So You Want to Be a Non-Executive Director?

January 19, 2017

NED1

Are you thinking about becoming a non-executive director?

Do you have the skills to join the board as an independent non-executive director?

Do you know what the role entails?

The following frequently asked questions (and answers) should give you the information to help you understand more about what it takes to become a non-executive director.

What are Non-Executive Directors?

The first and most important thing to understand about non-executive directors (NEDs) is that there is no difference between executive and non-executive roles in the eyes of the law. This means that the legal duties and liabilities of a non-executive director, who may be engaged for as little as 1 day a month, are exactly the same as those of the full-time executive directors. For this reason it is essential to find out as much as you can about an organisation before accepting a non-executive appointment.

The second thing to understand is that the limited liability afforded by a limited company registered at Companies House only protects the exposure of the company’s shareholders. Directors, regardless of whether they are executive or non-executive, may face unlimited personal liabilities if the Board acts illegally.

What do Non-Executive Directors do?

The principal role of a non-executive director is that of Critical Friend to the organisation, someone who supports the executive directors and acts as an ambassador but is also able to view the Board objectively and challenge the organisational strategy.

Getting the critical friend balance right is the ultimate test of success for a non-executive director. The Board should work together as a cohesive team, of which non-executive directors should feel an integral part – however they should not get so close that they find it difficult to ask awkward questions about executive proposals or performance.

Whilst Executive directors are directors who are also employees of the company, Non-executive directors are officers of the company and not employees. This means that non-executive directors do not have the same employment rights as the company’s employees though HMRC will still expect your director’s fees to be paid via PAYE with NI deductions.

Unlike Executive Directors who work for the organisation on a day to day basis, usually being responsible for particular functions such as finance, technology, sales or marketing, NEDs have no line management responsibility and are there to ensure that the company is governed properly; that it complies with the right laws (of which there are many!), that its strategies are robust, that stakeholder interests are protected and subjected to the appropriate due diligence, particularly in the case of mergers or takeovers.

They are usually retained for a particular number of days per month, though in practice the actual number of days spent on the role usually exceeds this figure, they can serve for a particular period of time, usually multiples of three years, typically six years in total and remuneration varies from a pro-rata equivalent to the executive directors down to nothing other than reasonable expenses depending on the size of the organisation and whether it is in the private, public or not-for-profit sector.

There is currently much debate about the independence of non-executive directors and whether or not they should also receive share options or be shareholders in their own right. Whilst there are no hard and fast rules the guiding principle with regard to independence should be your ability to resign your position as a matter of principle, though this should always be a last resort. The acid test therefore is that the remuneration, shareholding or options should not form a major part of your income or investment portfolio so you are not financially dependent on retaining your position.

NEDs perform a variety of functions such as ensuring that pension funds are managed properly, audits are managed with integrity and that Executive remuneration and performance related bonuses are set at an appropriate rate. The exact nature of a NEDs role is very much dependent on the size of the organisation, the nature of its operations and the sector it is operating in.

In order to have a balanced board, NEDs will often have been recruited with particular skills, experience or background to fill a gap in the board’s overall capability. NEDs with specialist knowledge will often find themselves being asked to sit on special purpose committees, take part in strategic projects or mentor executive directors with functional responsibilities aligned to the NEDs specialist expertise.

Regardless of any specialist expertise NEDs must be independent, have integrity and the respect of the other board members, be prepared and able to look at the business from a ‘big picture’ perspective, be well informed and manage difficult decisions in a facilitative manner. The chemistry with other board members is vital. It is the Chairman’s responsibility to ensure that the Board functions as a team, with the NEDs functioning as a cohesive unit within the Board team.

NEDs should act in a mature and professional manner and be prepared to make a stand if they do not agree with the way the organisation is being run. Increasingly NEDs are obtaining professional qualifications such as the Institute of Directors’ Chartered Director qualification to demonstrate that they have the understanding and experience to undertake their non-executive duties in a thoroughly professional manner.

Why would you want to become a Non-Executive Director or Trustee?

Despite the fact that NED fees are often low or non-existent, the risks and responsibilities can often be significant, especially reputational risks, the time commitment is often more than expected and the role can expose you to risks of claims of negligence quite disproportionate to the rewards – yet there are many more candidates for NED positions than there are roles available.

People become Non-Executive Directors for various reasons.

  1. As part of a Portfolio Career, where they will have a number of part-time remunerated roles often combined with interim, consultancy or coaching and mentoring work
  2. In order to develop their boardroom skills, either in conjunction with or preparation for an executive role
  3. As a way of ‘giving something back’ – increasingly non-executive, trustee or governor roles with a social enterprise or other not-for-profit are seen as more effective ways of volunteering than high street fundraising or sponsored activities
  4. To ‘keep your hand in’ after you have stepped down from a senior executive role in a major corporate, large public or not-for-profit sector organisation.
  5. To be part of the excitement of the next generation of entrepreneurs on the board of a start-up or high growth business.

Provided I have the skills, how would I become one?

It is often said, especially by recruiters, that you cannot be a NED unless you already are one – so how do you get started on the NED career ladder?

The routes tend to be rather different depending on whether it is a public or voluntary sector appointment or whether it is for a private sector company. For many the holy grail of a highly remunerated NED appointment with a FTSE 100 company is well out of reach as many of these appointments rely heavily on the old boy network.

Public Sector

Public Sector NED vacancies, particularly in the NHS and housing associations, are advertised daily and although competition for these roles is still tough you will have a much better chance of success than when competing for the much rarer private sector roles. You can also gain very useful experience as a Charity Trustee or School or College Governor. In terms of corporate governance, especially strategic risk management, public and voluntary sector boards are streets ahead of the vast majority of private sector boards so your experience serving on these boards will prove invaluable as you develop your Non-executive director career.

All senior public appointments, including non-executive directors, should be governed by the overriding principle of selection on merit. They should be open to independent scrutiny and the recruitment process must be transparent and appointments are publicised openly. Search and Selection companies are often used pro-actively to ensure a strong list of interested candidates.

Private Sector

The vast majority of non-executive director vacancies in the private sector are not advertised so you will need to adopt a different strategy to secure a private sector NED appointment. By far the best way is to engage with a business at board level as a consultant or coach/mentor to the Chief Executive and over a period of time, typically 18 months, work towards being seen as a trusted advisor to the board. From this position it is only a short step to a non-executive seat at the board.

Extensive networking and raising your profile as an expert in your field via social media and speaking engagements are two ways to improve your chances of being seen as potential non-executive material in the private sector.

Where do I go from here?

There are a number of steps that you can take to enhance your chances of obtaining a NED position:

  1. Subscribe to NEDworks – you can sign up for their newsletter and NED vacancy notifications free of charge to receive regular mailings of NED vacancies in all sectors
  2. Join NEDworks – in addition to NEDworks mailings by registering for free membership you will gain access to the exclusive member’s only areas of the site including discussion forums, groups and resources
  3. Become a NEDworks Tier1 Member for only £30.00 (ex VAT) a year here to additionally receive: a free CV review to optimise your CV for NED vacancy applications; discounts off all Executive Transitions’ events and courses from Excellencia; notification of Non-Executive Director and Trustee positions as soon as they become available; searchable directory listing – enabling recruiters and head-hunters to find you access to exclusive Tier1 member’s only area
  4. Read How to write a Non-Executive Director CV here to find out how a NED CV differs from an executive CV
  5. Book a place on the next How to become a Non-Executive Director course from Excellencia

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