There is, of course, no legal distinction for an unlisted company between an executive director and a non-executive director (NED). He or she has the same legal duties, responsibilities and potential liabilities as the rest of the board. That being said, the NED plays a very different role. The question is: do they add value?
It is important to understand their function is not to run the company; they are there to provide advice and guidance to the board and to help executives broaden their perspectives. In order to fulfil this role, the NED should have specialist knowledge in the industry and of the particular company, and ideally should possess wider business experience. However, at the heart of the NED’s role is their independence; their total impartiality to both the board and the company’s stakeholders. They could play a key part in corporate governance and general risk management. They could sit on relevant committees or subgroups; and while only previously considered by PLCs, they are now increasingly used by medium-sized or smaller entities.
Even some start-ups are appointing NEDs. They can fulfil an important function in filling gaps within the board, as well as making ideal mentors. After all, it is all too easy for an owner/manager of a business to be submerged in operational matters. The NED can be there to look ahead without having to worry about those day-to-day issues and importantly, can force the board to do so too.
Selecting the right NED is, of course, essential; a board can, after all, be a complex mix of personalities with different ages, experience, motivation and influences. The NED must be prepared to deal with these conflicts and stand up to the executives and do so without creating unnecessary conflict. The NED could come from the board’s contacts, or be found using the accounts of similar businesses, or through LinkedIn.
Ultimately, a good NED is not there to limit a company’s growth but to act as someone to help it run smoothly and make it the best it can be.