The document discusses the role of a Non-Executive Director (NED) in a small or medium-sized enterprise. It defines a NED as a part-time director who is not involved in day-to-day management. The key responsibilities of a NED include providing strategic guidance, holding executive directors accountable, and ensuring good corporate governance. An effective NED should bring experience, skills, and an independent perspective to board discussions and decision-making. The document outlines best practices for NEDs, such as preparing thoroughly, constructively challenging proposals, and maintaining independence from management.

1. The Non Executive Director
The role of a Non Executive
Director in a SME
David Lever
11th April 2008

2. Presentation will cover ……
Boards, directors, NEDs
 Roles & responsibilities
 Skills, attributes, requirements & expectations
 Liabilities and penalties
 Best practice
Becoming a NED

3. What is a director
 Shareholders own limited companies and
Directors run them
 Limited companies – minimum one, PLCs - two
 Roles & responsibilities
 case law
 Companies Act 2006
 “act in a way which is most likely to promote the
success of the business”

4. Who is a director?
 Director in law
 Executive directors
 Non Executive Directors
 Nominee directors
 Alternate directors
 Director by conduct
 Shadow director
 Director by Name
 Associate Director

5. Appointment of directors
 Shareholders appoint who they want
 Rules in Articles of Association
 How many
 How long to serve
 What happens at end of term
 Candidates must NOT be
 disqualified
 Undischarged bankrupt
 Under 16 (Scotland)

6. Directors' powers, duties and liabilities
 Powers
 Memorandum & articles
 Companies Act 2006
 Duties
 Exercise a degree of skill and care
 Act in good faith - interests of company as a whole
 Obey the law
 Continuance
 Liabilities

7. Retirement of directors
 Rules in Articles of Association
 May retire after set term
 Offer for re-election at AGM

8. Directors' powers, duties & liabilities
 Promote the success of the company
 Equal consideration to all shareholders
 No private profits & approval of personal deals
 Declare conflict of interest
 Declare any shareholdings
 contracts of employment
 Pursue the objectives
 Exhibit degree of skill
 Exercise degree of care

9. Purpose of Board
“Seek to ensure the company’s prosperity by
collectively directing the company’s affairs whilst
meeting the appropriate interests of its
shareholders and relevant stakeholders”
(IoD 2001 Standards for the Board)

10. Power & responsibility
Shareholders
Board of Directors
Management

11. Role of Board ……
 Provide entrepreneurial leadership of the
company within a framework of prudent and
effective controls, which enable risk to be
assessed and managed
 Set company’s strategic aims, ensure that
financial and human resources in place for the
company to meet its objectives & review
management performance.
 Set company’s values and standards and ensure
that its obligations to its shareholders and others
are understood and met.

12. Governance & management
 Board - Governance
 Establishing & maintaining the vision
 Formulating and owning corporate strategy
 Acquiring and allocating overall resources
 Settling & maintaining policies
Focus on the longer term – Strategy
 Executive Directors & managers - management
 Achieving strategic objectives
 Running the business – day in, day out
 Operational problem solving
 Profit generation
Focus on the here and now – tactics

13. Board roles ……
 Foresight  Establish vision, mission
& values
 Farsight  Set strategies & structure
 Oversight  Delegate to management
& review
 Exercise accountability to
 Hindsight
shareholders and be
responsible to relevant
stakeholders

14. Respective roles
 Board
 Collectively directs company’s affairs
 Chairman
 Leads the board & manages its business
 Managing Director / Chief Executive
 Executes strategies, plans & policies agreed by the
Board
 Leads the management and employees
 Manages the business activities day to day

15. Board fundamentals
 Board fundamentals
 Company’s mind and will
 Joint & several responsibility
 Council of equals
 Chairman is first amongst equals
 MD has no boardroom seniority
 NEDs - director role only; executive directors also
managers.

16. What is a Non Executive Director
 Non-Executive Director / Non Exec / NED
 NED = part time, non executive role (not executive roles
such as Managing Director, Sales Director etc)
 All Directors are equal
 Company Law does not differentiate between Executive
and Non Executive Directors
 NEDs not involved in day-to-day management
 No reporting lines within a company to a NED

17. What is a Non Executive Director
 PLCs & quoted companies - regulation and corporate
governance issues are crucial
 Owner managed business - resource not ordinarily able
to afford, cheaper & more committed than a
professional advisor or Consultant.
 Different from retained professional advisor, Interim
Manager or Consultant - Advisors are paid to advise
and Directors are paid to decide
 NEDs = “Corporate policeman or watchdog" with
adherence to good practise, adherence to Boardroom
disciplines, corporate governance and corporate
responsibilities

18. What is a Non Executive Director
Executive NED
 Full time  Part time
 Day-to-day, hands-on  Hands-off
 Employed  Self Employed
 Contract of employment  Letter of appointment
 Not Independent  Independent
 Line responsibility  No line responsibility
 Portfolio responsibility  Without portfolio
 Executive responsibility  No executive responsibility
 Executing strategy  Consider & review strategy
 Micro/internal knowledge  Macro/external knowledge

19. Contribution of NED …….
Key areas:
 Strategy
 Performance
 Risk
 People
 A Non-Executive Director should bring ……

20. Attributes of NED ……
 Experience  Intellect
 Commonsense  Tenacity
 Courage  Wisdom
 Diplomacy  Vision
 Credibility, experience and stature
 Business, commercial and technical knowledge,
skills and experience
 “soft” skills - communication, influencing,
mentoring etc.

