by their abilities and experience
Sometimes NEDs are paid extra, for instance, for serving on board committees.
The appointment of a NED
A Letter of Appointment and not a conventional employment contract outlines a company’s relations with a NED. A typical Letter of Appointment would include:
- How long a NED is to work for the company
- How long a NED is required to stay committed to the company
- Details of any board committee posts a NED is to hold
- How much and for what a NED will be paid
Many law firms and law regulatory bodies provide samples of a Letter of Appointment. Such sample letters are not prescriptive binding templates — they provide the initial checklist you might like to include into your final document. It is adapted to the circumstances and needs of your company.