Non-Executive Director: Definition, Roles and Responsibilities

Author: Zeinab Farhat & Gianluca Pecora, Progressive Legal

If you’re involved in a corporation as a non-executive director, or if you’re considering appointing a non-executive director as part of your corporation, it is important to understand the definitions and distinctions to be drawn between different types of directors.

This article will consider: what is a non-executive director, legal requirements, breaches of director duties and key takeaways.

What is a non-executive director?

Executive directors are members of a company’s board of directors who are actively involved in directly managing the company. 

On the other hand, non-executive directors are not involved in the day to day management of a company and are independent from corporate management. However, they still sit on the board of directors. Non-executive directors also are not technically employed by the organisation. This level of independence contributes to the important role that non-executive directors have in leading organisations.  

Non-executive director vs. independent director

What is the responsibility of a non-executive director?

Non-executive director responsibilities vary from organisation to organisation, but common threads appear.  

Common non-executive director responsibilities include: 

• Complying with the legal requirements for directors under the Corporations Act 2001 (Cth) (“the Act”). 
• Ensuring effective governance of the organisation. 
• Planning the strategic direction of the organisation. 
• Recruiting the CEO. 
• Reviewing, approving and monitoring the annual budget. 
• Contributing to policy development. 
• Monitoring the organisation’s risks. 

Non-executive directors are generally not expected to have the same operational knowledge as their executive director counterparts. However, as indicated below, the statutory and common law duties for non-executive directors are the same as executive directors.

What are the special roles of a non-executive director?

S & P/ ASX 300 Index Companies

Companies listed in the S & P/ ASX 300 Index must adhere to Listing Rule 12.7 which requires audit committees to consist of only non-executive directors with the majority also being independent non-executive directors.

Companies regulated by the Australian Prudential Regulation Authority (APRA)

APRA-regulated organisations include banks, credit unions and insurance companies. The Prudential Standard CPS 510 on “Governance” says that for board meetings to be valid, there must be more non-executive than executive directors present and eligible to vote.

What are the benefits of a non-executive director?

The ASX Listing Rules and the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations highlights that non-executive directors can bring a level of independence to a board of directors that investors see as a sign of good governance. 

This same independence can also give non-executive directors a fresh unemotional perspective to decision making.  

Since non-executive directors are not employees, they are in a special position that allows them to challenge, question and monitor the performance of the organisation’s CEO and other senior management.  

In addition, their extensive experience could also allow them to provide support and mentorship to the CEO, in addition to providing deeper insights about how to deal with issues or improve the organisation. 

What are the legal requirements surrounding a non-executive director?

Appointment and Removal

The Corporations Act outlines the process by which individuals are appointed to directorship and/or removed from this position. For example, a general meeting has to take place and a 50% majority vote is needed in order to appoint someone as a director under the Act.   

Director ID and DIN

Non-executive directors require a director Identity Document (ID) to verify their identity with the Australian Business Registry Services.  

Since 2021, directors are also required to have a Director Identification Number (DIN) which allows the Australian government to track a director’s identity permanently – across all directorships they will ever hold. This new strict type of identification has been implemented to combat illegal phoenixing of organisations.  

Duties of a Non-Executive Director

Breaching legal requirements and directorial duties may attract civil penalties for non-executive directors and may in extreme circumstances attract criminal prosecution.  

The duties of a non-executive director are the same as those attached to executive directorship. The Act provides an extensive list of directors duties.  

These include duties to: 

• care and diligence (the Act, s 180); 

• act in good faith and in the interest of the company (the Act, s 181); 
• not to improperly use their position as director (the Act, s 182); 
• not to improperly use insider information (the Act, s 183); 
• avoid any conflict of interest and to disclose material personal interests to the company (the Act, s 191); 
• maintain proper accounts and records (the Act, s 286); 
• prevent insolvent trading (the Act, s 588G); 
• act honestly; and 
• not to abuse a corporate opportunity.

What are the defences to breach of duty?

Business Judgment Rule

Section 180 of the Act relates to a director’s obligation to exercise their powers and discharge their duties with care and diligence. Section 180(2) further provides provision for the business judgment rule.  

For many years, it was viewed that the business judgment rule was in favour of directors because it made it easy to satisfy the requisite duty of care and diligence. 

