The Role of the Non-Executive Director in a Family Business

An independent non-executive director can transform a family business. Specifically, the right non-executive director brings outside perspective, professional discipline and independent judgment to a board that would otherwise be made up entirely of family members. As a result, the non-executive director is often the single most effective intervention a family business can make to professionalise its governance and reduce the risk of disputes. Importantly, the non-executive director is not a substitute for the family. By contrast, they work alongside the family, providing the independent voice that families cannot provide for themselves. Crucially, the value of a good non-executive director is hard to overstate. As a result, families that have appointed the right non-executive director typically regard the appointment as one of the best decisions they have made.

This page explains what a non-executive director does in a family business, when to appoint one, how to choose the right person, and what to expect from the role. Specifically, it covers the difference between non-executive directors and chairs, the particular value they add in family businesses, and the legal duties they carry.

What a non-executive director is

In short, a non-executive director is a member of the board of directors who does not have an executive or operational role in the company. Specifically, they attend board meetings, contribute to strategic decisions, and bring outside perspective to the company’s affairs. Importantly, they do not run the business day to day. By contrast, that is the role of the executive directors and the management team. As a result, the non-executive director provides oversight, challenge and judgment, rather than execution.

Crucially, a non-executive director in a family business is usually independent. Specifically, they are not a family member, not a long-term adviser to the family, and not financially dependent on the family. As a result, they can challenge the family without conflict of interest. Importantly, this independence is what gives the role its value. For the wider governance context, see preventing family business disputes.

Why family businesses particularly benefit

Importantly, family businesses benefit from non-executive directors more than ordinary companies do. Specifically, there are several reasons.

First, family businesses tend to make decisions through family dynamics rather than purely commercial analysis. As a result, the non-executive director provides the commercial discipline that family decision-making can lack. Second, family businesses often have weak or non-existent challenge to the executive family members. Specifically, no one wants to challenge the founder or the managing director who is also their parent or sibling. By contrast, the non-executive director can ask the difficult question that no one inside the family can. Third, family businesses often blur the line between business decisions and family decisions. Crucially, the non-executive director can help the family see when an issue is being taken to the wrong forum.

Fourth, family businesses often suffer from the founder problem. Importantly, an experienced non-executive chair is one of the most effective ways to manage the founder’s transition to retirement. Specifically, the chair can hold the founder to account on succession in a way that the founder’s own children cannot. For more on this, see the founder problem.

Finally, family businesses often face the question of how to develop the next generation. Crucially, a non-executive director can mentor the next generation, provide outside perspective on their development, and give them an independent figure they can speak to who is not a family member or a long-term adviser. For more on this, see the next generation.

The difference between a non-executive director and a non-executive chair

Importantly, there is a difference between a non-executive director and a non-executive chair. Specifically, the non-executive chair leads the board, sets the agenda, and is the focal point for the relationship between the board and the executive team. By contrast, a non-executive director is a member of the board without leadership responsibilities.

In family businesses, the chair role is particularly important. Specifically, the chair is often the person who has to manage the relationship between the founder and the next generation. As a result, the chair needs particular qualities of authority, judgment and tact. Importantly, in many family businesses, the chair is the first and most senior non-executive appointment. By contrast, additional non-executive directors are typically appointed afterwards to broaden the skills on the board. Crucially, in family businesses where the founder retains a major role, the chair role may be the most important governance appointment the family ever makes.

What a non-executive director actually does

Crucially, the role of a non-executive director in a family business typically includes the following.

Strategic oversight

First, the non-executive director contributes to strategic decisions. Specifically, they help the board think about where the business is going, what risks it faces, and what opportunities it should pursue. Importantly, the non-executive director brings outside experience to these conversations. As a result, the board has the benefit of perspectives that the family members might not have access to.

Challenge to the executive

Second, the non-executive director provides challenge to the executive directors. Specifically, they ask difficult questions, test the assumptions behind major decisions, and require the executive to justify what they are proposing. Importantly, this is not adversarial. By contrast, it is the kind of professional challenge that improves decision-making. Crucially, this is often the role that family directors find hardest to play with each other.

Governance oversight

Third, the non-executive director provides oversight of governance. Specifically, they make sure the company’s processes are working properly, that board meetings are well-run, that the documentation is in order, and that the company is meeting its statutory obligations. Importantly, in many family businesses, this is the kind of discipline that has been allowed to drift. As a result, the non-executive director’s arrival usually produces immediate improvements.

Mentoring and development

Fourth, the non-executive director can mentor family members. Specifically, they can mentor the next generation as they develop, give the founder a sounding board for difficult decisions, and provide a confidential perspective to family members who would not otherwise have one. Importantly, this is one of the most under-appreciated parts of the role. By contrast, in families that have used it well, the mentoring dimension is sometimes the most valuable.

Mediation of family disagreements

Fifth, the non-executive director can help mediate family disagreements before they become disputes. Specifically, they can hold informal conversations, provide a neutral perspective, and help family members find common ground. Importantly, the non-executive director is not a substitute for a professional mediator in a serious dispute. By contrast, they can resolve many of the smaller disagreements before they need a formal mediation. For more on the wider mediation context, see why mediation is usually the right starting point.

