A non-executive director (NEDs) is a member of a company’s board of directors but generally such directors are not part of the day-to-day management team, are not employees and typically offer part time external oversight. However, technically, non-executives are still registered as directors and have legal accountability.
The purpose of bringing in non-executives is to use their skills, knowledge and experience to help the company with strategy, performance, risk, resources, standards of conduct and the appointment and remuneration of executive directors. Typically, non-executives are utilised by larger companies where governance is an increasingly important issue, but such appointments can also be useful in family businesses where the directors are also the shareholders.
Legal risks for non-executive directors
Notwithstanding the above, non-executive directors often find themselves in precarious positions. This is because they have the same legal duties as executive directors, however, they do not have the benefit of the detailed knowledge that comes with being involved with that same company on a day to day basis that an executive director would have. This is something that non-executive directors are often unaware of when being invited to take up their positions.
This has been acknowledged by the Institute of Chartered Secretaries and Administrators (ICSA) and accordingly they have released some guidance on limiting the liability of non-executive directors so that they can carry out their roles including:
Before taking up a post in any company it is important that a non-executive director carries out appropriate research on the organisation including looking at its operations and considering whether he or she can make a valid contribution.
Has the director been negligent?
When considering whether a non-executive director has been negligent, the courts and regulators will often judge them according to the non-executive director’s skills and experiences to determine whether they have acted appropriately and thus how onerous the duty of care placed on them should be.
Accordingly, a prudent non-executive director will not only have (or be able to acquire) the appropriate skills but will also devote time to keeping this knowledge up to date.
Time commitment – be clear
As touched on above, non-executive directors are not expected to be involved in the day to day running of the company and will often take up several non-executive director positions at different organisation, devoting some of their time to each one. Usually the minimum time commitments will be stated in the letter of appointment, however, it is worth bearing in mind that they may be required to put in extra time during difficult periods and as such will have to ensure that they are available and have capacity when called upon.
Conflicts of Interest for company directors
Non-executive directors (as with executive directors) have a duty to disclose any conflict of interest or any potential conflict of interest at the outset of their involvement with the company and this duty continues throughout their time with the company.
In the interest clarity there should also be clear policies on accepting gifts to ensure that it cannot be questioned that any decision he or she makes is not in the best interest of the company.
Induction and Training
Non-executive directors should ensure that they are provided with support from the company in order to meet their training and development needs.
A non-executive director should always act in the best interest of the company. This means that he or she should exercise independence and challenge the board where necessary. High standards should always be upheld to ensure that the values of the company are being promoted.
Protecting yourself as a non-executive director
Available options include :-
- Ensuring you obtain a clear indemnity against all liabilities, cost or damage which may accrue to you personally based on your role as non-executive for any actions outside of your knowledge or direct input.
- Ensuring that you are given access to all necessary documents and records for the company and are kept informed to your satisfaction
- Agreeing that the company obtains and pays for appropriate Directors and Officers Insurance to cover you against liabilities.
Additional resources of interest
For advice on negotiating a service contract if you are a non-exec director or on any concerns you have about what is happening at a company where you are already a non-exec director, get in touch with me for an initial free chat. I have decades of experience with these types of issues.
Haven't found what you need yet?
Why not search the whole site?