Glossary term
Non-Executive Director (NED)
Subject: Governance, Board and Committees
Also known as: Outside Director
A non-executive director sits on the board but does not work in the company's management. The role is to challenge executives, oversee performance and risk, and bring outside experience.
Explanation
Executive directors run the business daily and are employees. Non-executives are part-time, usually paid fees and appointed for fixed terms. Their value comes from distance: they can question strategy, test management's numbers and speak up without worrying about their career inside the firm. They chair or sit on audit, risk and remuneration committees, take part in appointing and assessing executives and step in when there is a conflict. To do this they need time, sound information and an understanding of the business. Some are independent of the company and its owners, others represent a major shareholder. Law normally gives them the same duties as executives, so being part-time is no defence. Where non-executives lack time or information, management is in effect marking its own work.
Example
A non-executive director on a hospital group's audit committee notices that one site's profit rises every quarter while its cash balance does not. She asks the finance team for a reconciliation and invites internal audit to review. The review finds that income is recorded before treatment is delivered, and the board corrects the accounts before the annual report.
Not to be confused with
- Independent Director
- A non-executive may still have ties to the company or a large shareholder. Independence needs the absence of such ties.