What is a Non-executive Director’s Letter of Appointment?

A Non-executive Director’s Letter of Appointment is a letter to appoint a non-executive director of a company who is not involved in the day-to-day management of the company.


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What is a Non-executive director’s letter of appointment?

As the name suggests, a Non-executive Director’s Letter of Appointment is a letter to appoint a non-executive director of a company who is not involved in the day-to-day management of the company.  Also, a non-executive director is a board member but not part of the executive team.

Additionally, similar to a Director’s Service Agreement, a Non-executive Director’s Letter of Appointment sets out the duties of the director following their appointment to the post.

Contrary to a Director’s Service Agreement, the engagement under a Non-executive Director’s Letter of Appointment is not an employment relationship.

What is the difference between an executive and non-executive director?

Essentially, an Executive director is selected by a board of members for day-to-day business operation and management. Conversely, a non-executive director won’t look after daily business operations or executive tasks. A non-executive director is not a company employee. However, both roles have the same legal duties and responsibilities for the growth of an organization. In essence, the main role of appointing a non-executive director is to provide creative feedback by observing the external business environment without prejudice.

What is in a Non-executive Directors appointment letter?

As may be apparent from the title, a non-executive director’s appointment letter is written to appoint a new non-executive director to a company. Chiefly, there are some important things to put in the appointment letter. These include:

Commitment

Every non-executive director should agree to the norms of office.

Duties & Responsibilities

All non-executive directors should comply with the duties and responsibilities of that organization drafted by the Board of Directors.

Conflict of Interest

After being appointed as a non-executive director in a company, he/she should not engage in any other similar position in another organization that may lead to conflict of interest in near future. They should not improperly use their position for personal benefits.

Remuneration

The newly appointed non-executive director gets certain remuneration depending upon their knowledge and experience that the Board of Directors decides upon.

Confidentiality

As a non-executive director of any company, one has the access to companies documents & records including financial statements. So, it’s crucial to maintain confidentiality for the success of any organization.

What are the responsibilities of a non-executive director?

Essentially, non-executive directors are responsible for organizational policymaking activities, evaluating performances of management teams and building professional relations and contacts with the external business environment. They also act as an independent advisor who works entirely for the betterment of the organization. Non-executive directors also help the executive directors by providing them various business insights and also make sure that executive directors are able to meet their objectives.

How are Non-Executive Directors Appointed?

The entire process of appoint a NED is governed by a company’s article of association. In some companies, the board is able to appoint a Non-Executive Director. However, they do need the approval of the shareholders at their next annual general meeting (AGM).

Following this, a letter confirming the initial term of the NED should be drafted.

Conclusion

To sum up, drafting a simple contract outlining the terms of the appointment of a non-executive director easily ensures good corporate governance.  

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