Non-executive director: the role and responsibilities

Many people say yes to a non-executive role knowing the company but not the job. They read the board pack on the train, go along with the room and vote with the majority. The role asks more than that. A non-executive director shares the responsibility for every decision the board takes, and may one day have to show how they played their part. This guide covers what the role involves, the duties that come with it, what independence means and how to record that you disagree. It’s general guidance, not legal advice.

Executive and non-executive directors

An executive director, such as the chief executive or the finance director, sits on the board and also runs part of the business. A non-executive director sits on the board without a management job, and brings an outside view instead.

In UK law the distinction is one of practice, not status. The Companies Act 2006 has no separate category of non-executive director. Every director, executive or not, owes the same general duties to the company.

What the role involves

The non-executive role usually covers four areas.

• Strategy. Help shape the direction the business takes, and test management’s plans against it.
• Challenge. Ask the questions management may not ask itself, constructively and before the decision.
• Oversight. Hold management to account for performance, and satisfy yourself that the financial information is sound and the risks are being managed.
• People. Take part in appointing, rewarding and, if it comes to it, replacing the executives.

The work happens at board meetings and in preparing for them. In larger companies, non-executives also sit on board committees, usually audit, remuneration and nomination.

The duties every director shares

The Companies Act 2006 sets out seven general duties that every director owes the company.

• Act within powers (section 171). Follow the company’s constitution and use powers only for their proper purpose.
• Promote the success of the company (section 172) for the benefit of its members as a whole, having regard to the employees, customers, suppliers, the community and the long-term consequences.
• Exercise independent judgement (section 173).
• Exercise reasonable care, skill and diligence (section 174).
• Avoid conflicts of interest (section 175).
• Not accept benefits from third parties because of the role (section 176).
• Declare an interest in a proposed transaction with the company (section 177).

The duty of care has an objective minimum, which rises with the director’s own knowledge and experience. Every director is measured against what can reasonably be expected of anyone carrying out their functions. A director who knows more is also measured against what can be expected of them. A non-executive with a finance background can be held to a higher standard on the numbers.

Two practical consequences follow.

1. Being passive doesn’t protect you. A director who doesn’t read the board pack or ask questions can still be held responsible for a decision they took part in.
2. Record your dissent. If you can’t support a decision, vote against it and ask for your objection to be recorded in the minutes. That shows where you stood. It doesn’t automatically relieve you of responsibility, and on a serious matter you should take advice.

When the company is in difficulty

Directors’ duties shift when they know, or ought to know, that the company is insolvent or bordering on insolvency, or that an insolvent liquidation or administration is probable. They must then consider the creditors’ interests as a whole, and give them more weight as the company’s position gets worse.

Wrongful trading is a narrower liability. In Great Britain, if the company goes into insolvent liquidation or administration, a court can order a director to contribute to its assets. It can do so when the director knew, or should have concluded, that there was no reasonable prospect of avoiding that outcome, and didn’t then take every step to limit the creditors’ losses. Separately, a court can disqualify a director whose conduct makes them unfit to manage a company. If the company is in financial difficulty, take advice early.

Many companies take out directors’ and officers’ (D&O) insurance, which covers directors’ legal costs and some liabilities. Check what it covers before you rely on it.

What makes a non-executive director independent

An independent non-executive director has nothing in their relationships that is likely to affect their judgement.

Independence matters most in listed companies. The UK Corporate Governance Code is the Financial Reporting Council’s code for companies in the commercial companies listing category, which they apply on a comply-or-explain basis. Provision 10 lists the circumstances that can affect independence. They include employment in the company in the past five years, a material business relationship, close family ties to its directors or senior employees and more than nine years on the board. The board decides whether a director is independent and explains its view if one of those circumstances applies.

Provision 11 expects at least half the board, excluding the chair, to be independent non-executive directors. Provision 12 asks the board to appoint one of them as senior independent director, a sounding board for the chair and a route for shareholders and other directors with concerns. Smaller companies and most nonprofits set their own expectations.

Non-executives in charities and other nonprofits

In a charity, the trustees play a role close to that of non-executive directors. They’re usually unpaid, and the day-to-day work is done by staff or volunteers. A trustee of a charitable company is also a director under company law. Our guide to the charity trustee role covers what is different.

How Hippoly helps

The job depends on having read the right documents before the meeting. In Hippoly the board pack sits on the agenda, item by item, on any device. While you read, you can make private notes and annotations that nobody else sees, and a click in your notes takes you back to the passage. Once an admin has switched on access to the workspace content, hi, Hippoly’s AI assistant, can summarise a long document. Read more about meeting management in Hippoly, or book a demo to see it.