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Men in Suits

Non-Executive Director explained

A Non-Executive Director is a member of the board of directors who is independent of the company's Executive Director and other board members.

It is vital to highlight that Non-Executive Directors do not control a company's everyday operations; rather, they serve as consultants, mentors specialists with unique strategic specialties.

Why do businesses appoint Non-Executive Directors?

More talents may be necessary to support the plan as a firm or organisation grows.

For example, the company may wish to expand into new markets, merge with, or acquire another company. Instead, the business may wish to go through a thorough digital transformation and bring its IT systems up to date.

When a firm wishes to pursue something outside of its core competencies, it will appoint a Non-Executive Director with the required abilities to assist the board and senior management with strategy.

A Non-Executive Director is thus someone engaged from outside the company to advise the board and management and assist them in achieving their strategy.

What is the role of a Non-Executive Director?

A good Non-Executive Director (NED) is similar to an exceptional consultant in that they are there to actively criticise bad thinking and ways of doing things. A good Non-Executive Director is not someone who acts as a box ticker and 'yes' person on behalf of the CEO.

NEDs should play an important part in a business's governance by providing an independent and objective perspective from outside the organisation. A good NED will always contribute to a company's growth.

The job of Non-Executive Directors is to offer the board objective and unbiased counsel, allowing it to make better choices in the best interests of all shareholders and stakeholders.

How are Non-Executive Directors appointed or hired?

Non-Executive Directors are typically appointed by the board of directors and the nominating committee.

NEDs may be appointed to the board for a variety of reasons. For example, if a venture capital firm invests in a company, they may frequently request that 'one of their people sit on the board of directors to keep an eye on their investment. This frequently leads to more accountability for shareholder cash and improves a company's success.

Non-Executive Directors' responsibility

Non-Executive Directors should:

  • Provide a truly independent and external perspective to the board to spark debate and improve decision-making.

  • Offer strategic development with value-added feedback.

  • Operate in the best interests of the corporation as a whole rather than any one shareholder group.

NEDs should also support the board in executing its tasks, such as:

  • The strategic plan is being reviewed, approved, and monitored on an ongoing basis.

  • Assessing organisational capability in relation to stated goals;

  • Examining financial performance in relation to goals

  • Capital raising

  • Examining any major changes in the company, such as financial or administrative structures;

  • Giving advice on large investments or divestments

  • Keeping track of legal, ethical, risk, and environmental compliance (ESG)

Non-Executive Directors are also required to:

  • When appropriate, act as a change agent and challenge the status quo.

  • Preserve a company's highest ethical standards, probity and honesty.

  • Assist the executive team with risk management.

  • Take the lead in board committees.

  • Participate actively in assisting the CEO in managing their executive staff, including new appointments.

  • Participate in role-specific and related trainings.

What qualities define an excellent Non-Executive Director?

A normal board of directors may consist of six to twelve directors,; however, some are larger.

Some will be Executive Directors - usually the CEO, CFO, and one or two others - but the bulk will be Non-Executive Directors brought in to provide knowledge and judgement in the long-term interests of the organisation.

Sitting on a board is difficult; the tasks are extensive, the legal liabilities are big enough that they must be insured against, and the financial rewards are minimal for those with no additional commitments.

To be a good Non-Executive Director, you must have a high level of intelligence in order to understand complex and often financial challenges.

A positive attitude is also necessary. The chair chairs the board and provides leadership, but the non-executives must think, consider, advise and support.

They eventually support the chair. They must also be generally entertaining, amusing - and serious when necessary - as well as a well-rounded and mature individual.

Many boards are looking for non-executives who have been successful in their businesses and have acquired additional talents along the way.

What is the process for becoming a Non-Executive Director?

To be a Non-Executive Director, you must first grasp how boards operate. In board meetings, you can't just wing it.

Spencer Stuart, a search and recruitment business for executives and non-executives, has identified five "intrinsic qualities" necessary for Non-Executive Director. They are as follows:

  • Methodological approach

  • Independent-mindedness

  • Integrity

  • Interpersonal abilities and

  • Inclination to participate

In addition, the firm offers ten questions that prospective directors should ask themselves before accepting an invitation to join a board. They are as follows:

  • What can I provide you?

  • How will I locate the appropriate board? (Be patient; it may take some time.)

  • How much research should I do? (It should be strict. Consult with specialists, study the minutes, and so forth.)

  • Do I have enough time? (Ask for meeting times and locations for the following three years.)

  • Can I pitch in? (Determine where you can provide distinct and differentiated value.)

  • Will I ever learn? (Be interested and an open-minded intellectually.)

  • Will it be enjoyable?

  • How much time is required? (One of the hazards is underestimating the amount of time needed.)

  • Is my boss completely on board? (Tell your CEO what you've discovered and how it will benefit the company.)

  • Do I expect to be appointed to the board? (You should anticipate an induction process.)

Our Directors’ Institute- World council of Directors can help you accelerate your board journey by training you on your roles and responsibilities to be carried out in an efficient manner helping you to make a significant contribution to the board and raise corporate governance standards within the organization.

Our ESG Expert certification will help you to amplify your understanding of corporate governance in a detailed manner paving a way for you to become a globally recognized ESG leader.

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