What Is a Non-Executive Director?
The term non-executive director refers to a member of a company's board of directors. This board member isn't a company employee, which means they don't engage in the day-to-day management of the organization. Rather, most non-executive directors act as independent advisors and are involved in policymaking and planning exercises. Their responsibilities generally include monitoring executive directors and acting in the interest of corporate stakeholders.
- A non-executive director is a member of a company's board of directors who is not part of the executive team.
- This director typically does not engage in the day-to-day management of the organization but is involved in policymaking and planning exercises.
- Their responsibilities include monitoring executive directors and acting in the interest of the company stakeholders.
- Most non-executive directors are compensated for their time through fees, equity, and cash payments.
- They differ from executive directors who are hired to oversee the operational activities of non-profits.
Understanding Non-Executive Directors
As noted above, non-executive directors are not company employees. They are part of a company's board of directors. They 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 shareholders or other stakeholders.
Also known as external directors, independent directors, and outside directors), 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, a record of philanthropy, and prior experience could provide positive exposure and symbolic value for the firm.
Although they aren't employees, non-executive directors may still be compensated for their time. They can be paid through fees, cash, or equity compensation. The amount they are paid depends on the industry, the size and scope of the company, and the amount of time they spend doing work for the corporation. Because they come with a lot of experience and connections, many non-executive directors can be handsomely rewarded for their time.
Non-executive directors are equally liable for the success or failure of a business, as outlined by statutory requirements and tax laws.
As a function of their leadership role, non-executive directors are required to embody certain key values. This includes using their past experience to mentor others during new ventures. They are also responsible for keeping the executive directors and the entire board accountable. This can be accomplished by helping with and managing a company's:
- Risk from an objective standpoint unrelated to the intimacy of operating activity
They also independently assess the company's performance to ensure the firm's stakeholders are considered before the needs and want 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.
Non-executive directors must also provide value through leveraging their network of outside contacts that can benefit the company.
In some cases, non-executive directors may serve in the same role for two or more companies. When this happens, they must fully disclose their time commitments to both boards and juggle their responsibilities accordingly.
Non-Executive Director vs. Executive Director
It's easy to confuse a non-executive director with an executive director. But the two are inherently different. The former is not an employee. But an executive director acts as a leader and manages the day-to-day operations of the company they work for—usually a non-profit organization.
Along with managing company matters, some of the other responsibilities of an executive director include:
- strategic planning
- operating within and adhering to a budget
- leading fundraising efforts and boosting membership
- helping with public relations
Although the role and responsibilities of an executive director are similar to those of a chief executive officer (CEO), their salary is normally much lower. In some cases, many executive directors often work on a voluntary basis and are not compensated.
Example of Non-Executive Director
Here's an example to demonstrate the roles and responsibilities of non-executive directors.
Let's say the former CEO of a successful public technology company assumes the role of a non-executive director with a technology startup. As part of the board, they may be expected to:
- Mentor or steward any new ventures the company takes and leverage their past experience in the sector
- Assist executive directors with insight into hidden problems or external factors that may negatively affect the business and its profitability
In certain cases, non-executive directors are well-established in their fields. As such, they may have good connections in their industries. In the case of the former tech CEO, they would likely have warm relationships with venture capital firms that can help the startup achieve its goals of expansion and growth.
What Is the Role of a Non-Executive Director?
A non-executive director is an individual appointed to a company's board of directors. They are not employed by the company but act as independent advisors or directors to help the company achieve its goals. They are involved in policymaking and planning exercises and routinely monitor the company's executive directors to ensure they act in the interest of corporate stakeholders.
Are Non-Executive Directors Compensated?
Most non-executive directors are compensated for their time. Compensation can be through fees, equity, or cash. Their compensation can be high because of their experience and connections within their respective industries.
How Do Non-Executive Directors Differ From Executive Directors?
Non-executive directors are different from executive directors. Executive directors normally work for non-profits and assume the same responsibilities as a CEO, including managing the day-to-day operations, overseeing fundraising, boosting membership, and sticking to a budget. Unlike non-executive directors, many executive directors are not compensated for their time.
The Bottom Line
While non-executive directors are not a part of the executive team, they are members of the board of directors. Therefore, they are equally liable for the success or failure of the business. Their duties are very different from the day-to-day tasks mainly because they aren't actual employees. As such, they focus more on acting in the interest of shareholders and monitoring executive directors.