What is a 'Non-Executive Director'

A non-executive director is a member of a company's board of directors who is not part of the executive team. A non-executive director typically does not engage in the day-to-day management of the organization, but is involved in policymaking and planning exercises. In addition, non-executive directors' responsibilities include the monitoring of the executive directors and acting in the interest of the company stakeholders.

BREAKING DOWN 'Non-Executive Director'

Non-executive directors, also known as external directors, independent directors or outside directors, are put in place to challenge the direction and performance of a company as well as its existing team. Since non-executive directors do not hold C-level or managerial positions, they are thought to understand the interests of the company with greater objectivity than the executive directors, who may have an agency problem or conflict of interest between management and stockholders or other stakeholders.

Additionally, non-executive directors are often installed on a firm's board for public relations reasons. For instance, a particular non-executive director's community standing, record of philanthropy and prior experience could provide positive exposure and symbolic value for the firm. However, non-executive directors are still equally liable for the success or failure of a business, as outlined by statutory requirements and tax laws.

Requirements of Non-Executive Directors

Non-executive directors, as a function of their leadership role, are required to embody specific key values. If, for example, a former CEO of a successful public technology company assumes the role of a non-executive director with a technology startup, he'll be expected to take on the role of mentor or steward of the new venture and leverage his past experience in the sector.

Non-executive directors are also responsible for keeping the executive directors and the entire board accountable. These directors can do this by helping with - and managing - a company's strategy, performance and risk from an objective standpoint unrelated to the intimacy of day-to-day operations. The non-executive director, in this example, may do so by providing executive directors with insight into hidden problems or external factors that may negatively affect the business and its profitability. He also independently assesses the company's performance, ensuring the firm's stakeholders are considered before the needs and wants of the management or board. A non-executive director with the right experience may also take a deep look into the financials of the company to verify fiscal responsibility, putting necessary controls in place if required.

All non-executive directors are required to commit a significant amount of their time to the oversight of the company. They are expected to disclose any other significant time commitments to the board and to inform the board of any changes to their schedules. In the example above, the former tech CEO may serve as a non-executive director for two or more technology companies. If this is the case, he must fully disclose his time commitments to both boards and juggle his responsibilities accordingly.

Non-executive directors are also expected to provide value through leveraging their network of outside contacts that can benefit the company. In the example above, the well-connected former tech CEO would most likely have warm relationships with venture capital firms that can help the startup.

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