Relationship with key stakeholders

Sixth, the non-executive director provides the company with credibility and relationships outside the family. Specifically, they can introduce the company to banks, investors, customers and suppliers. As a result, the company benefits from the non-executive director’s network. Importantly, this is one of the most measurable benefits of the role.

Succession planning

Finally, the non-executive director plays a central role in succession planning. Specifically, they can hold the founder to account on succession, help develop the next generation, and ensure that succession is properly planned rather than improvised. Crucially, this is often the single most valuable thing a non-executive director does in a family business. For more on this, see succession planning for the family business.

The legal duties of a non-executive director

Importantly, the non-executive director carries the same legal duties as any other director under the Companies Act 2006. Specifically, the duties include the duty to act within powers, the duty to promote the success of the company, the duty to exercise independent judgment, the duty of reasonable care, skill and diligence, the duty to avoid conflicts of interest, the duty not to accept benefits from third parties, and the duty to declare an interest in proposed transactions.

Crucially, these duties apply equally to executive and non-executive directors. As a result, the non-executive director cannot simply be a passive presence on the board. By contrast, they are legally required to engage actively with the affairs of the company. Importantly, this is why the non-executive director should commit to a meaningful time investment in the role. Specifically, a typical non-executive director in a family business commits between 15 and 40 days a year, depending on the complexity of the business. For more on the underlying legal framework, see the legal framework for family business disputes.

When to appoint a non-executive director

Crucially, the right time to appoint a non-executive director varies between families. Specifically, the most common triggers are these.

• First, the founder is approaching retirement. Importantly, a non-executive chair appointed several years before the founder’s retirement can manage the transition far more effectively than any family member.
• Second, the next generation is taking over. Specifically, the non-executive director can provide the development and challenge the next generation needs to grow into the role.
• Third, the family is bringing in non-family executives. Importantly, the non-executive director provides a layer of governance between the family and the non-family executive team.
• Fourth, the family is contemplating a major transaction. For example, a sale, a refinancing, or an acquisition. Crucially, the non-executive director brings transaction experience the family may not have.
• Fifth, the family has experienced a near-miss with a dispute. Specifically, the appointment of a non-executive chair is often part of the response to a dispute that nearly happened.
• Sixth, the family has resolved a dispute and is rebuilding governance. Importantly, the appointment of a non-executive chair is often part of the settlement of a family business dispute.
• Finally, the business is growing significantly and needs more sophisticated governance to match.

Importantly, the best families appoint non-executive directors before they are strictly needed. By contrast, families that wait until they need a non-executive director typically appoint them in a hurry and without enough thought about the choice. As a result, the appointment is often less successful than it could have been.

How to choose the right non-executive director

Importantly, the choice of non-executive director matters more than the decision to appoint one. Specifically, the right non-executive director can transform the family business. By contrast, the wrong non-executive director can make things worse. Crucially, the qualities to look for include the following.

Experience of family businesses

First, the non-executive director should have experience of family businesses. Specifically, they should understand the particular dynamics that distinguish family businesses from other companies. Importantly, this is not the same as experience of any company. By contrast, family business experience is a specialist field. As a result, the non-executive director who has only worked in publicly-listed companies may not understand what a family business needs.

Independence

Second, the non-executive director should be genuinely independent. Specifically, they should not be a family member, a long-term adviser to the family, or anyone with a financial or personal interest in the family beyond the non-executive role. Importantly, independence is what gives the role its value. By contrast, a non-executive director who is too close to the family loses the perspective that makes them useful.

Authority and gravitas

Third, the non-executive director should have the authority to challenge the family. Specifically, this means seniority, experience and personal credibility. Importantly, in family businesses where the founder is dominant, the non-executive director needs to be able to hold the founder to account. As a result, a more junior or less experienced non-executive director often fails to provide the value the family needs.

Relevant skills

Fourth, the non-executive director should bring skills the family does not already have. Specifically, this might include financial expertise, sector experience, international experience, or transaction experience. Importantly, the non-executive director’s skills should complement the family’s, not duplicate them. As a result, the choice of non-executive director should be made with the family’s existing skills in mind.

The personality fit

Fifth, the non-executive director should fit the family. Specifically, this means having the personality to work constructively with the family members, the patience to deal with family dynamics, and the judgment to know when to push and when to wait. Importantly, the right personality fit is essential. By contrast, a non-executive director who is technically excellent but does not fit the family typically fails. As a result, the choice should be made on personality as well as on credentials.

The recruitment process

Crucially, the recruitment of a non-executive director should be conducted properly. Specifically, the most effective approach typically includes the following.

