Directors of a company are responsible for managing the company's business and affairs. They have legal duties under the Companies Act to the company that they are personally responsible for complying with. This article will outline what a non-executive director is and the legal duties they must comply with.
What is a Non-Executive Director?
A non-executive director is a director who is not employed by the company and is usually not involved in the business's day-to-day operations. In comparison, an executive director usually holds a senior management position in the company, such as a CEO, CFO or CTO. They are generally deeply involved with the day-to-day operations of the business.
For early-stage companies in particular, a non-executive director is usually the third or subsequent director to come onto the board after the founders.
Non-executive directors typically provide strategic insight and a wealth of previous business experience and knowledge to the board of directors. Since they are not involved in the company's everyday activities, this can bring a sense of independence and objectivity to the non-executive director's input.
A non-executive director may receive payment for their role. Either the company's shareholders or other directors will decide how much is paid in exchange for their services. This will be outlined in the agreement between the company and the non-executive director. Typically, the non-executive director will be paid for attending and contributing to board meetings, whether this is weekly, monthly or quarterly.
What are a Non-Executive Director's Duties?
Like any other director, including executive directors, a non-executive director of a company in New Zealand must comply with their director duties. These include the requirement to:
- act in good faith and the best interests of the company;
- exercise due care, diligence, and skill that a reasonable director would exercise in the same circumstances;
- exercise powers for a proper purpose;
- comply with the Companies Act and the company's constitution;
- not engage in reckless trading; and
- avoid incurring obligations unless satisfied that the company will be able to honour them when required to do so.
Risks and Responsibilities for Non-Executive Directors
For non-executive directors, it is important that they maintain a sense of independent judgement and objectivity before the board. Non-executive directors are legally responsible for upholding their directors' duties to the company, similar to any other director. This means that if the board were to make a decision in breach of their directors' duties and the non-executive director does not question and approves the decision, the non-executive director could also be held accountable.
While it may be common for one director to take the lead and for the others to follow, the non-executive director should ensure they independently assess the company's circumstances. They should not blindly follow decisions that may be a breach of their director's duties.
A good director is active. Indeed, a quiet non-executive director who does not add strategic input to the company will not add any value. Additionally, the non-executive director should be informed of the company's whole picture before making any decisions. The company must ensure that the non-executive director has access to all the required information. This enables them to decide independently based on the circumstances before them.
Being a director comes with legal duties and responsibilities. As such, some non-executive directors may be reluctant to be directors of a failing company. This concern is justified since if a company recklessly trades while insolvent, the directors can be held personally liable. Such liability is the same as if they breached one of their director duties.
Noting the above, when there is a genuine risk of a director breaching their director's duties, a non-executive director may request a deed of access and indemnity be put in place between them and the company. A deed of access and indemnity provides an indemnity against legal liabilities arising from being a company director. The deed should also state that the company agrees to obtain directors' insurance from a reputable insurer. This way, the non-executive director can rely on the company's insurance coverage for any potential risks.
In New Zealand, a company director has legal duties to the company. Directors are personally liable for breaching their directors' duties, even non-executive directors. While non-executive directors are not as closely tied to the company's day-to-day operations compared with executive directors, it is important that they retain their objectivity and independence. Equally, it is important that they do not blindly follow decisions that may result in a breach of their directors' duties.