The non-executive director explained
In straightforward terms, a non-executive director is an independent board member who provides advice and guidance to the company’s executive directors and other board members.
It’s important to note that non-executive directors do not manage the daily activities of a company; they are advisors, mentors and experts with specific strategic specialities.
Why do companies hire non-executive directors?
As a company or organisation develops, additional skills may be required to support the strategy.
For example, the company may want to enter new markets or merge with or acquire another company. Or, it may wish to undergo a complete digital transformation and bring its IT systems up to a high standard.
When a company wants to do something other than its area of expertise, it will often hire a non-executive director with the necessary skills to advise the board and senior management on the strategy.
A non-executive director, therefore, is someone from outside the company who is hired to advise the board and management and help them achieve their strategy.
What does a non-executive director do?
A good non-executive director (NED) is like an excellent consultant; they are there to challenge terrible thinking and ways of doing things constructively. A good non-executive director is certainly not a person who is there on behalf of the CEO as a box ticker and ‘yes’ person.
NEDs should play a vital role in a company’s governance by bringing an outsider’s independent and objective perspective. A good NED will always contribute to the development of a company.
The role of non-executive directors is to provide objective and independent advice to the board and enable it to make better decisions in the interest of all shareholders and stakeholders.
How are non-executive directors hired or appointed?
The board of directors and the nomination committee usually appoint non-executive directors.
NEDs may also be appointed to the board for other reasons. For example, if a VC company invests in a firm, they will often ask that they have ‘one of their people’ on the board of directors to keep an eye on their investment. This often results in greater accountability for shareholder funds and improves a company’s performance.
The responsibilities of non-executive directors
Non-executive directors should:
- Bring a genuinely independent and external perspective to stimulate board debate and enhance decision-making.
- Provide value-added input to strategy and strategic development.
- Act in the best interests of the company as a whole rather than any one particular group of shareholders.
NEDs should also assist in carrying out the duties of the board, such as:
- Reviewing, approving and ongoing monitoring of the strategic plan
- Checking organisational capability concerning stated objectives;
- Reviewing financial performance against targets
- Raising capital
- Reviewing any significant changes in the company, such as financial or administrative structures;
- Providing advice on significant investments or divestments
- Monitoring legal, ethical, risk and environmental compliance (ESG)
Non-executive directors must also:
- Act as a catalyst for change and challenge the status quo when appropriate.
- Maintain the highest ethical standards, probity and integrity of the company.
- Help the executive team manage risk.
- Play a lead role in board committees.
- Play an active role in helping the CEO manage their executive team, including new appointments.
- Undertake specific and relevant training for the role.
Watch the short video below, where David W Duffy, CEO of the Corporate Governance Institute examines the role of the non-executive director.
What makes a good non-executive director?
A typical board might have six to twelve directors, although some are larger.
Some will be executive directors – usually the chief executive, chief finance officer, and one or two others – and the majority will be non-executive directors, brought in to provide expertise and judgment in the organisation’s long-term interests.
Serving on a board is hard work, the duties are numerous, the legal liabilities are so significant that they must be insured against, and the financial rewards for those without additional responsibilities are relatively modest.
To be an effective non-executive, you must possess quite a high intellect – to comprehend complex and often financial issues.
A supportive personality is also required. The chair chairs the board and shows leadership, but the rest of the non-executives must think, consider, advise and support.
Ultimately, they support the chair. Also, they must be relatively engaging, funny – and serious when necessary – a well-rounded and mature person.
Many boards are interested in non-executives who have been successful businesspeople and gained other skills along the way.
How to become a non-executive director
To become a non-executive director, you first must understand how boards work. You can’t ‘wing’ it in board meetings.
Here’s a guide on preparing yourself for a non-executive director role, and you can click here to learn more about board member training.
Read more: How to become a paid non-executive director
Spencer Stuart, the executive and non-executive search and recruitment firm, has identified five “intrinsic capabilities” required of a non-executive director. They are:
- Intellectual approach
- Interpersonal skills, and
- Inclination to engage
The firm also suggests ten questions future directors should ask themselves before accepting an invitation to join a board. These are:
- What do I have to offer?
- How will I find the right board? (Be patient: it can take time.)
- How much due diligence should I do? (It should be rigorous. Talk to experts, read the minutes etc.)
- Do I have the time? (Ask for meeting dates for the next three years.)
- Can I contribute? (Work out where you can deliver unique and differentiated value.)
- Will I learn? (Be intellectually curious and open-minded.)
- Will it be fun?
- What is the time commitment? (One of the pitfalls is underestimating the time required.)
- Is my employer fully supportive? (Tell your chief executive what you have learned and how it benefits the company.)
- Should I expect a board induction? (You should expect to go through an induction process.)
Discover more about becoming a non-executive, download the course brochure for the Diploma in Corporate Governance.