A non-executive director (abbreviated to non-exec, NED, or NXD) is a member of a company’s or organization’s board of directors who is not part of the executive team. Also known as an independent director or external director typically does not engage in the day-to-day management of the organization but is involved in policymaking and planning exercises.
Non-executive directors are not employees of the company or affiliated with it in any other way and are differentiated from executive directors, who are members of the board who also serve, or previously served, as executive managers of the company (most often as corporate officers). However, they do have the same legal duties, responsibilities, and potential liabilities as their executive counterparts.
In addition, non-executive directors’ responsibilities include the monitoring of the executive directors and acting in the interest of the company stakeholders.
The appointment of Non-Executive Directors is predicated on their qualification like depth of data and breadth of experience, which helps the board in availing relevant insights and building contacts. They don’t just monitor the effectiveness of the company’s management but also assess the financial reports so on ascertain the risks if any. The company’s Chairman and Chief Executives often confer with the non-executive director on the broad matters, to urge a special perspective.
Non-executive directors are put in situ to challenge the direction and performance of a corporation yet as its existing team. Since non-executive directors don’t hold C-level or managerial positions, they’re thought to grasp the interests of the corporate with greater objectivity than the chief directors, who may have center problems or conflict of interest between management and stockholders or other stakeholders.
Additionally, non-executive directors are often installed on a firm’s board for promotional material reasons. As an example, a selected non-executive director’s community standing, a record of philanthropy, and prior experience could provide positive exposure and symbolic value for the firm.
According to the UK Institute of Directors, non-executive directors are expected to focus on board matters and not stray into ‘executive direction,’ thus providing an independent view of the company that is removed from day-to-day running. Non-executive directors, then, are appointed to bring to the board:
- Wide experience;
- Special knowledge;
- Personal qualities.
In addition to the above five key qualities, an effective non-executive director would influence the achievement of balance of the board of directors as a whole as well as commitment, perception, and a broad perspective of the area or industry. More key responsibilities may include:
- Contributing to the strategic direction of the company;
- Efficiently solving problems that arise;
- Communicating with third parties;
- Ensuring all the audit requirements are satisfied;
- Remuneration of the executive directors;
- Appointing the board of directors
Non-executive directors are liable for keeping the manager directors and therefore the entire board accountable. These directors can try this by helping with and managing a company’s strategy, performance, and risk from an objective standpoint unrelated to the intimacy of day-to-day operations.
All non-executive directors are required to commit a big amount of their time to the oversight of the corporate. They’re expected to disclose the other significant time commitments to the board and to tell the board of any changes to their schedules. Within the example above, the previous tech CEO may function a non-executive director for 2 or more technology companies. If this can be the case, he must fully disclose his time commitments to both boards and juggle his responsibilities accordingly.
Non-executive directors are expected to produce value through leveraging their network of outdoor contacts that may benefit the corporate. Within the example above, the well-connected former tech CEO would possibly have warm relationships with risk capital firms that may help the startup.
It is the duty of the entire board to make sure that the corporate accounts properly to its shareholders by presenting a real and fair reflection of its actions and financial performance in which the mandatory control systems are put into place and monitored regularly and rigorously. A non-executive director has a vital part to play in fulfilling this responsibility whether or not a proper audit committee (composed of non-executive directors) of the board has been constituted.