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What is a Non-Executive Director?
The non-executive director (NED) is an external member of the company's board of directors appointed through a letter of appointment, and they represent the shareholder's interest. They are neither the company's employees nor do they participate in everyday business activities.
They perform their duties by providing services like consulting, reviewing and monitoring plans, and assisting in the constructive improvisation of the company. Furthermore, appointing the correct number of NEDs is vital in ensuring that no one group dominates the board.
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- Non-executive directors definition specifies them as specialists who are not employees of the company but are members of the board of directors.
- Outside directors do not participate in the day-to-day operational management. However, as mentors or in creating corporate plans and policies, they play an essential role.
- They’re in charge of providing constructive criticism, advice, and expertise to the board, as well as monitoring their efforts.
- They’re not employees, so they don't receive a salary but get compensation in fees or stock grants.
Roles & Responsibilities of Non-Executive Director (NED)
A non-executive director’s fundamental role is to work for the company’s development while putting the interests of the shareholders first. They have to bring in excellent governance, dedicate time and knowledge, and successfully administer the corporate board. They participate in board meetings and have voting rights.
NEDs job includes the authority to examine different reports to assess management's performance. They can verify the accuracy of financial data and the risk management's resiliency. They have a voice in executive director appointments, compensation, and dismissal. They are, for example, in charge of evaluating the performance of the executive team. They have to go to the board and bring this matter to their notice if they think a particular group is not executing its job correctly. If the board decides to replace the team, they will play a key role in selecting a new one.
While most non-executive directors have other obligations outside of the company, they must devote a significant amount of time to this role. As a result, they must obtain board permission before accepting any assignment that may impact their performance.
Some of their primary responsibilities include:
- Performance review
- Risk management
- Participation in committee meetings
- Solving problems that arise in leadership positions
- Communication with third parties
- Forming strategies that improve the company
- Helping board members to achieve different objectives
Salary
NEDs get compensation in a variety of ways by companies. It can take several forms, including cash payments and stock grants. According to Spencer Stuart, the average total S&P 500 director compensation was $2,12,750 in 2009, and it progressively increased to $3,04,856 in 2019. The national average salary for a NED in the United States is $1,27,336 per year, according to Glassdoor.
The industry trend also shows that compensation packages are independent of company size, particularly smaller companies giving more excellent pay packages. Although a glitzy remuneration package frequently attracts experts, a high compensation package might impact the NEDs independence.
Non-Executive Director vs Independent Director
An Independent Director is a NED who neither represents the shareholders nor has the power to control the board. It guarantees that they are self-contained entities. Any commercial, industrial, financial, consulting, legal, accounting, a philanthropic, or familial tie between the independent director and the company is prohibited. However, based on the SOX act, NYSE or Nasdaq listing rules boards can assign specific responsibilities associated with auditing, executive compensation, and director nominations to independent directors.
Non-Executive Director vs Executive Director
NED is often called an outside director or non-employee director, whereas executive directors are inside directors and employees of the company. In addition, NEDs are independent of business management, whereas the company's executive directors are responsible for business management.
The executive director is a regular employee obliged to perform their responsibilities ascribed in the employment contract full-time. As a result, their primary concentration is on managing day-to-day operations and executing management strategies. So, they will have a more prominent voice in how their workers should operate and enforce instructions actively. NEDs, on the other hand, is an independent outside entity that helps the company monitor and review strategies and keeps track of the executive director's performance.
Frequently Ask Questions (FAQs)
NEDs are members of a company's board of directors, but they are not company employees, unlike executive directors. Instead, they promote the shareholder's interest, oversee executive management, and assist in developing strategies.
NEDs get payment for their services, mainly in fees or equity compensation. Therefore, an attractive compensation package while filling the vacancy for a non-executive director will help the company appoint experts in the field.
Executive directors are inside directors and paid employees dealing with day-to-day business operations. NEDs are outside directors who are not company employees, and they represent the shareholder's interest. They monitor and supervise the execution of strategies and help in strategy formation. Companies can benefit from NEDs in many ways. They provide quality advice methods that are independent and unbiased.
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