What are Non-executive Directors and which companies need them?

Unlike executive Directors, Non-executive Directors do not have a contract of employment with a company. They may be ‘independent Directors’, which means that they must demonstrate that they can make impartial decisions and so do not have such a close relationship with the company that may affect this. For example, they must not own a substantial amount of shares or be recently employed or contractually engaged by the company that indicates their impartiality will be affected.

What do they do?

Non-executive Directors are usually separated from the management division of the business. This is because part of their role is to act in an advisory capacity to the firm, but it is also so that they can act as a check upon management and prevent fraud. They have access to company accounts and contribute to the strategy of the firm, as well as the performance of the board and company overall.

Public Companies

Non-executive Directors are mandatory for ASX-listed (public) companies. These companies are required to have audit committees comprised of Non-executive Directors, the majority of which should be independent.

An independent director must not have a relationship based upon a substantial shareholding, recent employment or an engagement with the company which was of a contractual nature, or close ties to the company which might lead to a conflict of interest between the director and the Company.

What needs to be in a non-executive director's agreement?

The following information should be included in a non-executive director’s agreement with a company:

• the term of their engagement (the average term is about 5 years),
• what happens if the position were to become vacant,
• approximate time commitment of the Director,
• remuneration,
• requirement to comply with company policies, and
• a requirement to disclose conflicts of interest and prior confidentiality agreements.

Shareholders and non-executive directors

The relationship between the Director and the company is set out in the Director’s agreement as well as in the Company’s Constitution. It is important to have a Constitution that reflects the responsibilities and obligations of directors. As with Executive directors, shareholders can alter a Non-executive Director’s powers by special resolution (a vote that has 75% in favour of the motion).

If you have further questions, please contact us at frank@franklaw.com.au

This is not legal advice.