Selecting non-executive directors

There is a growing acceptance among boards of directors and shareholders that non-executive directors (NEDs or NXDs) have a valued and necessary role to play in maximising board effectiveness. This applies to private as much as public companies. The introduction of independent judgement to the board's activities provides greater assurance that the correct strategies and decisions are likely to be chosen.

The introduction of truly independent judgement to the board’s activities provides all interested parties with greater assurance that the correct strategies and decisions are likely to be chosen.

The contribution of NEDs can help to raise the level of discussion and improve the quality of decision-making on the board, increasing the chances of the company acting in the best interests of its long-term security and prosperity.

As with executive appointments, all board members should be involved in the decision to appoint NEDs. When changes to board membership are necessary, the board should first assess the qualities and competencies already around the boardroom table, then develop specifications of the skills, personal qualities, knowledge and experience required for each new appointment and, after that, identify potential candidates. Non-executive appointments are no exception.

NEDs should be chosen with regard to the balance of skills and experience on the board and with a view to supporting any areas that might be lacking. They should be capable of providing an independent and impartial view of the board’s considerations and decisions while also identifying strongly with the company’s affairs.

It is thus essential to look for strength of character and an ability to stand back from the issue being discussed. Pragmatism and the ability to compromise are also vital. The demands of the role call for courage, integrity, common sense, good judgement, tenacity, diplomacy and an ability to listen carefully and to communicate with clarity, objectivity and brevity.

The specific background, experience and special disciplines required of the NED will naturally depend on the qualities of the other directors on the board and the particular company concerned. Board-level experience of larger – but not necessarily related – enterprises is often needed. Business acumen and the kind of mind that focuses clearly on the matters in hand are essential.

Numeracy and the ability to gain an adequate understanding of the company’s finances, its management, its employees, its special capabilities and its markets should also be ascertained when selecting an NED.

For further information on appointing non-executive directors, refer to Letters of appointment for non-executive directors (IoD Factsheet).

Induction and training

To be effective, newly appointed NEDs quickly need to build their knowledge of the organisation to the point where they can use the skills and experience they have gained elsewhere for the benefit of the company. The UK Corporate Governance Code (the Code) requires a full, formal and tailored induction for new directors on joining the board (See B4 Main Principle and Code Provision B.4.1).

On appointment, NEDs will already have relevant skills, knowledge, experience and abilities. Nonetheless, extending and refreshing them will add to their credibility and effectiveness in the boardroom.

“The company,” states the Code, “should provide the necessary resources for developing and updating its directors’ knowledge and capabilities”. Note also the obligation in Listing Principle 1 of the Listing Rules: “A listed company must take reasonable steps to enable its directors to understand their responsibilities and obligations as directors.”

The essential point is that directors must be given the right ‘equipment’ and get the right preparation to do their jobs/discharge their duties. There is reference to “tailored induction”. Thus the Code recommends that new directors get the chance to meet major shareholders as part of their induction process and that “non-executives should also visit, and talk with senior and middle management” (Guidance on Board Effectiveness, published by the Financial Reporting Council).

For all directors, the right equipment includes “accurate, timely and clear information”. The supporting principles of the Code (B.5) say the company secretary must, under the direction of the Chair, ensure “good information flows within the board and its committees and between senior management and non-executive directors”.

The Institute of Directors provides training for NEDs, including a number of open courses such as The Role of the Non-Executive Director and The Role of the Company Chair. It also runs development programmes which provide the skills and knowledge essential for successfully directing an organisation from a strategic perspective, culminating in the award of the Chartered Director qualification.

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