Non-Executive Directors – Are You Putting Yourself at Unnecessary Risk?

Non-executive directors or ‘NEDs’ can provide vital specialist expertise and oversight for businesses. Becoming a NED can be great for an individual’s career development, allow them to build valuable relationships, let them earn additional income and gain strategic experience, increase their personal profile and offer a way to give back, amongst other benefits.

However, if you are considering taking on a non-executive director role, it is important to go in open-eyed with a clear understanding of your obligations and the potential risks. Failure to do so can increase the likelihood of conflict and could put you at risk of serious legal and personal consequences.

In this article, we cover what non-executive directors do, their legal obligations, key areas of risk to consider and what NEDs can do to protect themselves.

Need help navigating the relationship between a business and a non-executive director? Please contact John Wiblin, who will be happy to advise.

Key points for non-executive directors to know

• Non-executive directors are not employees of a business and are not involved in its day-to-day operations.
• The NED role should be clearly set out in a service agreement.
• NEDs have the same legal duties as executive directors, including to act within the company’s articles of association, promote the success of the company, avoid conflicts of interest and refuse any benefits from third parties.
• There are various areas of risk non-executive directors need to be wary of, including around personal liability, compliance and their reputation.
• Steps NEDs can take to protect themselves include having good service agreements in place, making sure they are always acting in the interests of the right people and the obligations of the role, and seeking expert legal advice when needed.

What does a non-executive director do?

Non-executive directors are not employees of a business and do not take part in its day-to-day running. Instead, their role is to provide additional support and oversight as needed while promoting and protecting the best interests of the company and its shareholders.

The exact duties of a NED will depend on the situation, their expertise and what support the company requires. This role should be formally defined in a service agreement. It is important for prospective non-executive directors to carefully review any agreement they are offered before signing so they are clear what is expected of them.

What are the legal obligations of a non-executive director?

Many people fail to realise that non-executive directors have the same legal duties as executive directors. This means that NEDs must:

• Always act within the company’s articles of association.
• Conform with any relevant regulatory requirements.
• Promote the success of the company and the interests of the shareholders.
• Use reasonable skill, care and diligence when carrying out their role.
• Exercise their own independent judgement.
• Avoid conflicts of interest (where possible) and declare any potential conflicts of interest that cannot be avoided.
• Not accept any benefits from third parties.

An important point to note is that if a business becomes insolvent, any non-executive directors have a legal duty to act in the interests of the company’s creditors in exactly the same way as any executive director.

What are the key areas of risk for non-executive directors?

The most potentially damaging areas of risk for NEDs are around personal liability, compliance and reputation. However, there are other risks that must also be considered.

Non-executive directors can potentially be held personally liable for issues such as fraud or negligence in relation to the operations of a business. They can also be held liable for any decisions they make or actions they take that result in losses for the business.

NEDs must comply with all relevant laws and regulations applicable to the business and the activities they carry out. Failure to do so could result in both legal and financial consequences.

If a business fails or misconduct is uncovered, then a non-executive director could suffer serious reputational harm, even if they were not directly involved in any wrongdoing.

Other issues to consider are how much time to commit to the role, as there is always a risk that this could start to outweigh the benefits, and the quality of the other decision makers within the business, as this can affect how productive a NED’s relationship with a company is likely to be given their limited control.

How can non-executive directors protect themselves?

When taking on the role of a non-executive director, it is important to give some thought to what protections you will have against any potential risks. This can help to minimise those risks and if a problem occurs, being forearmed can help to reduce any negative consequences for yourself.

The first step is to make sure you have a properly defined relationship with the business set out in a service agreement. You should get independent legal advice on this agreement to make sure you understand the terms and the obligations under which you will be placed.

It is also sensible to have good legal advice on other key issues, including the company’s articles of association, to make sure that you fully understand the legal framework within which you will need to operate.

Keeping in mind whose interests you are there to serve as well as what support and oversight you are expected to provide can also be very helpful. Making sure that you are acting in line with those obligations can reduce the risk of any questions being asked about your conduct should something go wrong and can provide a good line of defence if any questions are asked. To support this, it can be a good idea to make sure the rationale behind any key decisions is clearly documented.

If you are ever unsure about any of your obligations or potential areas of risk, such as a possible conflict of interest, the best way to protect yourself is with expert legal advice. The right legal support can give you confidence that you are properly carrying out your role and that any decisions you make are being done on a firm basis.

How Longmores can help non-executive directors

At Longmores, our Company Commercial team can advise non-executive directors on their obligations and potential areas of risk. We can also advise businesses on the relationship with NEDs, including making sure the right contracts and agreements are in place.

Should problems arise between businesses and non-executive directors, our highly skilled Dispute Resolution team can help find the right way forward for your interests.

For expert support on the relationships between businesses and non-executive directors, please contact John Wiblin, who will be happy to advise.

Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.