The Role of the Non-Executive Director
The role of the Non-Executive Director is in part defined by a number of common law and statutory regulations and it is vital that both the company and the Director are fully aware of all the legal requirements of the role before the Director is appointed.
In reality the role of the Non-Executive Director is more extensive than its legal obligations and Directors can perform varied and vital roles for a variety of companies and organisations.
The statutory duties required of Non Executive Directors can be summarised as:
- A duty to act in good faith.
- A duty to act with care and diligence.
- A duty not to misuse information or to gain improper advantage by abuse of the position.
- A duty to avoid conflict of interest in the position.
- A duty not to trade whilst insolvent.
The relationship between the Director and the company is defined as a fiduciary duty – the ‘duty to act with fidelity and trust to another’ – and as such the Director is obliged to act for the best interests of the company. In 2019, the role of a company is being reconsidered, with the role of companies increasingly viewed as having a responsibility or ‘licence to operate’ than ever before.
However, the role of the Non-Executive Director goes beyond the duties specified in law. Whilst individual Director requirements can vary from company to company, Director responsibilities will almost always include being involved in all of the board activities, including strategic planning, management evaluation and succession planning, the audit process and compliance issues. Broadly the role of the non-executive should be based around the following functions:
- Effective Corporate Governance. The Director should act as an effective check on management decisions and should evaluate management performance. The Director should also ensure that regulatory standards are met and ensure that adequate control systems are in place. Directors must consider external stakeholders and ensure that adequate disclosures are made to shareholders and others.
- Improving Company Performance. Directors should provide fresh ideas and information to management whilst providing an objective evaluation of company plans and performance. They should help management to identify opportunities, develop strategy and anticipate problems. Ensuring the company is operating in a sustainable way and with a longer-term outlook is a core part of a Director’s duty.
- Protection of Shareholder Funds. Directors need to ensure shareholder funds by careful evaluation of decisions and risk, ensuring that decisions promote the wealth of the company and do not deplete assets and ensuring that disclosures to shareholders are accurate and timely.
Individual board charters should include an explicit set of statements outlining the board’s expectations of:
- The time that Directors are expected to commit to the position.
- The extent of their authority to make decisions on the board’s behalf.
- Any special requirements for Directors that are representatives of a particular group.
Legal and other obligations should also be explicitly outlined.