NEDs play a crucial role in providing objective oversight and strategic guidance to the executive team. However, becoming an outstanding NED requires certain qualities and skills. Aspiring NEDs need to possess a deep understanding of the business, show a willingness to learn, ask challenging questions, and demonstrate exceptional communication and interpersonal skills. With these qualities, NEDs can provide invaluable contributions to an organisation's success.  Peter Snowdon sets out some key pointers.

Serving as a non-executive director (NED) offers a unique and fulfilling opportunity for professionals seeking to become involved in an organisation without committing to a full-time executive role. However, finding a suitable NED post can be challenging, particularly for first-time applicants and for those seeking a NED role it is important to be well-informed and prepared for the challenges involved. 

Developing a strong understanding of the industry and seeking relevant experience and exposure is crucial. However, it's equally important to consider the risks involved in joining a board. It's essential to be familiar with company law requirements, such as section 172 of the Companies Act 2006. Additionally, those who become NEDs in regulated firms will be subject to regulatory obligations. It is therefore essential to be fully aware of these obligations before accepting a board position. In summary, it's crucial to do one's homework and take all necessary precautions before diving into a NED role.

In this short article we outline some of the key considerations an aspiring NED should take into account.

Is the role of a NED right for me?

A NED takes on real legal risk; failure of an organisation may mean potential liability for damages, enforcement by regulators and possible fines. Even where the failure of an organisation does not result in direct legal consequences, a NED can suffer significant reputational damage.

The role of a NED can be demanding, and remuneration is typically considerably lower than executive pay. For most larger commercial organisations board meetings can be frequent and papers can run into hundreds of pages, all of which need to be read and understood and, on occasion, this may require significant additional research. 

A NED has a duty of care to shareholders, the company and, in some situations, other stakeholders. NEDs in a regulated organisation may also be subject to additional legal and regulatory obligations, such as, in some cases, needing approval from a regulator before taking up a role. Once in post a regulator will expect relevant NEDs to display certain behaviours.  Failure to do so could result in reputational damage and in more serios cases enforcement action from a regulator including the imposition of fines.

Some NEDs with an executive background can find it difficult to adapt to acting as a non-executive rather than an executive. A NED should support and challenge executives but must resist the temptation to second guess management decisions.

Due diligence

Before taking on a NED role it is important to carry out sufficient due diligence (DD) of the organisation concerned to mitigate the risk of taking on an inappropriate role.

There are a number of helpful guides on DD for NEDs. A full and detailed analysis of the points to consider falls outside the scope of this note, but there are two headline areas which all prospective NEDs should consider.

First is the need to research the organisation. Starting materials will include annual reports and relevant sector materials. Even where a prospective NED has good relevant industry experience, there may be material differences in business models. NEDs need to understand what the organisation stands for and its purpose. Purpose is normally interwoven with an organisation’s culture and NEDs need to buy-in to the culture and be able to influence it. 

Press reports, social media and analyst reports can help to build a picture of an organisation. Who are the competitors, how does their approach differ? For regulated businesses a NED should check an organisations regulatory profile. Most regulators have extensive material on their websites. Has there been enforcement action, if so, what did the regulator say about senior management? Will new regulatory initiatives impact the business? 

Research should also help form a view of the risk run by the organisation, these are the risks which a NED will be expected to monitor and manage and review.

Secondly, a prospective NED will want to understand who his or her new colleagues will be, this means researching the board and senior management. Who are the CEO and Chair? What are their reputations in the sector? How long have they been in post? As a prospective NED, you will meet them prior to appointment and good preparation should ensure that appropriate questions are asked about the board and the organisation. It should also offer the opportunity to understand their expectations as to the role they would like you to play and the expertise which they believe you will bring to the board.  Similarly, you will need to consider the value you personally bring – why and how can you add value but also mitigate the risk of getting pigeon-holed in to being an expert - and how you  can contribute across the whole agenda. 

