Non-Executive Directors Explained (A Complete Guide)

While the shareholders own the company and the executive directors see to the daily affairs of the company, what do the non-executive directors do?

In recent years, the importance and the value of non-executive directors within the UK has significantly increased. Most companies are now appointing non-executive directors because of the distinct value that they give to the company.

In this write-up, you would get to understand who non-executives are, what they do, how they are being appointed, their importance within a company, and so on.

What is a Non-Executive Director?

A non-executive director is part of the members of a company’s board of directors who is not coupled with the management of the day-to-day running of the business. They are individuals who provide guidance, advice, and mentorship to the executive members of the company to aid the smooth running of the company.

Non-executive directors are highly experienced members with expertise and leadership skills. They are therefore brought or invited to companies to render their skills to the company. So in most cases, they do not necessarily work on a full-time basis with a company but rather they work on a part-time basis to ensure that the executive directors are fully maximizing their potential and abilities.

Logically, non-executive directors provide constructive criticism, assess, evaluate, and help improve the performance of the executive directors. More so, they provide guidance and training where needed. Because of the important responsibilities that are associated with being a non-executive director, a company must be careful and strategic when appointing one.

Also, while appointing a non-executive director, the company should be sure of its cogent business needs, that is the company must be aware of the areas where it needs improvement and growth before appointing a non-executive director.

Importance of Non-Executive Director to a Company

Appointing a non-executive director is important to the growth and development of a company. Below are some of the reasons your company should have a non-executive director.

Brings about more opportunities

Non-executive directors are individuals with vast experiences and connections. A non-executive director could provide the company with contacts that will pave more ways and growth for the company. They could directly link your business to exceptional suppliers or customers. Because they are individuals who have been in business for long, it is easier for them to easily link your company to other stakeholders.

Enhances board of directors accountability

Having one or more non-executive directors within your company directly makes the executive directors more accountable. It is one of the roles of the non-executive directors to question the methods and strategies of the executive directors. While they are not directly involved in the daily activities of the company, they are in charge of ensuring that the company achieves its goals. They therefore constructively evaluate executive directors’ output, ensuring that they maximally perform their duties and make them accountable for the tasks and activities carried out.

Brings more valuable skills and experience

Many companies would usually involve a non-executive director if they desire growth in some aspect of their business or the other. Non-executive directors have various skills and the company should ideally choose one that can help resolve the company's most striking issue. For example, if a company needs more help with advertising and marketing, then getting a non-executive who is well-skilled in marketing wouldn’t be bad.

So having non-executive directors with distinct and valuable skills could bring more advancement to the company in the shortest possible time.

Brings more Prestige to the Company

Non-executive directors are highly experienced and prestigious people. Getting one or more non-executive directors for your company could bring about more credibility and reputation to your company. Because non-executive directors are most times people who have built many connections for years, they are easily trusted by people. Thus working with them helps the customers and the public in general trust your brand more.

Investment opportunities

When you bring more non-executive directors to your company, they may be willing to also invest in your company. Apart from that they could provide you with lenders or investors who will be willing to deal with your business.

Enhances Objectivity in Decision-making

Because non-executive directors are not involved in the day-to-day activities of the company, they could serve as the second eye to check and evaluate opinions during decision-making. When there are two or more executive directors within a company, they could suggest various strategies and ideas when making decisions. A non-executive director can therefore be used to weigh and assess the most suitable strategy and help everyone agree on one term.

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Who can be a Non-Executive Director?

Ideally, non-executive directors should be someone with sufficient skills, experience, and expertise. The position cannot be held by just anyone.  The same rules that apply to the executive director’s position also apply to non-executives. Therefore they must fit into the below criteria:

• Must not be less than 16 years old.
• Must not have been disqualified from being a director.
• Must not be a company’s auditor.
• Must not be an undischarged bankrupt.

Apart from these, they must possess the leadership skills to work for the company. They must be willing to take up more challenging tasks for the company. Overall your company should choose a director who can solve the company's most pressing needs.

Companies House and Non-Executive Director

To the Companies House, a non-executive director is simply considered a director. Thus the procedures for appointing and removing the non-executive director are almost the same with the executive directors.

