Non-Executive Director

A member of a company’s board of directors who does not hold an executive office

What is a Non-Executive Director?

A non-executive director is a member of a company’s board of directors who does not hold an executive office. Non-executive directors act as independent advisors and are not responsible for the daily operations of the company.

 

Non-Executive Director

 

However, they face the same legal responsibilities and liabilities as the executive directors and are involved in the planning and framing of company policies. Non-executive directors generally receive payments for their services; however, they are not considered employees of the company.

 

Summary

  • Non-executive directors are independent advisors to a company and are members of the company’s board of directors.
  • They help in strategy development within a company through positive criticism, external experience, and expertise.
  • Non-executive directors oversee the activity of executive partners and help to ensure that they meet their objectives. They make sure that the responsibilities towards stakeholders are consistently fulfilled.
  • Responsibilities of a Non-Executive Director

    Non-executive directors dedicate a part of their time to overseeing the company, participating in management team meetings or board meetings. They add value by providing a broad perspective of the company’s issues and protecting the interests of shareholders. They are responsible for the following:

     

    1. Performance review

    Non-executive directors are required to evaluate the performance of the management team in terms of meeting goals and objectives. They also monitor the executive members of the board, may even remove the senior management, and plan the subsequent appointments.

    The directors are also required to oversee the performance reporting of the company. Additionally, they ensure that the responsibilities towards the stakeholders are understood and accomplished consistently.

     

    2. Strategic direction

    Non-executive directors are responsible for objectively looking at the plans framed by the executive team. They help with formulating and overseeing the corporate strategy by providing constructive criticism and a broader view of the external factors affecting the business.

    They provide an external perspective and challenge the existing plans, thus helping to improve business strategies. Non-executive directors also set values and standards for the company in collaboration with the executive partners.

     

    3. Time commitment

    A non-executive director must commit a substantial amount of time for overseeing the company. Hence, when appointed, the director should disclose to the board their other important time commitments. They should keep the board informed of any significant changes to his/her schedule.

    They should obtain the chairman’s approval before accepting any additional commitments that can affect his/her role. A non-executive director is needed to take time out of his/her schedule to meet the expectations outlined in the appointment letter.

     

    4. Risk management

    Non-executive directors share with the executive partners the responsibility of developing frameworks and controls for accessing and regulating risks. They should assure the stakeholders that the financial information is accurate, and financial controls and risk management systems are robust and secure.

     

    5. People

    Non-executive directors can make connections outside the company and add further value to the company. The external connections can help the company in achieving its objectives and mission.

    In addition, a non-executive director can represent the company to outside firms. Working with other board members, they ensure that sufficient financial and human resources are available to meet business objectives.

     

    6. Professional development

    Non-executive directors can take advice on certain issues and discuss them in the board meetings. They may be authorized to obtain independent training required to fulfill their duties, at the expense of the company.

     

    7. Participation in committee meetings

    A non-executive director may be required to actively participate in committee meetings and execute his/her duties as a committee member. They should be made aware of the purpose of the committee and additional responsibilities, if any.

     

    Importance of a Non-Executive Director

    • Executive directors holding C-level positions may face a conflict of interest with the stakeholders or agency problem. Hence, non-executive directors are believed to objectively act in the interest of the company and the stakeholders.
    • Non-executive directors are appointed to challenge the performance of the management team and the company.
    • They also contribute towards ensuring that the board members achieve their objectives.
    • The experiences of a non-executive director from a different field may be valuable to the company. They bring in a wider perspective and outside experience contributing to strategic developments.
    • The network of external contacts provided by non-executive directors is valuable to companies.
    • The directors may be able to fill in the expertise gap in the management team.

     

    Related Readings

    CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

    In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful:

    • Board of Advisors
    • Fiduciary Duty
    • Independent Director
    • Staggered Board

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