What Are Non-Executive Directors?

Non-Executive Directors Definition

Non-executive directors, or NEDs are members of a company’s board of directors.

They are appointed to provide an independent viewpoint and oversight of the company’s operations.

Non-executive directors are not involved in the day-to-day management of the company
Executive directors, are involved in the day-to-day management of the company

Non-executive directors are appointed to represent the interests of shareholders, and to ensure that the company is being managed in a responsible and effective manner.

They are expected to do this by challenging the decisions of executive directors when necessary.

Non-executive directors are expected to bring an outside perspective to the boardroom, based on their experience and expertise.

They are typically appointed because they possess skills and knowledge that complement those of the executive directors, and because they can provide valuable insights into the company’s industry, market, and competitive environment.

For example, a non-executive director with widespread experience in finance and accounting can provide valuable insights into financial management and regulatory compliance, which can help the executive directors to make more informed decisions regarding the company’s finances.

Non-executive directors will attend board meetings and other important company events, to review financial and other important company reports, and to provide input and feedback on company strategy and decision making.

Non Executive Directors Roles and Responsibilities

The responsibilities and role of non-executive directors can vary depending on the business and the industry in which it operates.

However, some common duties and responsibilities of non-executive directors include:

Providing independent support and strategic direction to the executive directors
Challenging and questioning the performance of the executive directors
Ensuring that the company complies with relevant laws and regulations
Ensuring that the company’s risk management controls are robust and appropriate
Reviewing and approving the business’ strategic plans and annual budgets
Evaluating and approving major investments and capital expenditure
Reviewing and approving the company’s financial statements and reports
Appointing and reviewing the performance of senior executives, including the CEO.

It is important to remember that NEDs do not have the same level of involvement in the day-to-day management of the company as the executive directors.

While the executive directors are responsible for running the company on a day-to-day basis, the NEDs provide independent oversight and strategic guidance.

This division of roles helps to ensure that the company is managed in the best interests of all stakeholders, including shareholders, customers, employees, and the wider community.

Difference Between Executive and Non-Executive Directors

There are numerous differences between executive and non-executive directors, as shown in the table below:

	Executive Director	Non-Executive Director
Role	Involved in day-to-day operations and management	Not involved in day-to-day operations and management
Employment	Typically a full-time employee of the business	Usually not a full-time employee, may have other roles
Decision-making	Participates in strategic decision-making	Provides independent advice and guidance
Expertise	Possesses specific industry or functional expertise	Brings diverse experience and skills to the board
Compensation	Receives a salary and benefits from the company	Receives fees for service to the board
Accountability	Responsible for operational outcomes	Held accountable for governance and oversight
Time commitment	Requires a significant time commitment	Generally requires fewer hours
Independence	May have conflicts of interest with the company	Expected to act independently and objectively

Types of Non-Executive Directors

There are several different types of non-executive directors, each with their own unique roles and responsibilities:

Independent NEDs

Independent NEDs are directors who do not have any links to the company, management, or major shareholders.

They are appointed specifically for their impartiality and neutrality, and are expected to provide unbiased oversight and guidance to the executive directors.

Affiliated NEDs

Affiliated NEDs are directors who have some association with the company, management, or major shareholders.

They may be former executives of the company, representatives of major shareholders, or individuals with close ties to the company.

Affiliated NEDs can bring valuable experience and knowledge to the board, but it is important to ensure that their affiliations do not compromise their independence and objectivity.

Part-time NEDs

Part-time NEDs are directors who do not have a full-time role with the company.

They may have other professional commitments or may be retired.

Part-time NEDs can again bring valuable expertise and experience to the board, but it is important to ensure that they have enough time and availability to carry out their duties effectively.

Executive NEDs

Executive NEDs are directors who hold a senior executive position in another company, but also serve as a non-executive director on the board of another company.

Executive NEDs can bring valuable industry knowledge and expertise to the board, but it is important to ensure that their responsibilities do not conflict with their duties as a non-executive director.

Qualities and Skills Required for Non-Executive Directors

Non-executive directors are expected to bring a wide range of qualities and skills to the boardroom.

In addition to their professional experience and industry expertise, NEDs should possess the following qualities and skills:

Strategic Thinking	NEDs should be able to think strategically and provide insight to help the company plan and achieve it’s long-term goals.
Independent Judgment	NEDs should be able to provide independent judgment and challenge the executive directors when necessary.
Strong Communication	NEDs should be able to articulate their points of view effectively with other board members, senior executives, shareholders, and other stakeholders.
Financial Literacy	NEDs should have a strong understanding of finance and accounting principles, and be able to interpret and evaluate financial statements and reports.
Risk Management Expertise	NEDs should be able to provide input into the company’s risk management strategy and controls.
Ethical and Integrity	NEDs should have strong ethical values and a commitment to integrity, being able to hold the company accountable for ethical failures or non-compliance with laws and regulations.

The Appointment and Removal of Non-Executive Directors

The appointment and removal of non-executive directors (NEDs) is an important aspect of corporate governance.

The process of appointing NEDs should be transparent and objective, with clear criteria used for selecting candidates.

Appointment of NEDs

The process of appointing NEDs typically involves the following steps:

Step 1	Identify Need	The board identifies the need for additional NEDs based on the company’s strategy, objectives, and governance requirements.
Step 2	Search Criteria	The board establishes clear criteria for selecting NEDs, such as their skills, experience, and qualifications.
Step 3	Candidate Search	The board conducts a search for suitable candidates, either through an internal process or with the help of an external search firm. Candidates are evaluated against the selection criteria, and the most suitable candidates are shortlisted.
Step 4	Interview and Assessment	Shortlisted candidates are interviewed by the board or a selection committee, and their suitability is assessed based on their qualifications, experience, and fit with the company’s culture and values.
Step 5	Appointment	The successful candidate is appointed as a NED, subject to approval by shareholders and regulatory bodies, if required.

Criteria for Selection

The criteria used for selecting NEDs may vary depending on the company’s specific requirements, but could typically include the following:

Skills and Expertise	NEDs should have skills and expertise that complement those of the executive team, such as financial, legal, or industry expertise.
Experience	NEDs should have relevant experience in their field, such as senior management or board experience.
Independence	NEDs should be independent and impartial, with no conflicts of interest that could compromise their ability to provide independent oversight and guidance.
Diversity	NEDs should bring a diverse range of perspectives and experiences to the boardroom, reflecting the company’s stakeholders and the wider society.

Reasons for Removal

NEDs may be removed from the board for a variety of reasons, such as:

Performance	If a NED is not fulfilling their duties or is not adding value to the board, they may be asked to resign or be removed from the board.
Conflict of Interest	If a NED’s personal interests conflict with the interests of the company or its stakeholders, they may be asked to resign or be removed from the board.
Breach	If a NED breaches their fiduciary duties, such as by disclosing confidential information or engaging in misconduct, they may be asked to resign or be removed from the board.
Time	Some companies have term limits for NEDs, after which they must step down from the board.