What is a Non Executive Director?

Non-Executive Directors (NEDs) are appointed to provide companies with advice and support. They are appointed to tactfully contest strategies to glean the best results from management for business. The role is often challenging and requires the individual to be equipped with specific knowledge and expertise, confidence and analytical skills, whilst maintaining an external and objective viewpoint in order to contribute to an effective Board.

Legally, there is no distinction between Executive and Non-Executive Directors and, for this reason, the UK unitary Board structure concludes that NEDs share the same responsibilities, legal duties, and potential risks as their Executive colleagues. It is common knowledge that Non-Executive Directors cannot deliver the equivalent seamless attention to the business, as they are not, or at least should not be, involved in detail. However it is essential that they share the same drive for success as their Executive associates.

Accountabilities and Responsibilities

Non Executive Director Responsibilities

In terms of key responsibilities, NEDs should be regarded as leadership contributors. Chairmen and Chief Executives should harness their Non-Executive Directors to provide general counsel and seek their guidance on particular issues before they are raised in Board meetings. A Non-Executive Director is appointed to benefit the development of business strategy and effectively challenge strategic plans made by management. The independent viewpoint that the NED maintains (away from the day-to-day activities of company management) allows for better focus upon challenging and revising company strategy and maintaining objectives.

Risk Management process

In another light, NEDs are expected to ensure appropriate risk management schemes are in place and guarantee internal control frameworks are implemented regarding all characteristics of the business. One of these features for the NED is filling key business leadership positions within the company through successful succession planning.

Performance Monitoring

NED Directors should also take responsibility for monitoring the performance of Executive management and, in some cases, mentoring them - especially in regards to the progress made towards achieving the company strategy and objectives. The Non-Executive Director must also ensure that KPIs are met by the management team and involve themselves heavily in problem solving, financial queries, audits, and measurement activities.

Professional Networking

Furthermore, the unique contacts that the NED can bring to the table is a clear indication that outside sources can be a benefit to business. Broadening professional networks can help bring useful individuals and organisations on Board to strengthen business and the NED will also be called upon to represent the company externally and aid the Board in keeping stakeholders, customers, shareholders and third parties informed appropriately.

Business Challenges

As well as germinating strong communication ties between the company and outside sources, Non-Executive Directors should involve themselves with any company difficulties, such as trading troubles through changes in the market or ineffective governance and management. The NED should ensure the reliability of financial information that they are provided with and that the company publishes and also ensure that financial controls and risk management systems are strong and secure.

Personal Skills

A NED works in an advisory capacity only and is therefore expected to be truly independent, as an individual with no links to the company so that their perspective is not tainted. However, the Non-Executive Director does not have to work in isolation; discussions are encouraged, but it is imperative any decisions made are solely that of the NED. Having a strong and persistent character is ideal for these situations, and the ability to voice “no” decisions, tactfully deliver criticisms and command attention from a Board are key attributes.

Management Induction Programme

For the above reasons, it is essential that newly appointed Non-Executive Directors receive a full induction to the company (and continuing development) to understand the business fully. Tours, liaising with key managers, assessing competitors and understanding USPs, are all important ways for NEDs to contribute and assimilate into the company effectively.

Duties

The Companies Act in 2006 is the main piece of legislation which governs company law in the UK and has a number of statutory duties applied to all Directors irrespective of company size or Executive or Non-Executive standing.

Directors Duties

• A Director must act in accordance with the company’s constitution and only exercise powers for the purpose which they are conferred.
• Act in good faith, with regard to likely consequences of any decision in the long term; the interests of employees, community and the environment; and the desirability of the company maintaining a reputation for high standards of business conduct.
• Exercise independent judgement
• Exercise the care, skill and diligence of a ‘reasonably diligent person’.
• Avoid situations of direct or indirect interest that conflicts the interests of the company; these should be managed and declared,
• Must not accept any benefit from a third party which may cause conflict of interest (scale of benefit is critical, for example; lunch may be fine whereas a holiday is not).
• Must declare the nature and extent of any personal interest in a proposed transaction with the company to the other Directors before the company enters into transaction

However, these are not the only considerations for Non-Executive and Executive Directors alike, other duties a Director should consider include:

• Duty of confidentiality
• Duty to devote sufficient time and attention
• Duty to account to shareholders
• Duty not to make ‘secret profits’
• Stewardship of the company assets
• A general duty to act in good faith
• Duty to file accounts, annual returns, and tax returns
• Duty to maintain statutory books
• Duty to ensure the company is complying with legislation including, in particular, those involving risk to third parties, for example, health and safety at work

Skills of a Non Executive Director

The skills of a Non Exec will vary from appointment to appointment but a Board should aim to have a balance of skills and experience that is appropriate for the size and requirements of business. Skill gaps can be identified by Board members and filled appropriately by appointing new Non-Executive Directors. The Board want to ensure the success of the company and therefore, it is of high importance that varied skill sets of Non-Executive Directors are valued.

