What are the Non-Executive Director risks in the UK?

non executive director risks UK

In the UK, nearly all of the director duties for executive and non-executive directors are identical, and so are the risks. Essentially, executive directors and non-executive directors (NEDs) have the same liabilities, responsibilities and risks. In this article, I want to take you through some of the risks associated with being a non-executive director and how you might mitigate any risks before you accept a Non-Executive appointment.

The now famous Royal Commissions have had severe implications for non-executive directors, in some instances emptying boardrooms overnight. But today, boardrooms are well populated, and more people than ever are seeking board appointments because of the rewards.

Let’s start with some good news

Board appointments demonstrate strategic achievement and the ability to excel in areas beyond an executive role. According to studies, individuals who hold both board directorships and executive roles experience several benefits, including increased demand, higher earnings, reduced unemployment rates, and improved personal and professional networks. Additionally, they have more positive retirement experiences and can easily adjust to unexpected career changes. These are just a few of the rewards associated with board appointments, which often outweigh the non-executive director risks.

What is a non-executive director?

Executive directors are also employees involved in the organisation’s day-to-day management. Whilst Non-Executive Directors (NEDs) are not employees of the organisation, essentially, they are and should be independent. However, nearly all of the director’s duties are identical. Fiduciary duties are the most critical duties for both types of directors. To that end, executive directors and NEDs have the same liabilities and risks.

According to the IOD, there is no legal distinction between executive and non-executive directors. As a consequence, in the UK unitary board structure, NEDs have the same legal duties, responsibilities and potential liabilities as their executive counterparts. Non-executive directors are subject to the codified duties of directors contained in the Companies Act 2006 in the same way as executive directors.

To do so, they must show the same commitment as their executive board members without having the same continuous engagement or access to the company or organisation’s business.

Liabilities of non-executive directors

Accepting a NED appointment is not a decision to be taken lightly. Before accepting any board appointment, you should understand your legal responsibilities.

Liability need not be an issue for Executive and Non-Executive directors as long as they perform due diligence in all their board duties. They could be liable for any loss if they should be lax and not appropriately fulfil their duties and responsibilities. The consequences for board directors can include losing their board directorship, fines and prison time under the worst-case scenarios. Organisations and NEDs also have much to lose in the way of reputational.

Acknowledge and accept non-executive director risks

Before performing due diligence and mitigating potential risks you may incur, you must first assess the types of risks and how each relates to the role NED role you are considering accepting. These risks include but are not limited to, the following.

Financial Liability – Board directors are liable and have had to make payments out of their own pockets if not covered by insurance. Liability allegations against non-executive directors don’t often occur when they do and can seriously impact all board directors. The past has seen directors being pursued for anything from £20,000 to millions of pounds.

Remuneration – The hourly rate is often dreadful – When you do the sums, the hourly rate for most board roles often does not make up for the risks you will take. In other cases, you will find yourself paying to take on these risks if unpaid.

Limited Control – By definition, being part of a board means you are not the sole decision-maker. You are, therefore, partly reliant on the quality of other board members and the Chair – things you don’t have control over.

Time Taking on a board role means taking time out of the office and away from your family. This should be factored into any desire to take on a board position. Based on personal experience, taking one day off monthly can notably affect your productivity and time management.

Reputation – Whilst most directors fear financial penalties, I think the most significant risk is the reputational damage related to misconduct or business failure. I can recount the devastating effect that a failed appointment has had on several NEDs. They found the process of rebuilding their careers debilitating, professionally and personally.

Each time they apply for a new NED role, they have to explain their past actions and try, perhaps in vain, to explain why they are an acceptable risk for the new organisation to take. They have to do this initially in their application, and if they make it past the sifting stage, they have to do it again during interviews. To make it more difficult, they compete against others with similar skills and experience who do not have the same black mark on their reputation. As such, they almost always lose out and must go through the process again. It truly is awful to witness.

Mitigating risk and due diligence

As well as being clear on the non-executive role being offered, you should also find out as much as possible about the company itself. One of the main aims of carrying out due diligence is to ensure you are joining an organisation that is operating with integrity: adhering to its legal and regulatory obligations, maintaining and operating within the confines of robust corporate governance policies, and taking proactive remedial action if any deficiencies are identified.

Much of the information you need will be publicly available; the rest should be obtained from the company, including conversations with existing board members and senior management. The information you seek should include:

    • Financial– The company’s annual report and accounts will provide essential information about financial and trading history. A careful review of these reports and accounts should be the starting point for your due diligence exercise.
    • Legal and Regulatory– Analyse the legal and regulatory environment in which the company operates, and the implications for you and the business. You need to understand the possible consequences if things go wrong, plus the personal liability that could potentially attach to you as a NED
    • Governance– Understand where and how frequently board meetings are held, the level of attendance and disagreement at board meetings, whether directors are given sufficient time to review agendas and supporting documentation and the nature and quality of the deliberations.
    • Risk Management– Managing and mitigating risk, particularly in cybersecurity and disaster recovery areas, is critical to fulfilling your duties as a NED.
    • Public Statements– Research to find out what any press, analysts and rating agencies have reported about the company and the directors. Remember, you are tying your brand to that of the company.
    • Insurance– Ask for a copy of the company’s directors’ and officers’ insurance. Consider purchasing your own D&O insurance if necessary to completely cover yourself.
    • Culture– As a board director, you are going to be held accountable for it. During the due diligence process, speak to fellow board members who will be able to shed light here. 

So why would anyone want to be a non-executive director?

There are plenty of experienced Non-Executives who, when offered the opportunity to join a board, their first response is ‘no’ because, in their minds, the risks – reputationally, financially and personally – are too high.

Whilst the risks are considerable (and for many, entirely unpalatable), in the vast majority of cases, the rewards outweigh the risks. That means for every individual who says ‘no’ to a board role, I guarantee there are 10, 20 or 100 people or more who will take that appointment if they don’t.


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About the Author

David Schwarz is CEO & Founder of Board Appointments – The UK’s leading board advertising and non-executive career support firm. He has over a decade of experience in putting people on boards as an international headhunter and a non-executive recruiter and has interviewed over one thousand non-executives and placed hundreds into some of the most significant public, private and NFP roles in the world.

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