21. How a NED should act ……
 integrity & probity
 corporate governance
 Support whilst monitoring executives
 Well prepared and informed
 Attend board meetings regularly
 Understand company & business
 Travel and participate at events
 Question intelligently, debate constructively,
challenge rigorously, decide dispassionately

22. How a NED should act ……
 Probe information provided and assumptions
 Resolute in maintaining views
 Follow up
 Gain trust and respect
 Continually refresh knowledge and skills
 Communicate
 Allow Executives get on with their jobs.
 Independent advisor - challenge & support.

23. Why NED?
 Why companies want NEDs
 Reasons for becoming a NED
 Time commitment for a NED
 Payment for NED

24. Legislation & code of conduct
 US approach – legislation; UK - "Code of Conduct"
 Enron collapse - 2002 legislation Sarbanes-Oxley
 Prevent corporate fraud and protect investors.
 Stringent responsibilities - Executives / Directors
 Draconian measures damaged Corporate America
 Hampel, Cadbury and Higgs - Jan 2003
 Non-Executives – “custodians of Governance process”
 Combined Code on Corporate Governance
 standards of good practice in relation to issues such as board
composition and development, remuneration, accountability and
audit and relations with shareholders
 Listed companies only
 Good practices for all companies

25. Effective Board ……
 Entrepreneurial / prudent control.
 Know workings of company - answerable for actions
 Stand back - objective long term view
 Sensitive to short term issues / informed about long term
 Focus on commercial needs of business & responsibility
towards employees, business partners, society etc
 At least one NED
 Performance objectives and review achievement
 Input to the company strategy and its development.
 Risk management.
 Balance of skills and knowledge

26. Effective Board ……
 Good internal & external communications
 Regulatory legislation & market activity
 Respond constructively & quickly to problems & crises.
 Appropriate subjects on the board agenda.
 Effective board committees
 Feedback to management on requirements.
 Regular, well informed & constructive board meetings.
 Well led by effective Chairman
 Good, well managed shareholder relations
 Good relations within the board.
 Can raise issues and concerns

27. Role of Chairman ……
 Lead the Board
 Accurate and timely information
 Communicate effectively to the shareholders
 Views of the major investors
 Maximise contribution of NEDs
 Set the agenda
 Ensure sufficient time for issues
 Referee
 Development needs of new Directors.
 Annual assessment of board's performance
 Good dialogue between Executives and NEDs
 Succession planning of board members
 Effective implementation of board decisions

28. Types of Board
 Properly functioning Board
 Minimalist Board
 Disfunctional Board
 Subsidiary Board

29. Disfunctional Board
 Dominance of shareholder / Chairman / MD
 Not acting as a council of equals
 Inadequate skills, knowledge & ability
 Lack of right blend of skills and experience
 Unable to differentiate - Board vs management
 Unable to differentiate - director vs shareholder
 Day to day rather than Board issues
 Unable to establish vision and formulating
strategy

30. Disfunctional Board
 Inadequate Chairman
 Form over substance
 Lack of communication, conflict or interpersonal
issues
 Information withheld from Board / NEDs
 Focused on short-term rather than longer term
strategic
 Board unable / unwilling to provide governance
 Board does not have confidence of shareholders
 NEDs not seen as providing any benefit

31. Board Committees
 Remuneration committee
 Audit committee
 Nomination committee

32. NEDs with shareholdings
 NEDs should not be shareholders in listed
companies
 In SMEs - OK
 Holding of shares by NEDs
 may compromise independence
 indicates commitment; helps to protect IPR
 aligns interests of the NED with the long-term
interests of shareholders.
 Shareholding should not be large proportion of NED's
financial wealth.

33. Penalties ……
 Responsible for management of company - act in a way
to promote success of business & benefit shareholders.
Responsibilities to employees, trading partners, & state.
 Wide powers to promote the company but serious
penalties if abuse powers, or use irresponsibly.
 Legal duties include:
 Employment
 Health & safety
 Tax
 Company law

34. Penalties ……
 Personal liability
 Joint & several liability
 Unlimited liability
 Disqualification
 Criminal convictions

35. Directors' & Officers insurance
 Directors face increasing risks
 Companies to provide cover
 Some peace of mind
 Only 50% companies - D & O insurance

36. Pre-appointment due diligence
 Nature and extent of business activities
 Financial position & track record
 Key dependencies (regulatory approvals, licences)
 Corporate governance record
 Current executive directors & NEDs Company ownership
 Attitude to and relationship with shareholders
 Litigation
 Insurance cover
 Internal regulation sound
 Size, structure and make up of the Board
 Conflict of interest
 Qualities, knowledge , skills and experience required
 Suitability for role
 Not performing well – potential to turn it around

37. NED appointments – SME’s
 Direct by company
 Venture capitalist / bank
 Development & registers } List
 Public appointments }
To become a NED you need to have been a NED!
 CV
 What do you have to offer?

38. Other points ……
 Letter of NED appointment
 Reading list