What is a non-executive director?
A non-executive director, or NED, is a member of a company's board who is not an employee and does not run the company day to day. They attend board meetings, challenge and support the executives, carry the same legal duties as every other director, and are paid a fixed annual fee rather than a salary.
What a NED actually does
The job is governance, not management. A NED turns up to board meetings, usually six to ten a year plus committees, reads the papers properly, and asks the questions the executives would rather not be asked: whether the forecast is believable, whether the chief executive is the right person for the next stage, whether the risk the finance director just glossed over is really minor.
- Strategy: testing the plan the executives bring, not writing it
- Performance: holding the chief executive and the executive team to the numbers they committed to
- Risk: making sure the board knows what could go badly wrong and that somebody owns it
- People: appointing, paying and when necessary removing the chief executive, through the nomination and remuneration committees
- Integrity: the audit committee, the accounts, and whether the company is telling the truth to its shareholders and its lenders
What a NED is not
- Not an executive. They do not run a function, manage staff or sign off operational decisions. The day an independent NED starts doing the finance director's job, the board has lost its independent voice on finance.
- Not a fractional executive. A fractional CFO or CMO holds a real operating seat one to three days a week and is accountable for the function. A NED is one of the people holding that executive to account. The two are confused constantly because both are senior, part-time and contracted, and they sit on opposite sides of the board table.
- Not an advisor. An advisor has no legal duties, no vote and no liability. A NED has all three.
- Not a shareholder representative, unless appointed as one. An investor director sits on the board for the fund; an independent NED sits on it for the company.
The legal position
Under the Companies Act 2006 a director is a director. The general duties in sections 171 to 177, including the duty to promote the success of the company and the duty to exercise reasonable care, skill and diligence, apply to a NED exactly as they apply to the chief executive. A NED who attends four meetings a year and reads nothing is as exposed as the executive who ran the company into the ground, and the courts have said so.
The UK Corporate Governance Code, which applies to premium-listed companies and is followed voluntarily by many others, treats a NED as independent unless certain circumstances apply, among them having been an employee in the last five years, having a material business relationship, or having served more than nine years from first appointment. Large private companies report against the Wates Principles instead, which ask the same questions with less prescription.
Time, pay and tenure
Listed company boards commonly quote a commitment of twenty five to thirty five days a year for an ordinary NED, more for a committee chair, and one to two days a month is typical in a private company. The Spencer Stuart UK Board Index 2023 put the average base fee across the 150 largest companies with a premium London listing at £76,868; smaller quoted and private companies pay a fraction of that, and the fee page below sets out the published figures tier by tier. Terms usually run three years, renewable, with nine years the point at which independence is questioned.
Who hires a NED, and when
Listed companies must. Private companies choose to, and the usual triggers are an investor asking for an independent chair or director, a founder who wants somebody to answer to, a company preparing for a sale or a listing, and a board that has noticed it agrees with itself too easily. A company under about twenty people rarely needs one; it needs a good advisor and, more often than it thinks, a fractional executive in the seat that is actually struggling.
Common questions
What does a non-executive director do?
They sit on the board without running the company. They challenge the executives on strategy, performance and risk, serve on the audit, remuneration and nomination committees, and share the legal responsibility for the company's decisions. In a sentence: they govern, the executives manage.
Is a non-executive director an employee?
No. A NED is an office holder appointed by a letter of appointment, paid a fee rather than a salary, with no employment rights. The fee is normally paid through PAYE even so, because HMRC treats a directorship as an office.
Does a non-executive director have the same legal duties as an executive director?
Yes. The Companies Act 2006 does not distinguish between them. The duties to promote the company's success, to exercise independent judgement, to act with reasonable care, skill and diligence and to avoid conflicts of interest apply equally. What differs is what a court expects given the role: a NED is expected to inform themselves and challenge, not to run the function.
What is the difference between a NED and a fractional executive?
A fractional executive holds an operating seat part of the week and owns a function: the fractional CFO is the CFO. A NED holds a board seat and oversees the executives, including that CFO. One manages, the other governs, and a growing company often needs both at the same time for different reasons.
How many non-executive directors should a board have?
The Corporate Governance Code asks premium-listed companies for at least half the board, excluding the chair, to be independent NEDs. Private companies have no rule. Two or three independent voices on a board of six or seven is a common and workable shape; one lone NED tends to get outvoted and then ignored.
What does NED stand for?
Non-executive director. The plural is NEDs. In the US the same role is usually called an independent director or an outside director.
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More on non-executive directors
A board needs governing. A function needs running.
A non-executive director does the first. For the second, the bench lists verified fractional executives with the day rate on the profile, and retained search runs board and full-time appointments for the companies it works with.