Non-Executive means a function devoid of executive responsibilities. A person entrusted with a non-executive role is not engaged in the daily management of the company's affairs. An exception to this is attending board meetings.
In a company, a Non-Executive director holds a position of independence. By large, a director who is not an executive director is a non-executive director. Thus, to get a complete understanding, one needs to know who is the Executive Director.
Did You Know? Non‐executive directors are appointed in the same way as executive directors and are appointed by the board.
Non-Executive Director: Understanding The Role
Non-Executive Director is a director who is a member of the Board of Directors and is not actively involved in the managerial and executive functions of the company.
Non-Executive Directors do not hold Chief positions like senior management, generally known as C-level or managerial positions (Eg: Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, etc.). Yet their primary objective is to keep the company's interests above everything and act objectively.
Non-Executive Directors are equally responsible and liable towards the failures and frauds committed by the company. Unlike Executive directors, Non-executive directors are not on the company's payroll. They are compensated through sitting fees and remuneration as part of cash or equity shares profits.
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Is Independent Director a Part of Non Executive Directors?
Independent Directors are part of Non- Executive Directors however, everyone is not independent. Thus, a non-executive director may be an independent or dependent director. An independent director has no interest in the company according to the provisions of Sec 149(6) of the Companies Act, 2013.
On the other hand, a non-executive director may represent a major shareholder. An independent director is a director who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience. An independent non-executive director does not have a financial relationship with the company or its related persons as opposed to executive directors.
Roles & Responsibilities:Non- Executive Director
Non-Executive Director has the principal role of providing independent review, opinion and judgement to the company's management.
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Roles of a Non-Executive Director
- Establishes Long-term Goals and Strategic Direction of Company
- Challenges Management’s performance and control
- Ensures effective utilization of resources by the management
- Provides constructive criticism
- Acts as a whistle-blower in cases of frauds or misappropriation of assets
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Responsibilities of a Non-Executive Director
Non-executive directors have their place in the Nomination and Remuneration Committee (NRC). The majority of the directors of this committee must be non-executive directors. Hence as per the company's requirements, the independence of non-executive directors should not be compromised.
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Practice Objectivity And Maintain Integrity
A straightforward and honest approach should be maintained in professional and business relationships without being associated with false or misleading information.
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Problem-Solving And Analytical Approach
Act diligently by being aware of technical, professional and business developments. Ensure fast redressal to critical situations in a cost-effective yet efficient manner.
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Risk Management
Use of experience and expertise in managing areas of major risk to the organization.
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Dedicate Time Towards The Company
It is important to commit a significant amount of time to the company and disclose any other significant commitments to the board.
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Ensuring Compliance With Rules And Regulations
Overseeing compliances with numerous laws and understanding individual director’s responsibilities and legal duties
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Monitor Decisions and Activities of Executive Directors
Decisions taken by executive directors often tend to be relative to the short term performances where a futuristic approach is necessary.
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Accounting, Finance and Auditing
It refers to comprehending a company's financial statements and reporting requirements and mobilising corporate finance.
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Why Is A Non-executive Director Needed?
Appointing a Non-Executive Director is a challenge and needs a lot of time to decide for the Board of Directors. Following are the reasons why a non-executive director is appointed -
- To strike a balance between decisions taken by the executive directors majorly focused on positive periodical results and the long-term outlook of non-executive directors.
- To ensure that a neutral and impartial attitude is maintained while reviewing the decisions taken by the management.
- The experience and expertise would result in absolute results for the organization.
- The stakeholders find a company accountable when an objective person is involved in its management.
- Due to their qualification in their respective fields, Non-executive directors establish controls to improve financial stability.
Bonus Tips For Effective Non-Executive Director
Non-Executive directors provide relevant and valuable insights based on their expertise to assist in policy development and decision-making.
- Obtain a deep and thorough understanding of the business
- Maintain a thoughtful and curious approach
- Offer advice after considering its impact on stakeholders as a whole
- Act diligently with integrity and strong principles
- Emphasize the need for effective communication across hierarchies
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Conclusion
The role of a Non-executive director is to keep an organization sustainable in the future rather than a short-term growth perspective. The role offers an impartial view on the running of our business, governance and boardroom first-class practice. They oversee and constructively control mission control in its implementation of the strategy.
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