What Is A Non-Executive Director?
A non-executive director (NED) is a member of a company's Board of directors who is not part of the executive team, meaning they do not engage in the day-to-day management of the organisation.
Instead, they are involved in policymaking and planning exercises. Non-executive directors can make a significant contribution to the development, governance and success of a company.
Are Non-Executive Director’s Required?
Whilst Non-executive directors (NEDs) are required for public companies, they are also seen as necessary for large private companies. In addition, there is now a trend amongst many medium-sized private companies to appoint non-executive directors.
This is due in part to the increase in regulation, and also as a method of facilitating greater corporate governance in companies. In addition, SMEs throughout Ireland are recognising the additional benefits that NED’s bring to the Board.
There has been a demand for more diverse and specialised NEDs as businesses acknowledge the benefits of having the right people on their Boards.
The balance of executive and non-executive directors should be such that no individual or small group of individuals can dominate the Board's decision-making. Non-executive directors should comprise not less than half the Board of listed companies.
Qualities Of A Good NED
Companies considering the appointment of NEDs need to consider their appointments carefully. The following are attributes a company should look for when appointing a NED:
- Independence – as a NED it is important to remain independent of the management and free from any business or other relationships which could materially interfere with issues of strategy, performance and resources.
- Impartiality – they should bring a degree of objectivity to the Board's deliberations, and play a valuable role in monitoring executive management.
- Wide experience – they should bring a wide range of business acumen and experience to the role
- Specialist knowledge – In some instances, non-executive directors will have specific expertise relevant to a particular sector. Others may be well connected and can offer business opportunities otherwise unavailable.
- Communication skills - Accomplished non-executive directors will encourage debate and robust exchanges amongst the Board. High level interpersonal and communication skills are essential.
Powers, Duties & Responsibilities
Irish company law does not distinguish between the powers and duties of executive and non-executive directors. Non-executive directors are required to show the same duty of care and fiduciary duty to a company as an executive director. A non-executive director will be subject to the same liability as an executive director, compensating the company for losses arising from breaches of their duties.
Specific Tasks Of An Ned
- Strategic Direction: Given that NED’S are not involved in the day to day running of the business, they are widely considered to be in a better position to assess the business environment and the outside factors affecting the business. They should constructively challenge and contribute to the development of company strategy. NED’s may also add strategic value to SMEs, particularly where they are owner-managed or family businesses and objectivity may become compromised.
- Monitoring Performance: Non-executive directors should take responsibility for monitoring the performance of executive management, particularly regarding achievement of company strategy and objectives.
- Remuneration and Succession Planning: They are also responsible for determining appropriate levels of remuneration of executive directors. They may also have a central role in the appointment and removal of executive directors, in addition to succession planning.
- Risk: Non-executive directors should satisfy themselves that financial information is accurate and that financial controls and systems of risk management are robust. NED’s should ensure that all information requested by them to undertake this duty is delivered in an appropriate and timely manner. They should also have suitable access to the company’s auditors and bankers and should be empowered to seek independent legal advice if they believe this to be necessary.
Non-Executive Directors can add value to a business in a number of different ways. These include adding specific sectorial expertise, sharing their business acumen, introducing your business to a network of relevant contacts and acting as an independent sounding board on issues affecting your company. Therefore, Non-executive directors will continue to play an important role in the future success of a business.
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