Non-Executive Director

A non-executive director refers to someone who sits on the board of directors in a company but is not an employee of the company, and therefore not involved in it’s daily operating activities.

This means that the role of non-executive directors are often strategic in nature, and puts them in a position of looking at things from a distance.

While this perspective can sometimes be considered as not knowing what is actually going on on the ground, it can play an essential role in shaping corporate vision, formulating strategy, and setting corporate culture.

After all, entrepreneurs can often fail to recognize what is going on around them as they are too biased to their own business.

They are sometimes also known as outside directors.

Benefits of non-executive directors

A big reason why an individual is appointed as a non-executive director might be that he or she has no prior experience in the nature of business the company is engaged in.

However, he or she might have extensive and diverse experience in running successful companies and organisations.

These knowledge and experience can be highly valued especially when young founders seek direction in where to move the business towards.

And because non-executive directors are often established in their own industries, they can often help executives identify new markets where a product can have less obvious applications in.

For example, a tech startup might have a portable product that allows consumers to purify water themselves which is intended to be released in the mass market. But a non-executive director might see very useful applications of it in the military since he was a previous Colonel in the army.

This helps the chief executive identify new markets which he had never even thought off.

Non-executive directors are also often appointed to boards when a company is particularly interested in making inroads in a different industry.

For example a publishing company might want to enter the lucrative property market but has no experience in the industry. Therefore a director on board who is accomplished in real estate development can make major contributions towards the extension of the company’s business model.

This can also play a valuable role in mergers and acquisitions of companies that seem unrelated but strategic in nature.

For example, an online shopping portal might buyout a bike-sharing business. They seem totally unrelated to each other. But the big picture might be to offer bike-sharing as part of the rewards program offered by the ecommerce retailer. Therefore a director with experience in the unrelated business can assist in a smoother merge of operations between the two.

Sometimes non-executive directors are also appointed by venture capitalists who wants to have someone to keep track of what’s going on in a company they have invested heavily in.

This is to ensure that the startup maintains it’s integrity in managing the raised funds, and if they face problems, the director can offer assistance or call for help from the investors.

It can also be commonly observed that non-executive directors are appointed simply of the prestige they bring. This can be the case when they are high-profile business people.

Drawbacks of non-executive directors

While the very purpose of appointing a non-executive director is to add value to top management, many people view it as being unproductive.

This almost always originate from the fact that they are not in-tune with what is going on in the day-to-day company operations.

Thus, their suggestions, recommendations, advice or inputs can often be written off as armchair theory.

And because of this, many even choose not to vigorously contribute in meeting as they simply find it inappropriate to contribute without really understanding the business.

They don’t intimately understand the strengths and weaknesses of the company, they are probably not aware of operational challenges that workers face, they are unable to identify operational opportunities and threats present, and might not even be welcomed by the CEO as they were appointed on the request of investors.

For the reasons above, non-executive directors are often viewed as people who just rubber-stamps everything that the board or CEO wants to do.

The exception being that they are appointed for the primary purpose of providing oversight.

With the pros and cons of having non-executive directors in companies, it is generally accepted that their independent judgment and unbiased opinions play the most useful role in strategic formulation.

Is a non-executive director a real director?

From a technical and even legal standpoint, a non-executive director has as much responsibility as an executive director.

It’s just that because the signing of contracts and the entering of agreements are usually signed and endorsed by active directors, executive directors are often viewed as having responsibility.

And rightly so.

Because they are not part of operations, and thus do not enter into contracts, they avoid having to take responsibility for the mistakes that a company makes.

This is usually reserved for the CEO who signs them.

Saying that, they can make as much contribution to the cause as much as they would like at board meetings.

Whether their contributions are taken up is another matter altogether.

This can often be due to suggestions that are near impossible to implement as they do not know the intricate details of how operations work.

It can be both an honour and insult to be a non-executive director.

Non-executives can draw a director’s fee just like any other types of directors. But because they are not employees of the company, they do not draw a salary.

Anyone who is 18 years old and above and has full legal capacity can legally become a director.

The exceptions being when the person is an undischarged bankrupt, or that he or she is subject to automatic disqualification.

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