UNTIL relatively recent times, non-executive directors were seen as the almost exclusive domain of PLCs and the very biggest private companies. Not any longer. Increasingly, private companies of varying sizes are recognising the virtues of having a voice in the boardroom independent of the executive management team.
NEDs, as we will call them from now on, are generally appointed to offer a “creative contribution” to the board of directors by giving objective criticism and advice. Whilst it is accepted that they can’t give the same continuous attention to the business of the company as the executive directors, they are expected to show the same commitment to its success.
Their independence from the management of the company is essential to their effectiveness. This allows them to bring a degree of objectivity to the board’s deliberations and play a valuable role in monitoring management decisions.
NEDs are generally chosen for their calibre, their breadth of experience and their personal qualities. They may also possess specialist knowledge of use to the Board or have key contacts in related industries or financial institutions.
Whilst being careful not to stray into executive directions, NEDs should always be available to provide general guidance and to offer a different perspective on matters of concern.
Their principal responsibilities lie in the following areas:
- Strategy: NEDs should constructively challenge and contribute to the development of strategy.
- Monitoring: NEDs should scrutinise the performance of management in meeting agreed goals and objectives. They should continually act as a sounding board for management, but also probe and ask questions where they have doubts or concerns.
- Audit: NEDs should satisfy themselves that financial information is accurate and that financial controls and systems of risk management are robust and defensible.
They should also provide independent views on resources, appointments and standards of conduct.
Although NEDs may not be direct employees, they are full members of the board and, as such, have responsibility alongside the executive directors for the success of the company.
It is also worth bearing in mind that the law draws no distinction between executive directors and non-executive directors. Under the Companies Act 2006, they share the same duties, responsibilities and, therefore, potential liabilities. So it’s not without its risks.
Some firms – and, indeed, some potential NEDs – choose to not go the formal NED route and instead simply take on an experienced advisor as a mentor and sounding board, Indeed, that was my first role when I formed EMC in 1989. The three directors of a fast-growing PR and media firm in Kent needed someone to bounce ideas off and to provide them with some financial disciplines on a reasonably structured basis that included my attendance at most board meetings. But I never became their NED.
I worked with the firm on that basis for a good decade and eventually helped the directors to sell the business when the time came for them to think about taking life a little easier. It’s a blueprint that I and my EMC colleagues have copied many times since.
We have extensive experience of acting as NEDs and mentors or advising on their appointment. So If you would like to find out more, call us on 01273 945984 or email email@example.com