Non-Executive Director

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 policy making 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 thinking and performance of a company. Since non-executive directors do not hold C-level or managerial positions, they are thought to hold the interests of the company in higher regard than executive directors, who may have an agency problem or conflict of interest between management and stockholders.

Further, non-executive directors are often included on a firm's board for public relations reasons. For instance, the non-executive director's community status and experience could provide good exposure for the firm. However, non-executive directors are 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 elements. 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 hold key roles.

First, he is required to keep the executive directors and the entire board accountable. Non-executive directors do this by helping with - and managing - a company's strategy, performance and risk. The non-executive director, in this example, does so by providing executive directors with insight into external factors that may affect the business. He also independently assesses the company's performance, ensuring the firm's shareholders are top of mind. Further, he entrenches himself in the financials of the company to verify fiscal responsibility, putting necessary controls in place.

Second, 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 other significant time commitments to the board and to inform the board of any changes to their schedules. In the example above, the former CEO may serve as a non-executive director for two technology companies. If this is the case, he must fully disclose his time commitments to both boards.

Finally, non-executive directors are expected to provide value through 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.