Non-executive Directors and Their Risk - 7 FAQs

Here you can download our Non-executive Directors and Their Risk 7 Frequently Asked Questions answered booklet. An example of the useful information you can find in the booklet is featured below.

Introduction

It is often the case, especially with medium-size or larger companies, or often family companies, that individuals are appointed to the Board of Directors who do not have any day to day role within the company. Such individuals may be on the Board for nominal purposes or they may be appointed to the Board to reflect their Shareholding and the desire to have a continued involvement in the Company’s business or have an ability to access the Company’s detailed records (which may not normally be available to Shareholders).

Such Directors are often referred to as Non-Executive Directors, as they do not have any executive role and are merely there to supervise the other Directors. Whilst they are not a Managing Director with an ability to control Directors actions within the Company, as a Non-Executive Director they have the ability to consider matters more objectively and actively participate in the Company’s decision-making process at Board level, including the monitoring and decision-making following the review of the Company’s financial information.

In this article we attempt to address the common perception that Non-Executive Directors have little or no responsibility when things go wrong and the importance of taking proper advice and considering your position as a Non-Executive Director at all times.

 

1. What Do Non-Executive Directors Do?

A Non-Executive Director will have little or no role on a day-to-day basis, albeit they may be regularly referred to by reason of their experience, professional skills or expertise

Most typically, a Non-Executive Director will review management accounts at monthly Board meetings and monitor the financial affairs, departmental budgets and sales forecasts for the Company. Whilst s/he will not have a specific role within any specific department, they should review all reports and information provided by department regularly for the purpose of fulfilling their corporate governance duties as a Director.

In reality, this for small or medium size companies, regular monthly board meetings may not always be convened, or they may be convened quarterly or the Non-Executive Director will have more of an advisory role than a supervisory one. The appropriateness of this will depend on the Company’s situation, and in many cases this level of involvement will be sufficient.

With today’s technology, there is no longer a need for Directors to attend meetings or monitor the Company’s finance by attending the main trading premises. Non-Executive Directors may instead receive management information electronically and consequently should have proper access to data on the Company’s progress and growth in line sufficient to comply with their duties to promote the success of the Company as required under the Companies Act 2006.

Historically a Non-Executive Director was perhaps also the Majority Shareholder of the Company. It would not be an unusual situation where this individual was nearing retirement or in retirement and retaining this status by reason of his/her investment or as part of the handover to the next generation.

2. What Are The Common Myths Associated With The Non-Executive Role?

The appointment of a Non-Executive Director was historically seen as just a nominal appointment and the Director had little or no involvement in the Company, with equally little responsibility for decisions made.

This is an incredibly common myth which continues in many companies today which is totally incorrect and in more recent times the position of Non-Executive Director has become incredibly important.

A Non-Executive Director has the benefit of objectivity, is free of the day-to-day pressures faced by Executive Directors and is free of interference by other factors (which may affect decision-making). Non-Executive Directors may also provide their services on an advisory basis, mitigating the cost for small companies whilst yet retaining the skills of an experienced or highly qualified individual.

The Non-Executive role is largely dependent on the reporting structure within the Company and the participation of other Directors. Unfortunately, it remains the case with small to medium-sized companies that Non-Executive Directors have little involvement in the Company’s business whatsoever (even at Board meetings).

3. What Is The Differences Between Non-Executive And Executive Directors?

As described above, the Executive Directors will have day to day functions within the Company or, in some circumstances, a part-time role. An example of such Executive roles is a Finance director, a Sales and Marketing Director or an Operations Director.

Each of the Executive Directors will be responsible ultimately for the structure of their specific department, and with many small companies this may have a great overlap with other responsibilities. In reality, especially in small companies, it is only 1 or 2 Directors who have a joint responsibility for all of the Company’s operational areas.

A Non-Executive Director will have a very different role to these Directors. His/her role will be limited to involvement in the reporting process between the Board and the rest of the Company, or s/he may provide specialist consultancy services in a specific area falling within their expertise or profession.

This is commonly referred to as “Corporate Governance” which is a title given to how Company decisions are made and a Company managed at the most senior level, i.e. Board level.

4. What Are The Responsibilities Of Non-Executive DirectorsS?

Non-Executive Directors bear an identical responsibility for the Company’s affairs to that of Executive Directors, within the reporting structure and infrastructure of the Company (provided it is run properly). The only difference in their obligations, as opposed to Executive Directors, is that they do not have a direct responsibility for any specific department.

Whilst a Financial Director may have a responsibility for ensuring that the Company’s accounts are properly maintained, tax returns are filed and paid, Companies House filings are properly completed and systems are in place within the Company sufficient to maintain it’s financial integrity and reporting process, the Non-Executive Director will still have a duty to ensure s/he is properly positioned to oversees the management of the Company (usually by reference to reports provided by Directors at Board Meetings).

If a Non-Executive Director is aware of any breach of the Director’s fiduciary duties or any problems faced by the Company which are not being dealt with by the appointed Directors in the correct fashion, then s/he should raise this at the Board Meeting and possesses a positive obligation to take reasonable steps to mitigate any potential wrong.

Ultimately a Non-Executive Director does have a responsibility to ensure that the Company is run in compliance with its statutory and any other regulatory (or other) obligations, to the extent of their abilities and any failure to act in accordance with these duties, including any inaction or passive steps taken, can put them at considerable risk.

IN ORDER TO FIND OUT MORE ABOUT THIS SUBJECT AND THE ANSWERS TO THE QUESTIONS LISTED BELOW, DOWNLOAD OUR HANDY TIPS BOOKLET HERE.

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5. Is There A Requirement To Have A Board Meeting?

6. Do Non-Executive Directors Face The Same Risk?

7. What Are The Risks To Non-Executive Directors?

Should you require any further assistance at all with these matters, then please contact one of our corporate specialists on 020 7841 0390 and we will be happy to discuss this with you.