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D&O insurance  |  Directors' responsibilities

What are the potential liabilities for a NED?


What is a NED?

A non-executive director (NED) is an objective, independent, and unbiased individual who provides a creative, strategic and unique contribution in the boardroom. NEDs are expected to concentrate on matters of the board and stay clear of making any executive decisions. In doing so, they provide a keen insight as well as an independent perspective of the company, apart from its daily operations. They are responsible, however, in much the same way as the executive directors of the company.

Executive vs. non-executive director

Non-executive directors are expected to show a level of fiduciary duty and care to the organisation just like executive directors are required to. Non-executives also need to make sure they constructively challenge and analyse management’s performance when it comes to the board meeting. Non-executive directors need to make certain that they’re independent from the company’s general management along with any of its associated parties. It’s also crucial that NEDs have the exact same access to sensitive information in the company like all other directors as well.

Potential liabilities of non-executive directors

Since directors are liable for the primary management of the company, it’s only logical that they’re liable for their personal business actions as well. A non-executive will be held responsible just the same as any other director if a loss should occur due to breaches by the directors of their assigned duties. Therefore it’s crucial that they illustrate they’ve taken the appropriate steps, as well as every precaution necessary, in order to exercise care, diligence, and skill concerning the execution of their various responsibilities and roles.

Personal responsibilities of non-executive directors

Directors may bring about personal liability, both criminal and civil regarding their omissions or acts in their manner of directing the organisation. Any individual can potentially be fined according to summary conviction and/or be sent to prison for as long as six months. Also, a director may be held negligent where he or she may be personally liable for a certain transaction or business contract concerning an additional third party.

Diminishing risk as a non-executive director

In order to limit potential liabilities for NEDs, they must constructively challenge and constantly ask various questions of the company’s executives. Furthermore, they need to ensure that all requested information is properly delivered in a timely manner and also seek professional advice independently at the expense of the company if they deem it necessary to release their key responsibilities.

Written by Elise Perraud

For more resources, we encourage you to sign up to the NED Accelerator Programme, which provides a comprehensive overview of the duties of non-executive directors, the potential liabilities associated with the role and the key elements of D&O insurance. The course has been designed by experienced NEDs and each section is led by subject matter experts.

Want to know more? If you are an experienced board member, join NEDonBoard, the Institute of Board Members.