The business issues of a company should be focused upon by all Directors; with a broad perspective. The benefit of NEDs is that they can be of a high level of professional competence and can bring a wide array of experience and personal attributes to the table. Furthermore, many Non-Executive Directors are armed with varying degrees of specialist knowledge that can help deliver prized perceptions to the Board or offer key contacts.

Board Objectives

Most valued, is Non Execs ability to stand apart from the management of the company; this ensures objectivity to the decisions and dilemmas facing the Board and provides a key role in the monitoring of Executive management.

NEDs should be astute to Board matters and are expected not to stray into providing Executive direction; enabling an unbiased view of the company as the individual is not cohesive with the day-to-day running of the business. Non-Executive Directors are expected to bring not only personal attributes and professional knowledge to the table, but also draw on their wide professional experience and perform with independence and impartiality.

Non Executive Director and Board Structure

Balanced Board of Directors

Achieving a Balanced Board of Directors is a challenging but rewarding task for business. The Matrix, shown below, suggests four areas of expertise to address when businesses look to create an effective Board.

A Balanced Board is an Effective Board Matrix


The polar opposites are: strategy ‹ › operations and drive ‹ › monitor

First Flight recommends Boards should have at least one, ideally two Directors with each of these four core skills:
• Strategic - the big picture looking to challenge and shape the future;
• Operational – the detail looking to make sure actions and plans are consistent with the strategy and will deliver the required performance;
• Drive – the accelerator and entrepreneurial abilities to drive the organisation forward and overcome obstacles;
• Monitoring Risk – the brake and Governance to be able to identify risk areas and issues and stop the organisation doing the wrong things.

These four areas reflect four separate and independent dimensions of Board dynamics which form two opposing pairs in terms of interaction: strategy (the big picture) ‹ › operations (the detail) and drive (the accelerator) ‹ › monitor (the brake) and each of these core skills should be provided to the Board by its Directors. Boards that are well represented with each of these skills will be more effective.

An example of one side pulling too hard in a direction with drastic consequences is in the banking sector, and that error was a catalyst for the Banking Crisis experienced in the late noughties.

Initially, the Boards of Banks were too heavily weighted on the ‘Monitor’ side of the Matrix, meaning that these boards were placing too much emphasis on risk averse strategies with board members from finance, regulatory and Corporate Governance backgrounds helping to make those decisions.

The Boards of Banks realised that this situation had occurred and as a method to rectify the risk adverse model they had been following, they introduced more ‘Drive’ into their Boards however, they did not find an appropriate balance and over-skewed in Drive’s favour. This resulted in the Boards of Banks and Banking sector becoming cavalier and overly entrepreneurial in their approach to business.

As we have the benefit of hindsight, we now know that the Banking sectors’ cavalier approach was doomed, being responsible for the years of reverberating damage caused to our economy.

Consequences of Groupthink

The impact of the over-zealous, skewed weight of Bank’s Boards was clear for all to see in the years that followed and acts as a fantastic example of ‘Groupthink’.

Groupthink is a term used to describe a psychological phenomenon that occurs within a group of people responsible for decision making. The situation is not appropriately or in most cases, logically dealt with as a result of the desire for harmony and conformity within the group of decision makers. In a method to reduce confliction between the group of decision makers, a decision is reached that may actually be irrational when considered outside of the decision making situation (most usually, where it will have the largest impact).

This phenomenon is more likely to become a factor within unbalanced, skewed Boards which is a great protagonist for the creation of a Balanced Board of Directors. As balanced Boards will provide voices, opinions from the different ‘sides’ and angles of the business it can be assumed that these sides would not necessarily agree on decision making but instead find a comprisable agreement between each ‘side’ to form a decision that takes into account each of those ‘sides’ viewpoint and will result in better, balanced decision making that considers all aspects of a business and the impact of those decisions on stakeholders.

Other famous examples of Groupthink that caused devastating consequences include; the attack on Pearl Harbour, escalation of the Vietnam War and most recently, the invasions on Afghanistan and Iraq on claims of Weapons of Mass Destruction.

Changing face of Non Executive Director

Although the four skills outlined in the above matrixes are essential core capabilities that appear in the majority of Non Exec job specifications, skills are evolving and digital communications, HR and legal are being added to the operations quadrant.

A recent survey of FTSE companies indicated that there is a shortage of NEDs with a digital background. However, much of this is a fault could be that of the major search firms looking for candidates in prior FTSE directors. It is time to cast the net for a varied pool of talent to aid the creation of balanced, effective Boards.

