Companies are coming under an increasing number of compliance and administrative burdens that are integral to running a business but can often distract the company directors from their core operations. Companies have thus started to endorse the need of having a mix of Executive and Non-Executive Directors on the Board of Directors.
The Board of Directors is responsible for the effective running of the business and the company’s activities and trade. The size, legal responsibilities, power, and duties of the Board vary with the nature of the organization and the jurisdiction where the company is registered. These are determined by government regulations of the specific jurisdiction where the company is domiciled.
What is Non-Executive Director?
Whilst all directors should be capable of seeing company and business issues in a broad perspective, non-executive directors (NEDs) have board-level roles and thus have a fiduciary duty to the company and must act in the best interests of the company. A NED is an independent director which is appointed by the shareholders of a company or organisation but is not a member of the executive management team. The role of a NED places great emphasis on personality and ability and should demonstrate independence of mind and readiness to take – and stand by – decisions.
The demand for NEDs has increased in recent years, and so the need for business leadership skillset. NEDs should be of an appropriate calibre and have particular personal qualities. They are usually people of experience and expertise who can act as both a source of wise independent advice, and a check on any wilder elements on a Board of Directors. The addition of NEDs brings stature to a company because they can bring additional skills onboard, to the benefit of the Board.
Roles and Powers of Non-Executive Directors
The role of a NED is to scrutinize the managerial decisions in order to enhance the company’s long-term performance and success. Fundamentally, the NED’s role is to provide a creative contribution and improvement to the Board by providing dispassionate and objective criticism whilst seeking the best interest of the company and its well-being.
NEDs are also responsible for keeping the executive directors and the entire Board accountable. This can be done by assisting and advising in the company’s strategy, performance, and business risk appetite from an objective standpoint, without having an active role in the daily operations of the company or organisation. NEDs may do so by providing the Board with an insight about any hidden issues or factors that might negatively impact the operations and profitability of the company. Or, they might assess the company’s financials and performance and advise on any potential controls and measures that the company ought to put in place, whilst considering the views of shareholders and stakeholders.
Liabilities of Non-Executive Directors
Directors are at an ever-increasing risk of civil, criminal, and regulatory action. The legal environment is becoming increasingly hostile with directors being held ever more accountable for their actions or lack of action. The liabilities of NEDs are the same as those of executive directors. The company’s liability is limited; the director’s liability is not.
The NED is not always fully aware of what is taking place in the company’s executive decision-taking process, for it is not the NED’s job to be affiliated to such processes. Although NEDs are not involved in the day-to-day management and direction of the company’s affairs and are differentiated from executive directors, they do have the same legal duties, responsibilities, and potential liabilities as their executive counterparts.
When NEDs are vested with their position, even though it is a non-executive one, they are committing to their responsibility, irrespective of the actual function withing the company. Thus, it is imperative that when NEDs are sitting on a Board of Directors, they should lay down clear corporate governance rules and risk management procedures to be adopted by the organisation.
Indemnity and Insurance Protection to Non-Executive Directors
It is good practice for a company to offer indemnity and insurance protection against liabilities associated with a NED’s office. With such a lot at stake it is vital to understand the potential limitations of relying on corporate Director & Officers (D&O) policies organised by the company, and to take action to secure additional independent cover. A Non-Executive Director D&O policy is the solution.
This provides protection to the NED for any costs associated with a claim, and will defend the NED should the main company D&O insurance fail in any way, This could be as a result of an exclusion contained within the policy wording, or if the policy’s limit of indemnity is exhausted. In such circumstances, and without a Non-Executive Director D&O policy, the personal wealth and assets of the NED could be exposed. A Non-Executive Director D&O policy sits separate to the indemnity provided by the main company’s (or fund’s) insurance policy, to provide complete peace of mind.
Appointment of a NED
The services of a NED are secured with a Letter of Appointment (LOA), which is a contract for services rather than a conventional employment contract. A LOA is a formal letter appointing someone as NED of a company. It sets out the main terms of the appointment and the NED’s responsibilities and duties within the Board of the company. A LOA sets out clearly what the directorship terms are and frames the relationship between the director and the company. It ensures the NED operates in the business’ best interests during the whole course of his office. The main features of a LOA are:
- the NED’s status and duties
- the definition of the time that the NED has to serve;
- the time commitment required;
- details of any Board committee post the NED is to hold;
- the remuneration package to be paid;
- insurance and/or indemnity arrangements.
You can also expect the LOA to include a paraphrasing of the Companies Act, which obliges the NED to act in the long-term interest of the business, all stakeholders, and the wider community affected by business operations.
Remuneration
There is no fixed compensation to NEDs. Remuneration varies according to company size, the complexity of the board’s activities, the time commitment required from the NED, and their perceived value to the business in terms of ability and experience. NED pay may also be increased by additional fees for serving on board committees. Remuneration policies and practices for NEDs should be clear, based on risks, comprehensible, and should align with the company’s culture.
How Can NEDs Help?
To guarantee the stability of a company, it is beneficial to appoint a resident NED to ensure proper substance, provide ongoing scrutiny, act as a liaison with third parties, and to contribute to the strategic direction of the company.
NEDs can provide resident directorship and management services so that the company is operating according to the laws of the jurisdiction and any specific regulatory norms where the company is registered. These qualified professionals have the relevant industry experience that will add value to the operation and management of the company. They are a team of experienced and knowledgeable individuals who have the requisite skills and background to carry out the role, and who understand the needs of each private client.