There has been a lot of press commentary recently on the role of non-executive directors in quoted companies and financial institutions, which has been highlighted as a result of the current financial crisis. The role is coming under increased scrutiny, particularly in relation to the importance of challenging executive decisions. Non-executive directors are not, however, only important to quoted companies and financial institutions. Appointing a non-executive director to a private company may also be appropriate and bring with it many benefits, as explained in a recently published paper from the Institute of Chartered Accountants of Scotland ("ICAS").

What is the difference between an executive director and a non-executive director?

An executive director would normally be involved in the day to day management and operations of the company and hold an executive role such as managing director, finance director, operations director, etc. Non-executives, by contrast, are not "hands on". They are expected to attend board meetings and operate as a "check and balance" to the executives by bringing an objective external viewpoint to the meeting and, where appropriate, making constructive challenges to executive decisions.

Non-executive directors and executive directors owe the same legal duties to their company. The time devoted by a non-executive to the company's affairs, however, is likely to be significantly less than for an executive director. This would be taken into account should a question ever arise as to whether the non-executive director has properly discharged his duties to the company.

Non-executive director role not limited to quoted companies

The non-executive director has been a feature of the quoted company landscape for many years now. The role is enshrined in the Combined Code on Corporate Governance ("Code"). This provides that companies to which the Code applies should have a balance of executives and non-executives such that no one individual or small group of individuals can dominate the board's decision taking. The Code gives guidance on the role of the non-executive director which includes constructively challenging the board's proposals, scrutinising the performance of management, and ensuring that financial controls and systems of risk management are robust and defensible.

It is of course open to private companies to appoint non-executive directors. Whether or not this is appropriate will depend on a number of factors including the size of the company, the nature of its business, the stage of its development, its future strategy, and the current composition of its board. Increasingly, external investors and lenders are seeking to have a non-executive director on the boards to provide an investor's as opposed to a manager's view and offer a wider experience.

A prospective non-executive director will want to consider whether his particular experience is likely to be relevant and helpful to the company, and the time commitment required. Because of his potential liabilities as a director, he will be interested in the potential risks and will need to have sufficient understanding of how the company operates and how it deals with business risk.

The new ICAS guidance is intended to help identify:

  • whether a private company would benefit from appointing non-executive directors;
  • the expectations that a board and its shareholders may have of a non-executive director;
  • the support and information that may be expected from the company management so that non-executive directors can fulfil their remit;
  • the duties and responsibilities of individual directors; and
  • the potential risks to each director.

It also outlines a number of practical measures to help both the company and its directors fulfil their roles and manage their risks effectively.