Non-executive directors risk

What is a non-executive director?Non-executive directors, despite their distinct role and responsibilities within a company, are not immune to the risks and claims that can be faced by any director.

While they may not be involved in the day-to-day operations or management decisions, they still hold a fiduciary duty towards the company and its stakeholders.

As such, non-executive directors can be held accountable for any breaches of their duties, such as negligence, fraud, or misrepresentation.

They are subject to the same legal and regulatory frameworks as other directors, and their actions or inactions can result in legal claims and liabilities.

It is essential for non-executive directors to exercise due diligence, stay informed, and actively participate in board discussions to minimize the risk of claims and fulfill their obligations effectively

What is a non-executive director?

Non-executive directors play a vital role in the governance and oversight of a company, bringing specific expertise and perspectives to the boardroom. While they may not be involved in the day-to-day management of the company, their responsibilities and potential risks are still significant. These directors are registered at Companies House and are appointed based on their specialized skills, such as accounting, law, or other relevant areas of expertise.

In some cases, non-executive directors also hold substantial shares in the company, particularly in smaller businesses or family-run enterprises. Even though they do not participate in daily operations, their significant shareholdings give them a vested interest in the company’s success and make their role more than just a supervisory one.

Non-executive directors can also be appointed to oversee specific aspects of the company or conduct independent reviews. This is especially common in larger organizations, where an independent non-executive director may be tasked with ensuring proper corporate governance practices and evaluating the management’s decisions.

These individuals may have specialized knowledge in areas like turnaround strategies, which can be valuable for companies facing financial difficulties and are often brought in by concerned lenders.

Regardless of their specific roles and responsibilities, non-executive directors are subject to the same risks and claims as other directors. They have fiduciary duties towards the company and its stakeholders, and any breaches of these duties can lead to legal consequences. Therefore, it remains crucial for non-executive directors to exercise diligence, act in the best interests of the company, and contribute actively to the board’s decision-making processes.

What are the duties of a non-executive director?

The duties of a non-executive director are indeed identical to those of executive directors, despite their different level of involvement in the day-to-day operations of the company. These duties are established by legislation and general corporate governance codes and include the following:

  1. Fiduciary duty: Non-executive directors have a fiduciary duty to act in the best interests of the company, its shareholders, and stakeholders. They should exercise their powers and make decisions in good faith and with reasonable care, skill, and diligence.
  2. Duty of loyalty: Non-executive directors must prioritize the interests of the company over any personal or external interests. They should avoid conflicts of interest and disclose any conflicts that may arise.
  3. Duty of care: Non-executive directors are expected to exercise the same level of care, skill, and diligence as executive directors. They should stay informed about the company’s affairs, actively participate in board discussions, and make informed decisions based on adequate information.
  4. Board participation: Non-executive directors are expected to contribute to board discussions and provide independent and objective viewpoints. They should actively engage with fellow directors, challenge proposals when necessary, and contribute to the effective functioning of the board.
  5. Compliance and legal obligations: Non-executive directors must ensure compliance with relevant laws, regulations, and corporate governance standards. They should have a good understanding of the company’s activities and risks, and take appropriate steps to monitor and mitigate those risks.
  6. Strategy and oversight: Non-executive directors may be called upon to contribute their specific skills and expertise to the development and evaluation of the company’s strategy. They should provide oversight of the executive directors, monitor performance, and ensure that appropriate systems of risk management and internal control are in place.

It is important to note that the specific duties of non-executive directors may vary depending on the company’s size, industry, and other factors. However, their fundamental obligations remain the same, emphasising the need for integrity, independent judgment, and diligent oversight.

What are the risks for non-executive directors?

The personal liability risks associated with breaching fiduciary duties are equally applicable to both executive directors and non-executive directors. These fiduciary duties are rooted in company legislation and revolve around the fundamental principle of ensuring that directors exercise skill, care, and act in good faith. It is important to note that these duties extend to non-executive directors, de facto directors, and shadow directors, not just executive directors.

When a company is solvent, any director found to be in breach of these fiduciary duties can face potential claims from aggrieved parties. The court has the authority to nullify or reinstate transactions that were conducted in violation of these duties. It may also issue injunctions to prevent further breaches or order directors in breach to provide compensation in the form of damages.

In an insolvency scenario, additional remedies and penalties come into play for breaches of fiduciary duties. An insolvency office holder appointed over an insolvent company possesses broad powers to pursue recovery actions against directors who have breached their duties to the company or its creditors. As a company approaches insolvency or enters into insolvency, the directors’ obligations expand to include duties towards the company’s creditors as a collective entity.

It is crucial for directors, whether executive or non-executive, to be aware of these fiduciary duties and diligently fulfill their obligations to mitigate the risks of personal liability. Compliance with these duties is vital in both solvent and insolvent situations to uphold the trust and confidence placed in directors and to safeguard the interests of the company and its stakeholders.

Frequently asked questions

Can a non-executive director be held liable?

Yes, a non-executive director be held liable to disqualification for misconduct under the Company Directors Disqualification Act 1986. If a company's board of directors is investigated for 'wrong doing', such an investigation will include the actions or omissions of NEDs.

Can a non-executive director be sued?

Yes, a non-executive director be sued if they should be lax and not fulfill their duties and responsibilities appropriately, they could be held liable for any loss.

What are the liabilities of a non-executive director in the UK?

The liabilities of a non-executive director in the UK could be made liable for any loss if they should be lax and not appropriately fulfil their duties and responsibilities

Directors’ disqualification proceedings

Non-executive directors are not exempt from allegations of misconduct that could result in director’s disqualification proceedings, just like executive directors. The same rules and regulations apply to both types of directors in this regard.

In the event of a claim, a non-executive director may attempt to provide mitigation if they can demonstrate that they were intentionally kept uninformed by the executive directors. However, if their lack of knowledge is simply due to their failure to stay updated and there was no intentional deception by the directors, this will not serve as a defense or mitigation for the non-executive director.

Therefore, non-executive directors face the same risks as executive directors when it comes to potential disqualification. Before accepting a non-executive director role, individuals must have a clear understanding of their responsibilities to ensure compliance with company and insolvency legislation. This knowledge is essential to avoid any potential claims against them relating to the company’s affairs.

It is highly recommended that any non-executive director seeking to take on a role acquaint themselves thoroughly with their duties and obligations to minimise the risk of running afoul of the law and to fulfill their responsibilities effectively.

Steve Jones Profile
Insolvency & Restructuring Expert at Business Insolvency Helpline

With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.