This was found not to be the case by Austin J in Australian Securities and Investments Commission v Rich [2009] NSWSC 1229 at [7269]. Here, it was held that the onus of establishing the criteria outlined in s 180(2) of the Act rests upon the defendant.

In other words, it is now generally accepted that the business judgement rule puts the onus on the director to prove that their decision making was within the business judgement rule – thus operating as a defence.

The factors the Court considers when assessing whether the business judgement rule applies are:

• whether the judgement was made in good faith for a proper purpose (s 180(2)(a)); 
• whether the director had a material personal interest in the subject matter of the judgment (s 180(2)(b)); 
• whether the director informed themselves about the subject matter of the judgment, to the extent that they reasonably believed to be appropriate (s 180(2)(c)); and 

whether the director rationally believed that the judgement was in the best interests of the organisation (s 180(d)).

Reasonable Reliance Defence

If a director breaches any of their duties, they may argue the reasonable reliance defence. To prove the defence, it must be proven that the director relied on information, reports or statements provided by professionals and believed that the information was accurate and reliable when they breached their duty. Common examples of professionals that may give advice which instigates a director to breach their duties include accountants, consultants and lawyers.

Statutory Delegated Power

Upon breach of a duty, directors can argue that another person was responsible through statutory delegated power. This defence relies on another person being delegated power by the non-executive director and then for that person to have been responsible for making the breaching decision or judgement.

In asserting this defence, the director must prove on reasonable grounds, that they genuinely believed, in good faith, that the person was competent and reliable enough to perform the delegated responsibilities.

What are the consequences if a non-executive director breaches their duties?

Personal Liability for Non-Executive Directors

Just like other directors, non-executive directors may be found personally liable for payment of civil penalties, company debts, company tax obligations or compensating third parties.

Situations where personal liability may arise are:

1. if the non-executive director has committed fraud;
2. if the company was trading while insolvent;
3. if there are unpaid tax obligations; or
4. if personal guarantees were given by the non-executive director when getting a loan for the company.

There are many other instances that create personal liability, which are prescribed under legislation on occupational health and safety, customs and excise, environmental protection, discrimination, tax and superannuation and trade practices (Australian Consumer Law).

Criminal Liability

A non-executive director may be held criminally liable in instances of gross violation of a duty, commonly involving dishonesty or recklessness in making false or misleading disclosures.

The maximum imprisonment a non-executive director faces for breach of their duties is 15 years.

Disqualification

Upon breaching a civil penalty provision, the Court may disqualify a non-executive director from managing corporations for a reasonable period subject to section 206C of the Act.

In some cases, the Australian Securities and Investments Commission (ASIC) also has power to disqualify non-executive directors for up to 5 years.

Tips for non-executive directors

The following are tips for non-executive directors to reduce legal risk:

• Be aware that your legal duties are the same as for an executive director. It is vital to know what these duties are as prescribed under the Act. 
• Contribute to a compliance culture with your organisation. 
• Be pedantic about maintaining a high standard for board papers, including that they be sent at a sufficient time before the commencement of board meetings. 
• Identify any potential conflicts of interest. 
• Treat your job as non-executive director seriously, despite not having a role in day-to-day management. 
• If you are working remotely, ensure that you have access to all relevant documents during a board meeting. 
• Only delegate power when you have full faith in the competence of that person. 
• Do not engage in illegal phoenix activity. 
• Always bring identified problems to the board. 
• Carefully read financial statements and when you do not understand them completely, seek advice from an accountant or other professionals. 
• Ensure that your organisation has a whistleblowing policy in place that encourages, instead of punishes, a culture of revealing bad legal compliance or other elements of bad corporate governance. 
• Get legal advice on any problems identified within the organisation or impending decision that may result in a breach of your duties.

Please note that these tips are for general information and education purposes only, and do not constitute legal advice. For legal advice, give us a call or fill out the contact form on this page.

Key takeaways

Non-executive directors are members of the board of directors of a company. The key distinction to be drawn with executive directors, is that they are not involved in the day-to-day management of organisations. They may also be independent from the organisation.

Despite this, non-executive directors are subject to the same legal requirements and duties for directors under the Act. Where director duties are breached, this may result in the possibility of personal liability.

At Progressive Legal, we are conscious of the immense legal responsibility felt by directors – especially non-executive directors who may feel less in control of compliance within an organisation. If you need help with any legal issues facing your organisation, contact our corporate lawyers on 1800 820 083 or request our advice below.

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