Non-Executive DirectorExplained and Defined with responsibilities and Roles in an Organization
What Is a Non-Executive Director?
Non-Executive Director is a person who is a member of the board of directors but is independent of the management’s day-to-day operations.
The role of the Non-Executive Director is to oversee that the executive director’s work is beneficial for the company as a whole.
Their role in the organization is limited to planning decisions and policy making.
Apart from its shareholdings, the Non-Executive Director also receives a considerable fee for advisory services.
Understanding Non-Executive Directors
Non-Executive Directors are responsible for overseeing the overall business operations.
Though they are not regular employees, they are a member of the board and are elected as independent executive directors.
The non-executive directors are responsible for carrying independent judgment and a deeper understanding of internal and external issues in an organization to properly meditate to whatever circumstances that involve the management, shareholders, and relevant third party.
Most of the time, the installation of Non-Executive Directors is for the sake of public relations.
Those who are seasoned management advisors or excellent in community interactions and have built a network are ideal for this role as it adds value to the company’s image/reputation.
Other names for Non-Executive Directors are independent directors, external directors, or outside directors.
Unlike regular employees that receive a fixed compensation, a non-executive director is paid depending on the relative work done.
Payment may be in cash or equity compensation. Considering a non-executive director is a position of high regard, they typically receive handsome compensation.
Non-executive Directors acts as an advisor with regard to the overall operation of the business by the management.
The qualification for a non-executive director is to have a past meaningful experience that can be helpful for the business.
One of the duties of the Non-Executive Director is to oversee the Executive Director and the Board of Directors work hand in hand.
They usually help the management when it comes to the company’s strategy, performance, and risk which is not related to the core functions of the business.
Another function of non-executive directors is to conduct independent assessments of the company’s performance and to make sure that the interests of the stakeholders of the company are put first before the management or the members of the board.
They are also responsible for contributing a specific amount of their time to fulfill their duties.
A disclosure must be made to the board of directors of any changes in their schedule and time adjustments.
Because non-executive directors are considered seasoned management advisors and have a vast network, they can further add value to the company through their connections.
Non-Executive Director vs. Executive Director
The difference between a Non-executive Director and an Executive Director is their involvement in the management’s operation.
The Executive Director is part of a managing position that involves the management of the day-to-day operations while Non-Executive Directors only deal with advisory services and policy making.
The executive director’s salary is much lower than that of a C-Level position even though they have the same corporate responsibilities.
Generally, they work for non-profit organizations, and some work as a volunteer and are not compensated.
Example of Non-Executive Director
An example of a Non-executive Director’s role includes the following:
A tech company start-up is looking for a non-executive director.
Since Mr. Appo is a former CEO of a prestigious public technology company, he fits the role perfectly.
Being a board member, he must do the following:
- Advise and guide the company with a new strategic plan that may contribute to the company’s growth. Such advice or guidelines may be based on the experience of Mr. Appo as a former CEO.
- Assist the executive director with the internal and external factors that may negatively impact the growth and profitability of the business.
Non-Executive Directors are known to be established in their field and considered to have a wide range of networks related to their expertise.
Hiring Mr. Appo will help the company achieve its objectives based on the connections that he has within the industry.
What Is the Role of a Non-Executive Director?
Non-Executive Directors are individuals that are elected by their co-members of the board to act as an independent director that oversees, monitor, and gives advice on the internal and external issues of the company.
They are seasoned individuals and have established a high profile based on their previous jobs and experience.
Are Non-Executive Directors Compensated?
Most of the Non-Executive Directors receive compensation in a form of cash, equity, or fees.
But there are others who do the advising function voluntarily and don’t receive any compensation for their time. Due to their established profile, Non-executive Directors are handsomely paid.
How Do Non-Executive Directors Differ From Executive Directors?
Non-Executive Directors differ from Executive Directors in terms of the level of responsibilities and the organization they serve.
Executive Directors involves in the day-to-day operation of the management and usually works for non-profit.
They also have the same responsibilities as C-level executives in a company although Non-Executive Directors only do their tasks when it is needed.
The Bottom Line
Non-Executive Directors are individuals who are also members of the board.
Both Executive and Non-Executive Directors share the same interests in the growth of the company.
They only differ from their management responsibilities.
The primary task of the Non-Executive Director is to monitor the executive director and act as an advisor of the company to ensure that the interests of the stakeholders are protected.
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University of Houston "Non-Executive Directors at Early-Stage Startups" White paper. August 29, 2022
Penn State "What decides the effectiveness of nonexecutive directors’ monitoring? " White paper. August 29, 2022