The Role of the Non Executive Director – 26.9.13

Introduction

The role of the Non-Executive Director is one that is often misunderstood and in order to address this issue the Institute of Chartered Secretaries and Administrators (“ICSA“) have issued a guidance note on the liability of non-executive directors (“NEDs“).  The guidance is intended to cover a number of areas of best practice that NEDs should give heed to and a summary of the main points is set out below.

Initial Steps

The guidance note sets out a number of things that NEDs should do before they join the board of a company including:

  • Undertaking their own due diligence on the company to ensure that they are satisfied that it is a company that they have confidence in and can make a strong contribution towards;
  • Understanding that there are two tests for establishing whether a director has satisfied their duties.  The “objective test” is to see whether a director has exercised the care, skill and diligence that would be exercised by a  reasonable person with the general knowledge skill and experience that it would be reasonable to expect of a person carrying out that director’s role.  The “subjective test” is an additional test on top of this and means that if a particular NED has greater knowledge, skill or experience than the notional reasonable person then they should be held to account at that level;
  • Recognising that their role is to uphold high standards within the company and to support the chairman and executive directors in instilling appropriate values and behaviours into the Company’s ethos;
  • Reviewing their letter of appointment and raising any concerns that they may have before signing it.  An NED should also ensure that the letter is sufficiently detailed to set out their time commitments and what will be expected of them in their role;
  • Understanding the requirements of the Companies Act 2006 in relation to conflicts of interest, gifts and hospitality and declare any potential conflicts of interest to the board before appointment.

Appointment to the Board

Upon appointment to the board of directors of the Company, the ICSA recommend that newly appointed NEDs should:

  • Receive a comprehensive tailored induction programme;
  • Understand that their role is to provide independent oversight and constructive challenge to the board;
  • Ensure that they receive a schedule of upcoming board meetings so that they have the opportunity to attend;
  • Insist on receiving information on the Company well in advance of such meetings;
  • Speak to the company’s executive directors at any time (not just board meetings) about any concerns they may have;
  • Ensure that all decisions are made objectively and in the interests of the company;
  • Appreciate that they may need to consider resigning from the board if they have any difficulties in respect of any of the above.

Conclusion

The duties that apply to NEDs are the same as those that apply to other directors, despite there usually being a difference in the time, commitment and knowledge of the business that NEDS have.  This can lead to issues for NEDs when it comes to discharging those duties and the guidance from ICSA is therefore to be welcomed.

If you are concerned about any of the issues raised above, please call us on 0161 969 3131 and ask to speak to a solicitor in our Corporate Department.