The role of a Non-Executive Director (NED) is an exciting proposition, but is not without its pressures. Although as a non-executive you are not officially part of the day-to-day management team, you still have legal obligations to uphold (and can be held accountable for) failings within the company or the misdemeanours of board members, if they are left unchecked.
While the principle role of Non-Executive Directors is to contribute objective, independent and unbiased insights and advice to the executive board, the role does not involve making executive decisions.
However, it should be understood by anybody acting as a NED that you are equally responsible for the failings of a company as the executive directors that make the decisions. It is the responsibility of a non-executive to perform due diligence on a company before taking up a position on the board. Critically, it is your legal obligation to ensure the company, or its board members is not acting negligently or illegally.
NED legal risks
Given that non-executives are bound by the same risks and liabilities as executive directors, it is your responsibility, and a question of personal interest, to ensure the actions of other board members fall within the boundaries of the law.
There have been several high-profile cases in recent years that highlighted the risk of personal liability and the risk of having to pay significant damages. In 2017, two non-executive board members were ordered to pay their (‘their’ is not needed) contributions of £1.7m in damages to the CEO of International Petroleum Ltd for unfair dismissal. The two NEDs were deemed to have failed in exercising their executive authority and were held personally liable for a share of the damages.
However, in situations where you can evidence that you have taken the appropriate steps and necessary precautions to avoid risks, you may not be deemed responsible for the actions or decision of your fellow board members.
Diminishing risk as a Non-Executive Director
There are situations where a court judge will show leniency to non-executives, and even discharge you from all liability. Providing NEDs are able to categorically show their input was disregarded, it is possible to be cleared from indemnity against all liabilities, costs and damages.
It is therefore important that you perform due diligence and engage in appropriate levels of governance. Before accepting a role on a board of directors you should ask for assurances that you will be given the appropriate training and development, together with access to all relevant documents and records.
From a financial perspective, companies should agree to pay for Directors and Officers Insurance as cover against legal liabilities. Regardless of the size of the company, a NED is assigned to contribute strategic direction and monitor performance to ensure the business is profitable. However, if you are developing a NED portfolio career, with multiple organisations, then you may decide to take out your own cover.
It goes without saying that NEDs should always act in the best interests of the company. In performing due diligence, it is important to ensure the company has sufficient financial and human resources to effectively meet goals and achieve exceptional levels of performance.
NED legal obligations
In cases of negligence or fraudulent activity, regulators and court officials will seek to determine whether a NED was aware of the indiscretion. Questions would be raised on whether your skills and experience were sufficient to have foreseen the warning signs and prevented the negligence.
A prudent Non-Executive Director that performs due diligence might be expected to identify situations in which a company is liable for negligence. It is, therefore, the responsibility of a NED to keep a record of the advice you provide and question the activities of a company when the advice is clearly ignored.
If fraud or other criminal activities are suspected, it is the responsibility of NEDs to disclose concerns to regulatory bodies. Failing to do so, could make you culpable if the Courts feel you failed in your duty as a board member regardless of your status.
It is also prudent to decline offers of private payments or gifts that might be called into question. To avoid liability, always act in the best interests of the company and do not seek personal profits other than the remuneration agreed to in your contract.
The penalties for NEDs are high. They range from fines, disqualification and imprisonment. For more information about how to avoid the range of penalties for failing to carry out your legal obligation take a look at our Legal Landscape video on the member portal which is part of our new Winning Portfolio Careers on-demand series.
If you’re contemplating furthering your career as a NED, register with us today so you understand the risk and how to avoid liability.