Non-executive director (NED) positions are popular among many senior executives seeking to hone their skills, generate further income for their retirement, and reduce working hours.
There are significant benefits for individuals taking up such roles, including financial rewards and personal satisfaction from working in an interesting, and challenging field and using their years of experience to assist newer businesses to find solutions to challenges they may face.
The benefits for a business of taking on a NED are also significant. The advantages in turbulent economic times of having someone who brings a different perspective and judgment, gained over a lifetime of business experience, can be invaluable.
Considerations for prospective NEDs
However, prospective NEDs should ensure that before beginning their appointment, they negotiate contractual documentation that clearly spells out their responsibilities and entitlements as a NED and protects their interests and assets.
1. Directors and Officers Insurance
It's important to bear in mind that NEDs have the same personal liability as executive directors, despite usually being less involved in the day-to-day running of the business. For this reason, Directors and Officers (D&O) insurance is particularly important for NEDs.
They may also face personal liability where they do make executive decisions. In Timis v Osipov, the Court of Appeal upheld a decision that NEDs who were responsible for dismissing an employee because of his whistleblowing were jointly and severally liable for damages flowing from the dismissal. In this case, a NED dismissed Mr Timis on the specific instructions of another NED.
The practical effect of Osipov is that where an employee successfully argues that their dismissal was because of whistleblowing, they can potentially claim for all losses flowing from their dismissal against the relevant decision-makers as well as the company. In this case, the relevant losses totalled £1.75 million and the company was insolvent, meaning the NEDs were left to pick up the bill.
Although NEDs are not usually involved in the day-to-day running of a business, they are sometimes involved in decisions concerning employees (particularly in small businesses or where they are also a major shareholder).
Luckily the relevant NEDs were covered by the company's D&O insurance policy, meaning that they did not have to pay out of their own pocket. However, this case demonstrates the importance of ensuring that you are covered by the company's D&O insurance policy or negotiating this coverage for the future where a policy is not currently in place.
This is also important given that NEDs can have personal liability in cases of negligence and fraud.
2. Independent legal advice
NEDs should also ensure that the company is required to finance independent legal advice where they require the advice in relation to their role as a NED. This is because there may be instances where there is a conflict of interest between the company and the NED, meaning that the NED cannot take advice from the company's legal representatives. The guarantee of coverage for independent legal advice ensures that NEDs do not have to finance this personally.
3. Conflicts of interest and other commitments
NEDs should make sure they disclose all potential conflicts of interest to the board both prior to their appointment and on an ongoing basis, and that the company has adequate procedures for dealing with conflicts of interest. They should also ensure that where they intend to accept positions or acquire shares at other entities or already hold them, they have the company's permission to perform these roles and/or acquire the shares at the same time as being a NED. Existing positions and shareholdings should be dealt with in the NED appointment letter.
4. Reputational risk
NEDs should ensure they consider the risks the company is exposed to, the industry it operates within and the level of public scrutiny it is likely to experience before accepting a NED role to assess the level of risk to them personally. They may also want to negotiate a contractual entitlement to PR advice/support when needed.
Final thoughts
While NED positions can be the perfect end to many senior executives' careers, as explained, it is vital that prospective NEDs ensure that contractual documentation is in place that adequately protects their interests and assets before accepting the position.
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