Apart from that the Companies House considers the duties, roles, responsibilities, and liabilities of an executive director to apply to non-executive directors. As such the non-executive director’s details are also made available to the public through the Companies register. However, their roles as non-executive directors are not aren’t really visible in the register but rather they are simply registered as directors.

How to Appoint a Non-Executive Director

To appoint a non-executive director for your company, you’ll need to reach an agreement with the other shareholders and executive directors of the company. Once you’ve agreed on this and followed the right selection process bearing in mind the skills and values that are required from a standard non-executive director, then you could follow the below process.

• The agreement should be passed through the ordinary resolution. This can be voted on by the shareholders and the directors or either of the two (as contained in the article of association).
• The new non-executive director will be required to sign a consent letter that confirms their approval to come on board. This letter must be kept in the register of directors and the company’s registered office.
• After the appointment, the Companies House should be notified within 14 days. This can be done by filling out the AP01 form (Appointment of Director form) online.

Responsibilities of a Non-Executive Director

Below are some of the responsibilities of a non-executive director.

1. Participation in Company’s meeting

As a non-executive director, you might be required to be actively involved in the company’s meetings. As part of the board members, you would be expected to participate in vital company decisions. So every company must explain the roles and responsibilities of board members, how frequent meetings are held, and what the expectations of the company are as regards official meetings while appointing the non-executive director.

2. Professional development

Non-executive directors must be willing to take on challenging tasks that will lead to the growth and development of the company. As such, they must be willing to go through courses, training, and workshops that will help them maximize their potential. Apart from that, they should be able to recommend training that will help the executive directors grow.

3. Time Commitment

Though non-executive directors are not expected to work full-time with a company, it is a must for them to commit some time to the company. While they’re being appointed, there’d usually be agreement as to the working terms and conditions including the period they are expected to work for the company. As such if a non-executive director is willing to take on other roles or activities, it must not be to the detriment of the company they currently work for.

4. Strategic direction

Being an outside member of a company, the non-executive director could understand better the external conditions inhibiting the business environment and the company as a whole. The responsibility of the non-executive director as regards strategy would be to provide necessary information and guidance that will contribute to the company’s growth. They are considered as the company’s reserved strategic expert and should therefore be able to put their best to that.

5. Avoid Conflict of interest

As a non-executive director, you are expected to help avoid conflict as much as possible among the executive directors. Because each executive director could have varying opinions, ideas, and strategies, there is bound to be conflict. However, a non-executive director should be able to avoid these conflicts and be able to help resolve them when they occur.

Challenges faced by Non-Executive Directors

Non-executive director positions are highly rewarding but sometimes challenging. Here are some of the challenges faced by non-executive directors, especially the newly appointed ones.

1. Getting familiar with the business

Getting familiar with the business product and market could particularly be a challenge to non-executive directors especially in cases when they work on part time basis. Non-executive directors are appointed based on the skills, values, and opportunities that they could bring to the company. However, they might need to commit themselves to getting familiar with the company’s products or services and their market.

2. Time commitment

Another challenge that is common to non-executive directors is the ability to create time. Because they have several other commitments that they deal with, it becomes quite difficult to create the necessary time for a company to which they are appointed. It should however be noted that non-executive directors must create sufficient time if they are to carry out their responsibilities efficiently.

3. Risk and reward

Non-executive directors are highly paid individuals. However, as much as they are rewarded, they also face much risk if care isn’t taken. Just like the executive director, they also face legal liabilities. However, most of these risks and liabilities can be avoided if they commit to their duties, work effectively with the executive directors, and so on.

4. Adapting to the new role

It could be particularly challenging for first-time non-executive directors to adapt to this new role. If they had previously been an executive director for years, adjusting to the new role might be something they’d need to learn. Non-executive directors should not interfere in the daily running of the business as it isn’t part of their role, however, they should focus on the plans that will help the company grow.

Conclusion

Getting a non-executive director might just be the one crucial step you need to take your company to the next level. While there are many non-executive directors with several skill sets, be sure of your business needs before appointing the right individual. Have any questions about executive directors? You can contact Incorpuk here for answers to your questions.