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 corporation, such as a company, cooperative or non-government organization, but not a member of the executive management team. They are not employees of the corporation 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 corporation (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 corporate 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 corporation 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 corporation 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:
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:
NEDs should also provide independent views on:
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:
Much has been written about how best to go about evaluating board performance and it remains a key topic of discussion.
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
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 a company's accounts are prepared properly. These should inform its shareholders by presenting a true and fair reflection of its actions and financial performance and all of the board should ensure 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:
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.
A non-executive director can be appointed in different organisations:
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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