Most private limited companies have Boards comprised solely of Executive Directors i.e. directors who work full-time for the company and are involved in the day-to-day management of the company. Executive Directors are often intimately connected with the company and may be financially dependent upon it. It is this closeness, however, that leads some companies to appoint Non-Executive Directors (NEDs).
NEDs are as accountable for the management of the company as an Executive Director (ED). There is no legal distinction between a NED and an ED. All directors have the same responsibilities and liabilities. However, in practical terms, they serve a different purpose.
NEDs have the benefit of being somewhat removed from the day-to-day management of the company. They may not be embroiled in the office politics, the management of staff or the various issues that arise daily in the management of a firm. As such, they can, theoretically at least, give a more objective perspective on issues facing the company, providing useful and valuable challenge to the Executive Directors.
NEDs are sometimes appointed because they have certain expertise in the field. They may be retired or semi-retired practitioners within the sector and may be able to provide the Board with important advice and insight.
NEDs also have an advantage in that their financial livelihood is usually not dependent on their employment with the company so they have greater freedom and may find it easier to resign their directorship over a point of principle, if they feel it necessary.
Not all Boards have NEDs and some people may be reluctant to take on the role because NEDs face the same liabilities as the Executive Directors. NEDs are often paid less than their executive counterparts and, as they do not have the same level of day-to-day involvement in the company, they may fear that they would not have a full understanding of the issues facing the company and that the Executive Directors, with their greater knowledge of the company’s affairs, may be able to keep important information from them.
The Senior Managers and Certification Regime (SM&CR) has certain implications for NEDs. For example, NEDs at Core and Limited Scope firms that have been approved to hold the CF2 function under the Approved Persons Regime will no longer need FCA approval and their approval will lapse on the implementation of SM&CR. However, if the NED serves as the firm’s Chair (i.e. the person responsible for overseeing the performance of the firm’s governing body), they will need approval for ‘SMF9 – Chair’. Firms with a non-executive Chairperson will therefore need to submit Form K to the FCA, notifying the regulator of the intention to convert an approved NED to the chair function. This must be in place before the commencement of the new regime. Continuing to serve as chair without FCA approval will constitute a breach of the rules. In Enhanced SM&CR firms, approval will also be required for NEDs holding, where relevant, the Chairs of Committees or the role of Senior Independent Director.
The more stringent criminal record checks and regulatory reference requirements imposed under SM&CR as part of fitness and propriety assessments will also apply to NED appointments (except for Limited Scope firms). NEDs will also need to comply with the FCA’s Individual Conduct Rules, even if they are not Senior Managers. Senior Management Conduct Rule SC4 also applies to NEDs – ‘You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice’.
NEDs can play an important role in the governance of a company, but it is important that anyone holding this position is aware of the responsibilities, accountabilities and regulatory requirements that the role holds.