Researching other directors is important to build up a picture of board dynamics. How long have they been in post, are they new or will they soon be leaving? What are the key challenges they face as directors? What are the current issues and challenges on the horizon?  What value will you bring to your NED colleagues as well as to the organisation and, thinking ahead, which committee Chair roles might you be able to take on – given how dynamic Board appointments are and, how long they can go on for e.g., 9 years - joining a Board should be seen as adding long term value. 

Behaviours

The NED role brings with it certain behavioural expectations. Adapting to a non-executive role can be difficult for an individual who has been used to performing a senior executive role.  Independent NEDs need to have a positive relationship with executives but at the same time maintain distance to ensure they remain independent. 

The transition from an executive role to a non-executive director role can be a significant shift. As an executive, individuals are typically part of a tight-knit team dealing with intense and challenging situations on a regular basis. The relationship among team members is often close and supportive, creating a unique bond. However, NEDs must maintain a level of independence and accountability. A NED cannot and must not cross the line into executive territory. While the NEDs themselves will also hopefully be a team, it is unlikely to have the characteristics of closeness of a successful executive team. Ultimately NEDs are part-timers usually with other roles in life. They should have a good working relationship with their peers, but it will not have the same dynamic as a successful executive team.  Learning to operate in this way can be a particular challenge for an executive new to a NED role.

NEDs with a professional expertise such as accountants or lawyers need to resist the temptation to “step into the weeds” of decisions made by executives. Advising and challenging is appropriate and expected but second-guessing detailed analysis or advice can be time consuming and unproductive for executives and even impact on the performance of the company. This principle applies equally to NEDs with operational expertise, they should provide strategic advice and challenge where it is needed but they must not be “hands-on”.

NEDs can often obtain useful intelligence and understanding about an organisation by talking to executives outside formal board or committee meetings. However, it is important to remember that most executives are busy and will have limited time to give to NEDs seeking information or tutoring.  Overusing executives will likely cause frustration and can damage working relationships. 

The Board plays an important role in developing and challenging proposals on strategy. Similarly, the NEDs play a crucial role in thinking about the strategic challenges facing their respective sectors. From anticipating changes in the market to identifying new opportunities, NEDs should bring a fresh perspective and critical thinking to the table. 

The ability to challenge the executive is one of the key functions of a good NED. Challenge is rarely easy. Observers and regulators often refer to ‘constructive challenge’ but in practice executives can react badly to challenge irrespective of the motive and approach. In his book Ensuring General Wisdom J A Sutherland observes:

“[a] good NED knows how to challenge well and in my view this challenge is founded on three personal qualities: the will to challenge, the skill to challenge and the knowledge needed to challenge.”

Executives typically respond positively to challenge that is well-intended and articulated but occasionally, the NED may need to be the "pebble in the shoe" on an issue, pushing for necessary changes that may not be welcomed by those being challenged. In these situations, an experienced Chair can help navigate any disagreements and work towards an effective resolution. As a NED, facing opposition is part of the job. Those who excel in this role understand the importance of a strategic approach when dealing with dissenting voices. It is essential to build trust, to encourage an open exchange of views and opinions. An effective NED will take the time to build rapport, to gain a deep understanding of the organisation and its stakeholders. By doing so, they can provide invaluable insights and perspectives. Dealing with opposition should be viewed as an opportunity to showcase a strategic mindset and bring about positive change.

Sutherland also touches on the key issue of knowledge. An effective NED must have a good understanding of the organisation, its activities and the environment in which it operates. There are no doubt examples of non-experienced NEDs bringing a fresh voice to a board and asking vital questions which those with sector knowledge may have overlooked, but these are likely to be the exception rather than the rule. In practice, NEDs need to know what an organisation does, and the sector in which it is active, to be able to ask questions and, where necessary, provide reasoned challenge to management.

To conclude, when considering whether to become a NED, it is important to understand the responsibilities that come with the role. Undertaking research and due diligence is crucial not only to determine a good fit with the organisation and its board, but also to ensure one is aware of the legal, regulatory obligations, and general duties that come with the role. Being a NED can be both fulfilling and challenging, as it requires knowledgeable and effective decision-making. By taking the time to educate oneself and by approaching the role with the appropriate level of attention and commitment, a NED can make a valuable contribution to the success of an organisation.