Boardroom Best Practices

What Is a Non-Executive Board Director?

Non-executive directors bring many skills and abilities to the board of directors. Something that sets non-executive board directors apart from other directors is that their role was strategically designed to fill a unique purpose. In simple terms, a non-executive director is a board director who isn’t also a corporate executive. Although retiring executives often become non-executive directors, non-executive directors have absolutely no responsibility for any of the day-to-day activities of the operation during their service on the board.

The primary role of non-executive directors is to monitor the executive directors, to develop responsible policies and to participate in planning exercises. It’s necessary for non-executive directors to always act in the best interests of shareholders and stakeholders.

It’s considered best practices to have all non-executive board directors on the board. Alternatively, boards may have at least half the board be non-executive directors or, preferably, have the majority of directors be non-executives.

Non-Executive Directors Fill a Unique and Purposeful Role

The terms non-executive director, external director, outside director and independent director are all interchangeable. Non-executive board directors aren’t C-suite-level executives or managers on any level, which allows them to be highly objective.

As objective leaders, non-executive board directors are expected to hold managers and the rest of the board accountable for making decisions that are in the best interests of the company, including its shareholders and stakeholders. Their role requires them to challenge the board and management’s direction and performance.

Boards sometimes choose non-executive directors on the basis of their reputation within the field, which helps to elevate the company’s reputation from a public relations standpoint. Regardless of a non-executive director’s biography and reputation, non-executive directors and executive directors are equally responsible for the success or failure of the company.

Software Governance Solutions Secure Non-Executive Board Director Collaborations  

In addition to having quality independent board directors, boards benefit greatly by providing all board directors with electronic governance software solutions for board work. Diligent Corporation offers governance solutions for agendas, minutes, self-assessments, electronic storage, electronic messaging and more. These products provide valuable assistance for non-executive directors and other board directors in fulfilling best practices for good governance.

Best Qualities of Non-Executive Board Directors 

Some corporations are still in the habit of moving their retired executives directly onto the board upon leaving their management positions. However, this situation doesn’t support the idea that retiring executives are truly independent. Upcoming retirees who want to serve as non-executive directors are better off using their extended networks to seek a non-executive directorship that’s unrelated to their past employment. It’s also common for boards to seek the assistance of headhunter organizations to help them find the most talented, most qualified and truly independent non-executive board directors.

In addition to having a high degree of independence, financial experience tops the list of non-executive director qualities. The most desired independent board directors will have strong financial expertise and a lengthy commercial tenure. Valued prospects for non-executive director will have a great comfort level working with balance sheets and profit and loss statements. They’ll be acutely familiar with the company’s key financial drivers and be capable of digging deep into the company’s financial history. The hope is that they’ll be instrumental in using this knowledge and expertise to put necessary financial controls in place to help keep the company financially tough.

Strong resumes for non-executive directorships will include experience with successful strategic planning, fiscal responsibility and experience in dealing with mergers and acquisitions. Corporations will find much worth in non-executive director candidates that have a good record of philanthropy and a basic understanding of good and legal governance principles.

Boards of directors expect much from today’s non-executive directors. Boards expect non-executive directors to leverage the best of their skills, expertise and experience to help the company shine. Beyond that, boards will be looking for non-executive directors who are well connected within the industry and are willing to leverage their outside connections in ways that benefit the corporation.

The most valued non-executive directors will be able to objectively assess the company’s performance and be able to collaborate with the board and management to help manage the company’s strategy, performance and risk as it relates to the day-to-day operations. These tasks require non-executive directors to have the ability to challenge members of management by asking the right questions. Having critical evaluation skills, such as being able to read and interpret key performance measures, will help non-executive board directors to get directly to the most important issues and address them promptly.

It’s essential for non-executive board directors to be proficient in problem-solving. In the event that internal problems are brewing, the only people who can realistically intervene without a potential conflict of interest are the independent board directors. Non-executive board directors are a valuable asset when they act independently from management as a catalyst between shareholders and management during times of strife.

Non-executive director hopefuls should be prepared to commit somewhere between 15 and 25 days per year to board business. They will also need to fully disclose their commitments to other boards and be upfront about how they believe they can manage all of their responsibilities responsibly.

While non-executive directors are known for their independence and objectivity, they also need to have an outward focus. They’re often called upon to play an ambassadorial role as representatives that speak to their shareholders, stakeholders, regulators and legislators. At times, non-executive directors may also be called on to represent the company to the public or the media.

In recent years, shareholders have kept a keen eye on board director remuneration. Non-executive directors serve as a check and balance on executive directors who may be tempted to vote for excessive remuneration packages for themselves. Acting independently and in the best interests of the company, non-executive directors have the duty of helping develop appropriate remuneration packages, severance pay and other incentives.

Wrapping Up Thoughts on Non-Executive Board Directors

The evolution in the financial markets requires as much objectivity and independence as boards can offer. Boards that make strong efforts to have highly independent boards send a powerful message to shareholders that they’re committed to best practices for good corporate governance and are willing to adhere to the highest standards of ethics and integrity.

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