By James Partridge, Partner. Contact Thomson Snell and Passmore 01892 510000.
To correct a common misconception, the legal duties of executive directors and non-executive directors are the same. If things go wrong, the likelihood is that the non-executive directors will be as much in the firing line as the executive directors.
Anyone who is (or is thinking about becoming) a non-executive director is likely to find the guidance note issued by ICSA (Institute of Secretaries and Administrators) on 18th January 2013 helpful. The note sets out details of some of the steps which a non-executive can take which should help to demonstrate that he or she has exercised reasonable care, skill and diligence in the execution of his or her duties.
If you are looking to become a non-executive director:
- Assess whether you have the appropriate experience and skill sets which would be expected of a director of the company.
- Ask for and review a letter of appointment and raise any concerns before you sign it.
- Understand your obligations under the Companies Act 2006, particularly in relation to managing conflicts of interest.
- Understand that your role is to provide independence, oversight and constructively challenge the board.
- Recognise that circumstances may arise where you need to take independent advice and, if necessary, resign from the board.
The standard against which any director will be assessed is essentially a two-fold test:
(a) The general knowledge, skill and experience that may reasonably be expected of a person carrying out the
functions carried out by the director in relation to the company; and
(b) The general knowledge, skill and experience that the director has.
It is important to understand that more will be expected of non-executive directors if they have specific skills or experience. By way of example, the standard expected of a non-executive director who has trained as a chartered accountant will be higher than that of a lay person.
Companies can mitigate the potential personal exposure of their directors by putting in place directors’ and officers’ liability insurance. Ideally, the insurance should include run off cover for a period after a director has resigned from office (typically six years). The wording of the policy documents should be reviewed carefully.