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What are the responsibilities of a Non-Executive Director (NED) in a private company?
Traditionally, Non-Executive Directors (NEDs) have been appointed to the boards of UK public companies. More recently, this practice has extended to private companies who have recognised the value that can be added by experienced, objective and regular advice to a board. Private equity firms have long known this and routinely seek to protect and enhance their investment by requiring the appointment of an NED.
This article provides a brief introduction to the role and responsibilities of a NED of a UK private company, as well as an overview of the key actions the NED should take before joining a board and then once brought onboard.
Principles of good corporate governance
The UK Corporate Governance Code (July 2018) sets out the principles and provisions of good corporate governance for listed, public companies. It includes the following key principles related to NEDs:
“The board should include an appropriate combination of executive and non-executive (and, in particular, independent non-executive) directors, such that no one individual or small group of individuals dominates the board’s decision-making. There should be a clear division of responsibilities between the leadership of the board and the executive leadership of the company’s business.
Non-executive directors
should have sufficient time to meet their board responsibilities. They should provide constructive challenge, strategic guidance, offer specialist advice and hold management to account.”
NED role and responsibilities at a private company
The role of an NED appointed by a private company is typically based on that for public company directors although, strictly speaking, it is not subject to the UK Corporate Governance Code. Furthermore, there is actually no distinction in law between the duties and responsibilities of executive and non-executive directors - or, more colloquially, there is no 'non' in non-executive. Irrespective of whether a company is large or small, public or private, all directors take on significant legal duties:
- Acting within the company’s constitution (articles of association).
- Promoting the success of the company for the beneft of its shareholders as a whole.
- Exercising independent judgement by developing their own informed view on the company’s activities.
- Exercising reasonable care, skill and diligence.
- Avoiding or disclosing conflicts of interest which may affect objectivity.
- Keeping minutes of board meetings to provide a record of the board’s decision-making process.
However, unlike an executive director who will normally have a full-time role, an NED works part-time only and therefore cannot reasonably be expected to have the same detailed knowledge and experience of a company’s affairs as the executive director. Should an NED find themselves in the unfortunate position of a legal challenge, then this factor would be taken into account.
The NED is not engaged in the day-to-day management of the company. Instead, in addition to the requirements for all directors, the NED is expected to constructively challenge and help develop the company’s strategy, to participate actively in the decision-making process of the board, and to scrutinise the performance of management in meeting agreed goals and objectives.
What to do before joining a board
Prior to joining a board, as a prospective NED you should:
- Conduct sufficient due diligence to provide confidence that the company is one that you can make a strong and value adding contribution.
- Understand the level at which you will be expected to perform – more is expected from you in the area of your specific skill or experience.
- Form a judgement on the culture, values and behaviours associated with the board because your role is to uphold high standards of integrity.
- Decide whether you like the CEO and other directors and whether they like you - is there an openness around the board that supports clear and collaborative decision-making?
- Review the letter of appointment to satisfy yourself that you can meet the minimum time requirements.
- Disclose any conflict of interest and seek authorisation from the other directors.
What to do following appointment to the board
Once in place as a NED, you should:
- Complete a comprehensive, tailored induction programme.
- Receive a schedule of future board meetings planned well in advance, and insist on receiving high-quality information sufficiently in advance of meetings so you can prepare thoroughly and make a meaningful contribution.
- Provide independent oversight through constructive and robust challenge to the board, and contribute to the development of strategy, bringing your experience and expertise to bear.
- Seek specialist, independent advice if necessary – normally the letter of appointment will confirm the basis upon which this may happen and when expenditure will be reimbursed.
- Discharge your statutory duties as a director.
- Be prepared to resign under certain circumstances, but you should always talk first to the chairman or other senior individuals, and consider taking independent professional advice.
Conclusion
The NED has exactly the same duties and responsibilities as an executive director, though the part-time nature of the role requires the NED to focus on independent oversight. Before joining a board, as a prospective NED you should have conducted sufficient due diligence to assure yourself that it is the right company for you and, once in place, you should apply your experience and expertise to add real value to the business.
A strategic due diligence sets the potential and a roadmap of initiatives gets you there.
PE firms require non-executives to sit on the board of portfolio companies.
It may be the best decision the board ever makes.