[Commercial] Non-Executive Directors
28 May 2021
An effective and competent board is crucial for a successful company. The board sets the company’s goals and values and works on strategies to promote the success of the company. While executive directors are the main decision makers, the importance of a non-executive director (NED) ’s role must not be underestimated.
What is a NED?
There is no legal definition of a NED and in English law there is no distinction between an executive director and a NED. NEDs are subject to the duties of directors set out in the Companies Act 2006 in the same way as executive directors. Therefore, NEDs have the same legal duties, responsibilities, and potential liabilities as executive directors. In practice, however, NED’s duties are not as onerous as those of executive directors, as executive directors deal with the day-to-day management of the company’s business on a full-time basis and a NED’s role is mainly supervisory. They are expected to provide an objective, independent and constructive view of the plans and decisions made by executive directors.
Do we have to appoint a NED?
If you are a public company, yes. The UK Corporate Governance Code 2018 (the “Code”) is a set of principles that applies to the companies listed on the London Stock Exchange to promote good corporate governance. The principles state that the board should include an appropriate combination of executive and non-executive directors and, in particular, independent non-executive directors. There is distinction between independent NEDs and NEDs under the Code - while all NEDs are expected to provide independent views and judgments, independent NEDs must be free from any connections that can potentially give rise to a conflict of interest. This is to ensure that that no particular individual or small group of individuals has undue influence on the board’s decision making. The Code shows how important NEDs are considered when it comes to good corporate governance. At least half of the board members, excluding the chair, should be independent NEDs. NEDs also have an important role in appointing and removing executive directors.
We are not a listed company. Would it still be beneficial to have a NED?
In short, yes. It is not uncommon for a private company to have a NED and this trend has been growing recently. Even though private companies are not subject to the Code, appointing a NED can be beneficial in various ways. Using their skills acquired in different sectors, NEDs complement the skills and expertise of the executive directors. NEDs act as a sounding board for the executive directors by providing an objective and independent view. They also bring constructive challenges and support the executive directors to make decisions for the sustainable success of the company. They bring a wealth of experience gained while working in different roles in different environments. For all these reasons, NEDs can bring fresh perspectives to the board. In addition to these practical benefits, having a NED can also help a company gain a better reputation and become more attractive for clients and investors.
How is a NED different from an executive director in terms of appointment?
Having a supervisory role, NEDs’ remuneration is likely to be lower than executive directors, who are involved in the company’s day-to-day management on full time basis. While a private company does not need to adhere to the Code, it is also worth noting that share options or other performance related elements are generally not permitted in NEDs’ remuneration under the Code. Also, while executive directors are typically employees of the company, NEDs are not. NEDs are engaged through a letter of appointment. Therefore, NEDs will not be entitled to certain employment rights such as the right not to be unfairly dismissed.
Is there merit in UK subsidiaries of overseas companies having a NED?
This will depend on the particular overseas group. The parent company may already have NEDs on its board, so in terms of strategy there may not be an immediate need. However, if the parent is new to the UK or the UK market operates differently to that of the parent, then a NED may be able to provide valuable high-level advice that an executive team, particularly one seconded from the parent’s head office, might be lacking.
If you have any questions or would like advice and assistance in appointing a NED, please contact us.
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