Non Executive Directors
20th September, 2013
We are often asked about non-executive directors for companies and we thought that it might be worthwhile pointing out some of the main issues that surround them.
The benefit of a non executive director (or a NED as they’re usually known) is that a company has the input of a senior and experienced person on the board who can offer insight and a wider perspective to board decisions. NEDs are not full time and can act as a sounding board for directors and a safety net for non-director shareholders.
NEDs are there to offer guidance rather than protection for shareholders, as in private companies the owners are usually the directors as well. The executive directors want some input to help them grow the business.
Why not hire a consultant?
If you need some advice on particular topics you could sign a retainer with a consultant at a per diem rate. This may well work for some companies. If, however, the consultant attends all board meetings and contributes to the board meetings as an equal to the directors he is, under company law, a shadow director with all the liabilities that entails. Given that, he or she might as well be a director. You must consider what you want – a consultant to advise on a specific matter or a NED to advise more generally.
For example, if you are implementing a major new piece of IT and the company does not have the expertise in-house to manage that project, it makes sense to appoint a consultant. It is not unusual, however, to appoint a NED with a particular area of expertise. For example, a fast growing company that has grown out of the founders’ technical expertise may require a NED with a commercial background to support the sales and marketing of the company or perhaps a NED with a financial background to support the company’s FD.
So who is a director?
The Companies Act does not make a distinction between executive and non-executive directors. You are either a director or you are not. And all the Companies Act duties of directors apply to NEDS. They must (Part 10 of the Companies Act 2006):
- Act within the powers conferred by the company’s constitution (section 171).
- Promote the success of the company for the benefit of its members (section 172).
- Exercise independent judgment (section 173).
- Exercise reasonable care, skill and diligence (section 174).
- Avoid conflicts of interest (section 175).
- Not accept benefits from third parties (section 176).
- Disclose any interest in a proposed transaction or arrangement with the company (section 177).
Recruitment and Appointment
As with any recruitment you must be clear what skills, knowledge, behaviours and experience you want and recruit appropriately. Key to recruitment is induction. This may include all or some of the following:
- Corporate documents – provide copies of the latest financial information and articles of association.
- Board meetings and procedures – provide dates of planned board meetings, copies of minutes from recent board meetings and details of any board committees, especially if the NED is to sit on any of them.
- Company procedures – provide all relevant internal rules and procedures, for example anti-bribery procedures and procedures for approving expenses.
- Business information – provide details of the company’s history, organisation charts, business plans, major customers, suppliers and competitors and papers explaining any regulatory framework within which the business operates.
- Investor information – provide details of all the company’s shareholders.
- Advisers – provide details of key contacts of the company’s principal advisers including auditors, bankers and legal advisers.
- Site visits – arrange a tour of the company’s sites and meetings with key staff.
You will need to appoint them using the correct procedures referring to your Articles of Association and any Shareholder Agreements you have. Form AP01 will need submitting to Companies House.
You will then need a Director’s Service Agreement, which is a bit like an Employment Contract, setting out their hours and their remuneration (the posh word for directors’ pay!). It should include the usual notice periods and importantly restrictive covenants as they will acquire sensitive and valuable information about your company.
Any director, including a NED, need not own shares in accompany of which they are a director. You may wish to give them some shares or some share options to tie them in and, for small companies, it may be preferable to pay in shares or options rather than cash. If they become shareholders, you’ll need to sign them up into a shareholders’ agreement.
Roles and Responsibility
You need to set our clearly what their roles and responsibilities are, but you must not fetter their ability to discharge their duties under the Companies Act. If you want them to chair committees or have a specific remit for specific areas, e.g. marketing, accounting, strategy, overseas development, it must be made clear.
Becoming a Non-Executive Director
If you want to become a NED it can be fulfilling and challenging and sometimes an opportunity to “put something back”. In large companies it can be remunerative, but in smaller companies it tends not to be. They key is to remember that you are a director, your duties are to the company, not the person who appointed you, and you must remain independent.
NEDs can be very useful for a company, especially one planning growth. Remember they are full directors and both the company and the NED need to be clear on their role.