When it comes to taking on a Non-Executive Director (NED) role, the legal implications can sometimes seem unclear and are often one of the reasons people hesitate to sign up for the role. At our recent NED event, Partner at Roythornes Solicitors, Phil Cookson gave us invaluable insight into the legalities of the role.
Straight off the bat, Phil was quick to explain that being a NED is a highly valuable and rewarding job. But it is also a ‘proper job’ and you need to go into it with your eyes open from the start.
A director is a director
“One of the main problems is that there is currently no statutory definition for a NED, which can in itself be a cause for concern. But it is worth remembering that in the eyes of the law, it makes no difference if you are a Non-Executive Director or an Executive Director. The same standard Director duties apply,” he explained.
And these duties are:
To promote the success of the company
To exercise independent judgement
To exercise reasonable skill, care and diligence
To avoid conflicts of interest
To declare any conflicts of interest
To not accept benefits from third parties
But there are often additional duties that apply to a NED as they are usually brought in to perform a specific role, whether it is to support the senior executives, guide the business through a merger, or to bolster the Board’s skills. This will impact the outcome of the tests that are applied to assess the success – or failings – of you as a NED. For example, what success looks like for the NED brought on for their financial acumen and experience versus one brought on for the HR expertise.
Contract is king
The non-negotiables for Phil, however, are very clear: “A NED needs to exercise reasonable care, skill and diligence and to make sufficient inquiry into the company’s business to provide an effective challenge. A NED also needs to remain independent from the executive management team and be a critical friend.”
But all this is irrelevant if the role has not been clearly defined. It is vital therefore to be very clear about what these specifics are right from the start and the key here is to get a contract drawn up and signed. As Phil explains: “Contract will be king. Be specific as ambiguity creates risk. Be clear about the skills and expectations as well as your level of commitment. Also, do this at the beginning and if expectations change, document them.”
Insolvency and Health and Safety – yes, there is scope for personal liability
There are two areas that tend to cause more concern than others - insolvency events and health and safety. When it comes to both, there is scope for personal liability as a NED. In the case of insolvency, your duties as a NED will also shift to include managing the interests of the creditors. There’s no doubt that if a business is going through this, they will turn to you for advice, turning a blind eye is simply not an option and Directors’ disqualification is a risk.
Similarly, with health and safety legislation, as a director, you will be expected to show ‘consent connivance or neglect’. All this can be unnerving, but the key thing to do is your due diligence. As Barry Gamble, Senior Advisor at the Non-Executive Directors’ Association explained: “Speak to the other NEDs in the business, the accountants, the lawyers. Look closely at the accounts and really get to grips with what kind of business it is.”