What is a Non-Executive Director?
There is no statutory definition of a Non-Executive Director (NED), but they are usually required to devote part of their time and affairs to a company as an independent adviser, e.g. by attending regular board meetings.
Companies recruit NEDs for a number of reasons, including:
- the addition of a particular expertise to the board;
- to achieve growth in the company; or
- to seek an exit.
NEDs are usually senior, experienced individuals who offer a wider perspective on matters under discussion. As a director, they are subject to the statutory duties under the Companies Act 2006. NEDs appointed to listed companies are also subject to the UK Corporate Governance Code.
Recruiting a Non-Executive Director
Finding the right person to become a NED of a company can be complex and time-consuming for the existing board. Not only does the NED need to have appropriate experience, they also need to accept the culture of the company and be able to support its goals and objectives.
Further complications can arise when agreeing the role and obligations of the NED and negotiating their remuneration package, especially with regards to giving shares in the company.
Non-Executive Director Employee Rights
It is also important to consider a NED’s status. By definition, a NED should not be an employee nor have an executive capacity. However, a NED will have specific duties and, occasionally, these can increase to such an extent that the NED can claim that they are entitled to the protection of worker or employment rights. This can include unfair dismissal rights, the right to paid holidays and protection against discrimination. Therefore, the scope of the appointment should be clearly defined. It is also useful to make clear in the appointment documentation that, whilst being a director of a company, the NED is not an employee.
Types of Shares for Non-Executive Directors
It is common (but not required) for a private limited company to issue shares to a NED on appointment or grant them the right to acquire shares at a future date pursuant to an option agreement. The type of shares or share options issued will be subject to certain tax considerations relating to both the company and the NED.
The type of share that is issued will also vary depending on the NED’s role and objectives, which may lead to different classes of share being issued by the company, for example:
- Growth Shares – these are shares of a specific class designed to allow the holder to benefit only from the growth of the company over and above the value of the company after the date of issue of the shares. For example, if the company is currently valued at £2m, the shares would only entitle the holders of them to participate in any value over and above £2m. This allows the existing shareholders of the company to lock in this value for themselves.
- Hurdle Shares – these are similar to growth shares, but only allow the holders to benefit from the growth of the company over and above a specific amount in addition to the current value of the company. For example, if the company has a current value of £2m, a class of shares which only allows the holders to participate in growth over and above £3m would be classed as hurdle shares. These allow the shareholder to retain the existing value but also to motivate the NED to grow the company above a target level.
There are benefits to the NED in each of growth and hurdle shares as the amount payable for them by the NED will be nominal as at the date of issue. This is because they will have no or little value as they are excluded from participating in the current value of the company.
- Ordinary Shares – the shares issued may be the same class of shares as the existing shareholders which means that the NED will simply share in any growth they would receive on a future exit over and above what they paid for the shares. This is a far simpler structure which allows the NED to share in the current value of the company, but would normally involve the NED paying market value for such shares at the time of issue.
The timing of the issue of the shares will also be the subject of discussion, i.e. are some of the shares issued on appointment and more at a later date or are all of the shares to be subject to an option which is only exercisable upon the satisfaction of certain agreed conditions. Again, this will be subject to tax considerations and the role and objectives of the NED.