The concept of a non-executive director (NED or NXD) to those new to the term, can seem daunting and complicated. Executive and non-executive members of the board have the same responsibility in the eyes of the law. Therefore, it’s unsurprising that lines are blurry when defining the difference between these two crucial leadership roles.
If you are considering your first NED role, then it’s worth knowing what your board will expect from you.
Requirements of non-executive directors
The Institute of Directors lists independence, impartiality and specialist knowledge amongst the core NED functions.
Ultimately, a NED is a member of the Board of Directors. And, amongst the requirements of non-executive directors, is the ability to provide an impartial and independent view to support the executive team. Unlike executives and directors within an organisation, normally NEDs do not get involved in the day-to-day ‘nitty gritty’ of business operations. They act as experienced advisors; a guiding hand for those whose job it is to run the company on a daily basis.
As defined by the CIPD, non-executive directors are board members without management responsibility. NEDs are typically required to commit much less time (although equal amounts of dedication) than their executive teammates. But, non-executive directors must be able to allocate sufficient time to carry out their duties. Time commitments are determined by the board and can range from one day a month to as little as three days a year. Frequently as a NED, in reality your time commitment can be much greater than agreed.
Core Responsibilities of non-executive directors
The duties and responsibilities of non-executive directors can vary from business to business. Most companies have similar requirements from non-executive members of the board.
- Remuneration. NEDs take an active role in determining appropriate levels of pay and compensation for their executive counterparts. They also play a vital role in executive hiring decisions and succession planning. This ensures the business remains in a position of strength and the leadership team is sustainable.
- Mentoring. In a fledgling business or start-up, the executive board may choose to hire a non-executive director for a specific industry or functional expertise. In which case, the NED would act as a mentor and advisor to the company and could commit more of their time to the role.
- Strategy. Non-executive directors will often act as a challenger, critics or ‘devil’s advocate’ to the board. They will provide valued advice on the setting of strategy and business direction. An outsider’s point of view is crucial for most boards. This is especially true for companies with a tight-knit executive team that may have worked together for several years.
- Risk and audit. As non-executive directors have the same legal responsibilities as executive members of the board, they are equally as accountable for the company’s financial position. Financial duties for non-executive directors can include verifying and presenting financial information to shareholders, forming risk and audit committees, and ensuring robust risk management controls.
Non-executive director qualifications
Formal non-executive director qualifications are often not necessary. It is understood that extensive leadership experience and industry specialism are essential for the role.
For prospective first-time NEDs who want to strengthen their skills and knowledge in the boardroom, qualifications are available.
The Financial Times Non-Executive Director Diploma is one of the most respected. It is a formally accredited qualification and covers the entire spectrum of the NED role.
In summary, a non-executive director is a crucial position on the board. Non-executives hold the same responsibility for ensuring the company’s success as executive board members. NEDs, however, are not company employees and are therefore not compensated in the same way.
The distinction between the roles of non-executive and executive director is that NEDs are there to steer the business, to act as advisors. They do not tend to get involved in the operations of the company and are unlikely to ‘get their hands dirty’.
Often, businesses welcome the insight and experience of non-executives and as such, NEDs can form the role of ‘business friends’. If you are considering your first NED role and have the skills, wisdom and experience to offer to a board, then there are plenty of positions available.