Non-Executive Directors Good vs Bad

The Role of Non Executive Directors

A non-executive director (NXD) or outside director is a member of the board of directors of a company who does not form part of the executive management team. He is not an employee of the company or affiliated with it in any other way. They are differentiated from inside directors, who are members of the board who also serve or previously served as executive managers of the company (most often as corporate officers).

The considerable amount of media attention on the issue of corporate governance has highlighted the role of Non-Executive Directors.  It is well documented that Non-Executive Directors can make a significant contribution to company performance regardless of size.

Non-Executive Directors is one way of accelerating the development and growth of SMEs and whether it is a longstanding traditional business or a start-up seeking equity finance, non-executives can bring added value with objectivity drawn from their own experience and skills.

It is normal for Venture Capital investors to place a Non-Executive Director on the Board of the investee company to represent their interests.  This can either be one of its own fund managers or an individual who has sectoral, market, or management expertise which will help delivery of the corporate plan.

Most Venture Capitalists, however, recognise that the chemistry and teamwork between the non-executive and the existing management team is crucial.  As a result, the VC’s Non-Executive Director is there to play an integral role in the development of the company rather than act as a watchdog for their investment.  This availability of outside expertise to the management team represents a valuable asset for most companies, particularly start-ups, and is one reason why Venture Capital is regarded as a value-added source of finance for SMEs.

Non-executive directors have responsibilities in the following areas;

  • Strategy: Non-executive directors should constructively challenge and contribute to the development of strategy.
  • Performance: Non-executive directors should scrutinise the performance of management in meeting agreed goals and objectives and monitoring, and where necessary removing, senior management and in succession planning.
  • Risk: Non-executive directors should satisfy themselves that financial information is accurate and that financial controls and systems of risk management are robust and defensible.
  • People: Non-executive directors are responsible for determining appropriate levels of remuneration of executive directors and have a prime role in appointing, and where necessary removing, senior management and in succession planning.

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