Independent directors are not employed by the organisation. Neither do they have any relation to the organisation other than being a director; they are considered free of any business or other relationship that could materially interfere with – or could reasonably be perceived to materially interfere with – the independent exercise of their judgment.
In Australia, it is considered good practice from a governance perspective for the majority of directors on a board to be non-executive and independent, especially for listed companies.
Non-executive directors typically do not engage in the day to day management and administration of the business and instead provide leadership and guidance in regards to longer-term planning and strategic decision making. They are responsible for overseeing the executive team and acting in the interests of the business’s various stakeholders.
Non-executive directors take on liability for the success or failure of a business and must be familiar with their legal responsibilities. All directors, whether executive or non-executive, must comply with basic legal requirements under the Corporations Act 2001 (Cth).
Why does a business have non-executive directors?
Non-executive directors are not involved in the running of the business. Instead, non-executive directors add value to an organisation by assessing and challenging the broader direction and performance of the organisation and in identifying risks and opportunities. Given they are not involved in the day to day management, non-executive directors are expected to bring independence and objectivity to these functions; it is assumed that their ability to act in the best interests of the company is not compromised.
Non-executive directors may also bring value or prestige to a business based on their expertise, networks or reputation.
How does a non-executive director differ to an executive director?
Non-executive directors rely on management (or executive directors) to run the business and do not expect to be informed of the details of how the company is managed.
Executive directors, unlike non-executive directors, have been delegated the authority to make day-to-day executive decisions about the management of the business, and they do so without deferring to the board. In contrast, appointment as a non-executive director carries no express or implied grant of executive power.
Unlike executive directors, non-executive directors provide their services to the business on an intermittent basis. Their duties are performed at regular board and committee meetings and non-executive directors have no authority to act on behalf of the company. Instead, directors act collectively as a board and it is the role of individual directors to actively participate in the decisions of the board.
What is expected of non-executive directors?
While non-executive directors are not expected to have the same knowledge of the operational activities of their organisation as executive directors do, they are expected to add value by:
- Acting as leaders of the organisation and setting the tone from the top in terms of the
values and culture of the organisation;
- Bringing an independent and fresh perspective to decision making;
- Demonstrating relevant capability, expertise and ethical behavior;
- Challenging, questioning and monitoring the CEO and senior management;
- Drawing on their external networks which are of use to the company; and
- Supporting and mentoring the CEO.
What does the role of the non-executive director entail?
Directors have an obligation to take reasonable steps to ensure they are in a position to guide and oversee the management of the business. This includes being familiar with the fundamentals of the business in which the organisation is engaged, keeping informed about the activities of the business, and being familiar with the financial position of the corporation.
To perform their role effectively, non-executive directors must make a real commitment to their role. Directors are expected to actively participate in board matters and there is no room for disengaged directors who do not contribute effectively to the board's work.