Expectations of NED and NED Expectations

Company Expectations

Essentially, a Non-Executive Director is expected to be a cohesive and influential member of the Board whilst maintaining an independent and outside perspective. Their contribution to strategic leadership is imperative and the NED must be prepared to challenge Executive recommendations to strengthen business. They are also expected to draw upon their valuable skills and experience to execute their role effectively in relation to:

• Setting and revising company strategy and objectives
• Risk management and internal control framework implementation
• Succession planning

Employee Expectations

However, for an NED, it is equally as important to understand what they can expect from a company on appointment. Taking on a role as a Non-Executive Director can broaden experience and elevate skill sets to the next level.

The NED must have a clear understanding of what is expected from him/her and the control and responsibilities they will have under company legislation. Furthermore, the skills and expertise the company wishes to utilise from them must be detailed, along with notes on time commitment desired from the NED both in terms of formal time and informal time. Appointments must include a clear description of the role in the letter of appointment, an appropriate fee and Directors’ and Officers’ (D & O) insurance.

It is beneficial for prospective NEDs to liaise with the company Chairman, other Directors and senior management to discuss and agree the role in-depth. This would also be an ideal opportunity for the NED to gain an extensive understanding of the business of the company.

Continuing Professional Development

• Induction about the company
• Annual agenda of Board meetings, with meetings held at regular intervals, and with sufficient time given to each point to be discussed
• Which Sub-Committees will the Non Exec sit on or Chair – all Non Execs should join one or more Sub-Committees (Audit, Risk, Remuneration, Nomination, Consumer etc)
• Receive Board papers of an appropriate length and quality in order to prepare for meetings
• Receive timely minutes that effectively reflect the discussions and decisions taken at the meetings

Non-Executive Directors are expected to be treated as other Directors to allow for full participation at Board meetings. With all Board members being held responsible for the success of business, it is essential that Board members relay key risks to the NED as they are not involved in the day-to-day running of the business. Therefore, the Non-Executive Director needs to have confidence in Board members to adequately identify, record, control and report risks to them.

Risk Management and Internal Controls

Working as a Non-Executive Director associates the individual with a company and its Board which carries legal, financial and reputational risks.

Risk management in itself is a cycle of identifying, assessing, monitoring and mitigating risks. This may not result in the removal of acknowledged risk, but the process in which to handle circumstances correctly and affectively. The NED, although collectively responsible for risk management along with all Board members, is heavily reliant upon the internal controls already in place working properly and the Non-Executive Director may need to seek professional advice from an accountant, insolvency practitioner or lawyer following the identification of a financial problem.

It goes without saying that risk is congruent with business. Risk is a pitfall that businesses face regularly and systems initiated must be able to adapt, escalate and control to address the challenge and report to the Board immediately. An effective system of internal control is fundamental to robust risk management and regular checks of set procedures are vital to maintain an effective control system.

Difficulties

It is possible that a company may get into trading difficulties through a changing market or through ineffective management and governance and these issues can escalate. A Non Exec must be fully aware of the Company’s situation and be au fait with the risks that can arise in adverse trading periods and the impact of those risks on business and their responsibilities. It is the Non-Executive Director’s responsibility to seek professional advice at an early stage.

Wrongful Trading

When a company fails to recognise trading beyond a point at which Directors are aware, it is referred to as wrongful trading and prospects of avoiding insolvency liquidation are slim. A company is considered insolvent when it cannot pay debts on time or when the value of its assets are less than the liabilities. Directors can find themselves in the firing line for the company’s debts if they do not strive to minimise loss to the company’s creditors.

Insolvency

A point can be reached when a company has to admit serious fault and an insolvency practitioner is called upon as soon as possible. The advice given will enable Directors to deliver correct governance and management to validate that they have endeavoured to avoid wrongful trading. As previously mentioned, the NED plays no part in the day-to-day activities of the company and therefore, the Non-Executive Director must be made aware immediately of any signs that the business is deteriorating, allowing them to manage the situation and challenge any reassurances that management may give.

Conclusion

The Role of a NED

The role of a NED is challenging position, independently providing advice and method to a business to help overcome business challenges. However, the reward can be great in regard to remuneration and sense of accomplishment.

The role is ever-changing, continuing to develop over past years’ alongside businesses need and desire for an effective board that can help improve aspects of a business.

More and more businesses are understanding the advantages to employing an independent Non-Executive Director to their board which provides greater opportunities for prospective NEDs.

First Flight Non-Executive Directors specialise in the search and selection of Non-Executive Directors. Aiming to broaden the Non-Exec gene pool and provide more diverse candidates to clients.

First Flight is the ideal place for candidates looking for a Non-Exec Role to begin their search, please contact us to discuss your requirements.

Success Stories