What is Non-Executive Director?
The non-executive director (NED) is an external member of the company’s board of directors appointed through a letter of appointment and they represents the shareholders interest. They are neither the employees of the company nor do they participate in everyday business activities.
They perform their duties by providing services like consulting, reviewing and monitoring plans, and assisting in the constructive improvisation of the company. Furthermore, appointing the correct number of NEDs are vital in ensuring that no one group dominates the board.
- Non-executive directors definition specify them as specialist who are not employees of the company but are members of the board of directors.
- Outside directors do not participate in the day-to-day operational management. However, as mentors or in the creation of corporate plans and policies, they play an essential role.
- They’re in charge of providing constructive criticism, advice, and expertise to the board, as well as monitoring their efforts.
- They’re not employees, so they don’t receive a salary but get compensation in the form of fees or stock grants.
Roles & Responsibilities of Non-Executive Director (NED)
A non-executive director’s fundamental role is to work for the company’s development while putting the interests of the shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares. first. They have to bring in excellent governance, dedicate time and knowledge, and successfully administer the corporate board. They participate in board meetings and have voting rights.
NEDs job includes the authority to examine different reports in order to assess management’s performance. They can verify the accuracy of financial data and the risk management’s resiliency. They have a voice in executive director appointments, compensation, and dismissal. They are, for example, in charge of evaluating the performance of the executive team. They have to go to the board and bring this matter to their notice if they think a particular group is not executing its job correctly. If the board decides to replace the team, they will play a key role in selecting a new one.
While most non-executive directors have other obligations outside of the company, they must devote a significant amount of time to this role. As a result, they must obtain board permission before accepting any assignment that may impact their performance.
Some of their primary responsibilities include:
- Performance review
- Risk management
- Participation in committee meetings
- Solving problems that arise in leadership positions
- Communication with third parties
- Forming strategies that improve the company
- Helping board membersBoard MembersBoard members comprise the individuals whom the shareholders elect as their representatives. They are responsible for taking crucial corporate decisions regarding the company's policies, dividend payouts, top-level managers' recruitment or layoff and executive compensation. to achieve different objectives
NEDs get compensation in a variety of ways by companies. It can take several forms, including cash payments and stock grants. The national average salary for a NED in the United States is $1,27,336 per year, according to Glassdoor. According to Spencer Stuart, the average total S&P 500 director compensation was $2,12,750 in 2009, and it progressively increased to $3,04,856 in 2019.
The industry trend also shows that compensation packages are independent of company size, particularly smaller companies giving more excellent pay packages. Although a glitzy remunerationRemunerationRemuneration refers to overall monetary and non-monetary compensation that employees or independent contractors receive for providing services to an organization or company. package frequently attracts experts, a high compensation package might impact the NEDs independence.
Non-Executive Director vs Independent Director
An Independent Director is a NED who neither represent the shareholders nor has the power to control the board. Any commercial, industrial, financial, consulting, legal, accounting, philanthropic, or familial tie between the independent directorIndependent DirectorThe term "independent director" refers to a member of the board who is not associated with the organization and who provides a neutral opinion because he or she is not tied to the current management. and the company is prohibited. It guarantees that they are self-contained entities. However, based on the SOX actSOX ActThe Sarbanes-Oxley Act (Sox) of 2002 was enacted by the US Federal Law for increased corporate governance, strengthening the financial and capital markets at its core and boost the confidence of general users of financial reporting information and protect investors from scandals like that of Enron, WorldCom, and Tyco., NYSE or Nasdaq listing rules board can assign specific responsibilities associated with auditing, executive compensation and director nominations to independent directors.
Non-Executive Director vs Executive Director
NED is often called outside director or non-employee director, whereas executive directors are inside directors and employees of the company. In addition, NEDs are independent of the business management, whereas the company’s executive directors are responsible for business management.
The executive director is a regular employee obliged to perform their responsibilities ascribed in the employment contract full-time. As a result, their primary concentration is on managing day-to-day operations and executing management strategies. So, they will have a more prominent voice in how their workers should operate and enforce instructions actively. NEDs, on the other hand, are an independent outside entity that helps the company monitor and review strategies and keeps track of executive directors performance.
Frequently Ask Questions (FAQs)
NEDs are members of a company’s board of directors, but they are not company employees, unlike executive directors. Instead, they promote the shareholder’s interest, oversee executive management, and assist in developing strategies.
NEDs get payment for their services, mainly in the form of fees or equity compensation. Therefore, an attractive compensation package while filling the vacancy for a non-executive director will help the company appoint experts in the field.
Executive directors are inside directors and paid employees dealing with day to day business operations. NEDs are outside directors who are not company employees, and they represent the shareholder’s interest. They monitor and supervises the execution of strategies and helps in strategy formation. Companies can benefit from NEDs in many ways. They provide quality advice, methods that are independent and unbiased.
This has been a guide to What is Non-Executive Director and its Meaning. Here we discuss the roles & responsibilities of the non-executive director along with their salary, differences. You can learn more from the following articles –