What is a non-executive director?

The presence and significance of non-executive directors, also known as 'NEDs', in UK companies have seen a substantial increase in recent years.

Although traditionally non-executive directors were typically thought of as only being necessary in listed companies, it's becoming more common to see them present in private companies, including smaller ones.

In this guide we’ve collaborated with Mary McKenna MBE to help you understand what a non-executive director is, how to recruit one to the board of your business, and how they could help your business take the next step.

What is a non-executive director?

A non-executive director is a part-time position which holds a seat on a business’s board of directors and shares in the collective responsibility for the success of the business.

They are often required to attend board meetings but can also have a variable and wide-ranging remit within the company including special projects, liaising with shareholders, and representing the business at external events.

Unlike executive directors, they do not hold any operational responsibilities within the company, nor are they considered employees.

It’s worth noting that the Companies Act 2006 makes no distinction between an executive and non-executive director, therefore both non-executive directors are subject to the same duties, responsibilities, and potential liabilities as executive directors.

What does a non-executive director do?

A non-executive director will spend their time scrutinising business performance and offering strategic guidance and support to the executive team.

Generally, non-executive directors do not engage in the day-to-day running of an organisation.

Instead, they contribute by distancing themselves from the daily operations of the business and posing critical questions to the executive team.

This approach allows them to offer an unbiased and objective viewpoint on the board's decision-making process.

Often, a NED will bring attention to overlooked issues or pressing concerns that the executive team, engrossed in the routine management of the business, may inadvertently overlook.

While some companies might initially resist the idea of 'external' supervision and critique, it could become increasingly beneficial as the company expands.

This kind of constructive criticism from a 'critical friend' can positively influence the performance of executive directors and the entire board.

A NED can also serve to safeguard and improve the company's governance and overall performance.

This is advantageous for shareholders, employees, customers, and other stakeholders.

Consequently, external shareholders, such as corporate shareholders who are interested in protecting their investments, often advocate for the appointment of one or more non-executive directors.

In Mary’s experience as a serial investor, NEDs can be invaluable: “In my last startup, we engaged two high profile NEDs from the moment we began trading.

“One had a high profile in our industry and gave us credibility as we were starting out; the other was a well-known individual from our target customer base and he was able to provide us with valuable insights.

“We held regular board meetings and our two non-execs ensured we were held accountable during those first tricky two years after starting up”.

Non-executive directors of Start-ups

In a start-up company, the role of a non-executive director often extends to that of a business mentor.

A NED can offer guidance on a wide array of business-related concerns, often through informal communication such as phone calls rather than formal meetings.

The encouragement and emotional support they provide can be as crucial as their professional advice.

How much should I pay a non-executive director?

Whilst some NEDs give their time and effort for free, it is not uncommon for NEDs to be compensated for their involvement with a business.

This can often take the form of equity and it’s often the case that a NED will also be an investor, taking an equity share equal to their investment plus a small additional amount for agreeing to serve as a NED for a period of time.

However, just offering equity to a NED as compensation could have its drawbacks when seeking further investors as Mary suggests: “A mistake often made is startups give newly recruited NEDs equity in lieu of services and this is often too high.

“When further investors enter the business, this can sometimes lead to the NED being asked to give up some of their equity in the business which can be a difficult situation.”

Instead of compensating NEDs solely with shares, a business owner or their shareholders could consider agreeing a fee with the NED based on their experience, time commitment, and any additional responsibilities such as the chairing of a board.

Business advantages to having a non-executive director

There are a number of reasons to consider bringing a non-executive director into your business.

Most NEDs won’t be able to offer all of the below so it’s important for a business seeking to recruit a non-executive director to identify what support they’re looking to receive from the appointment.

Objectivity

An independent perspective on the business, detached from daily operations, is a key advantage of non-executive directors.

Their impartiality can be particularly beneficial in situations where consensus is hard to reach among the executive team.

Similarly, their input can be valuable when executive directors are in agreement but seek a more objective viewpoint before proceeding with a decision.

The concept of constructive challenge by non-executive directors, which we've previously discussed, can greatly aid a business.

Experience

By their very nature, non-executive directors can bring substantial experience to any business they join.

It’s common to see businesses recruiting NEDs with particular experience or skills that they don’t have in-house.

This could encompass specialised knowledge of a specific industry, product, process, or market or it could involve expertise in a certain business discipline.

For instance, if the board lacks experience in finance or marketing, they may seek a non-executive director with a background in these fields.

This can often be the case in a younger business or where the executive director is inexperienced or lacks specific expertise.

Representation

In some cases, shareholders may insist on having a representative on the board as part of their investment in the business.

Depending on the industry the business operates in, it may also be necessary to appoint NEDs to satisfy good governance procedures.

Prestige

A business can often receive a boost in its reputation and visibility if a well-known industry figure joins their board, especially if that figure agrees to represent the business at external functions.

In Mary’s view, a high profile and respected NED can really raise the estimation of an organisation with potential investors: “As an angel investor, it’s always of great interest to me as part of my due diligence to see who a startup has been able to attract as their early NEDs.

“It’s a good indicator of how well the founders are regarded within their industry and it’s also a statement of intent”.

Investment opportunities

A non-executive director could potentially be interested in investing in the business, and sometimes, their investment might be contingent on them securing a position on the board.

Furthermore, they could offer valuable connections to other investors or contribute their proficiency in fundraising.

Accessing a wide network

Cultivating strong relationships with other stakeholders such as customers, suppliers, and potential partners can be a vital part of running a business.

A non-executive director often plays a crucial role in this process by connecting the company with third parties who can contribute to its growth and development.

How to recruit a non-executive director

Once you’ve decided that your business can benefit from bringing a NED on board and you’ve identified the specific skills you’re looking to attract, it’s time to begin the recruitment process.

Like normal employees, it’s a good idea to draft a job description for the role detailing the expectations you have and the skills and experience you’re looking to recruit for.

By doing this you’ll ensure not only that appropriate candidates apply for your role, but candidates will have a strong sense of your business and its brand before they apply.

The next step is to form a hiring committee and agree on the recruitment process.

When it comes to advertising your new position, there are a number of companies who specialise in non-executive recruitment who can help get your job advert in front of suitable candidates.

It could be a good idea to enlist the services of one of those companies, especially if the skills and experience you’re looking to attract are quite niche.

Once you have a pool of interested candidates and have reviewed their applications, you can begin the interview process.

Interviews should aim to identify the candidate who best displays the traits needed to be a successful NED within your company.

Start ups may approach the process of recruiting NEDs slightly differently and in a more ad-hoc way.

It’s common for start-up founders to put together a priority list of potential NEDs and then approach them to be involved, making their way down the list until they’ve successfully recruited.

Mary McKenna MBE is a technology entrepreneur and serial angel investor. In 2014 she was awarded an MBE for services to digital technology, innovation, and learning. In 2023 she was crowned UK Angel Investor of the Year at the UK British Business Angel Association in London and European Female Angel Investor of the Year by Business Angels Network Deutschland.