A non-executive director is a member of the board of directors of a company or organisation but not a member of the executive management team. The non-executive director’s role is basically to provide the board with dispassionate and objective criticism. They are not usually involved in the day to day running of the company. They are usually people of stature who are chosen because of their independence and initiative, experience and their particular personal qualities. It can therefore be complementary to be asked, but a non-executive director must be aware of the fact that they have the same legal duties, responsibilities and potential liabilities as their executive counterparts. There may be benefits and attractions of being a non-executive officer but you need to go in there with your eyes wide open.
In terms of the Companies Act 2006 a director has 7 general duties to perform which also apply to non-executive officers. These are:
- To follow the company’s constitution and its articles of association
- To promote the success of the company
- To use independent judgement in making final decisions
- To exercise reasonable care, skill and diligence
- To avoid conflicts of interest
- To not accept benefits from third parties
- To tell fellow directors and members if you might personally benefit from a transaction the company makes
Not only do these duties affect non-executive officers but when it comes to liabilities the law makes no distinction between executive directors and non-execs. Say, for example, you are a non-exec of a small company having been invited onto the board because of your entrepreneurial skills. You have just given up full time work but are not quite ready for a life of pure leisure so you are delighted to accept. You carry out your duties but suddenly the business starts to fail, insolvency practitioners are called in and there are some creditors substantially out of pocket. You are now in trouble as when insolvency looms, directors of any kind, are in the firing line. In recent times there has been an increase in insolvency litigation against directors. Litigation financing firms are acquiring debts when a company goes into insolvency and then pursuing the directors to recover the debts. Liquidators may be happy to assign claims in return for a share of the spoils and you as a non-exec are now being sued for breach of director’s duties.
So be warned. Think carefully about taking on directorships. Although it may be an interesting way to use your experience, it is not about having a nice lunch now and again and you must make sure you have the time to be able to fulfil your responsibilities. You should also take out directors and officers liability insurance to cover not just your liabilities but also your legal costs. This may be provided by the organisation you are joining but make sure you check it.