First, the family agrees what it is looking for. Importantly, this means writing a job specification that sets out the skills, experience and personal qualities the family wants. Second, the family creates a long-list of candidates. Specifically, this might be through personal networks, a non-executive director recruitment firm, or organisations that maintain non-executive director networks. Third, the family interviews the candidates. Importantly, the interviews should be conducted by several family members, not just the founder. As a result, the chosen candidate has support across the family. Fourth, the family takes up references. Specifically, references from previous chairs and chief executives of family businesses are particularly valuable. Fifth, the family negotiates the terms of the appointment. Importantly, this includes the time commitment, the fee, and the duration of the appointment.

Importantly, the recruitment process typically takes three to six months. By contrast, families that rush the process often end up with a non-executive director who does not fit. As a result, the time invested in proper recruitment pays back many times over.

What a non-executive director should be paid

By contrast, the question of remuneration for non-executive directors in family businesses is sometimes underestimated. Specifically, family businesses sometimes try to pay non-executive directors significantly less than market rate, on the assumption that the value of the role is in the experience rather than the income. Importantly, this is usually a false economy.

In practice, market-rate remuneration for non-executive directors in family businesses depends on the size of the business and the time commitment expected. Specifically, the range for an experienced non-executive chair is typically £30,000 to £100,000 per year. The range for a non-executive director is typically £15,000 to £50,000 per year. Importantly, paying significantly below market rate signals that the role is not taken seriously. As a result, the best candidates will not accept the role.

How long should a non-executive director serve?

Importantly, the question of how long a non-executive director should serve depends on the role. Specifically, in publicly-listed companies, the typical term is three years renewable for up to nine years in total. By contrast, in family businesses, the term is often longer.

In practice, the most common arrangements are these. First, a chair role is typically held for five to ten years. Specifically, this provides enough continuity to manage major transitions like the founder’s retirement. Second, a non-executive director role is typically held for three to six years. Importantly, this gives the non-executive director enough time to make a real contribution while keeping the board fresh. Third, both roles should be subject to regular review. Crucially, the appointment should be ended at the right time rather than allowed to drift on after the value has diminished.

The risks of getting it wrong

By contrast, the risks of appointing the wrong non-executive director are significant. Specifically, the most common failures include the following.

• First, the non-executive director who is too passive. Importantly, this often happens when the family has appointed a friend rather than an independent professional. As a result, the role adds little value and the discipline of having a non-executive director is undermined.
• Second, the non-executive director who is too aggressive. Specifically, they fail to read the family dynamics and push too hard, too quickly. As a result, the family loses confidence in them.
• Third, the non-executive director who lacks family business experience. Importantly, they apply the standards of a publicly-listed company to a family business and create unnecessary friction.
• Fourth, the non-executive director who becomes too close to one branch of the family. Crucially, this destroys their independence and often produces a dispute itself.
• Fifth, the non-executive director who fails to make the time. Specifically, they take the fee but do not actually engage with the business. As a result, the role becomes nominal.
• Finally, the non-executive director who does not understand their legal duties. Importantly, this can expose them and the company to risk.

Crucially, all of these failures are preventable with a proper recruitment process and clear expectations on both sides.

The non-executive director in the dispute context

Importantly, where a family business is in dispute or has recently resolved a dispute, the non-executive director plays a particular role. Specifically, they often become the focal point for the rebuilding of the governance. Importantly, the non-executive director appointed as part of a settlement should be agreed by all sides. By contrast, a non-executive director chosen by one branch of the family will not be trusted by the other.

In practice, the non-executive director appointed after a dispute typically does several things. First, they oversee the implementation of the settlement, including the introduction of new shareholders’ agreement provisions, dividend policies and remuneration policies. Second, they hold the board to account for the new governance disciplines. Third, they provide an independent voice that the family knows it can rely on. Fourth, they help the family rebuild trust by demonstrating professional discipline. Crucially, the right non-executive director can transform a post-dispute family business into a much better-governed one. For more on the settlement context, see settling a family business dispute.

The senior independent director

By contrast, in larger family businesses, the concept of a senior independent director becomes relevant. Specifically, this is the senior non-executive director other than the chair. Importantly, the senior independent director provides a route for shareholders to raise concerns without going through the chair. As a result, this is particularly useful in family businesses where some shareholders may have concerns about the chair’s relationship with particular family members.

In practice, the senior independent director is typically appointed in family businesses with multiple branches of the family, several non-executive directors, and complex ownership structures. Crucially, smaller family businesses usually do not need this additional role.

The audit and remuneration committees

Importantly, larger family businesses often establish board committees, with non-executive directors playing the leading role. Specifically, the most common are the audit committee and the remuneration committee.

The audit committee oversees the company’s financial reporting, internal controls and the relationship with the external auditors. Crucially, the audit committee should be chaired by a non-executive director with relevant financial experience. Importantly, the existence of a properly functioning audit committee provides significant protection against the kind of financial concerns that often drive family business disputes.

The remuneration committee oversees the remuneration of the executive directors, including any working family members. Specifically, the committee should ensure that family member remuneration is at market rate for the roles performed. Importantly, the existence of a properly functioning remuneration committee addresses one of the most common causes of family business dispute. For more on this, see the have and have-not pattern.

Where to find non-executive directors

Importantly, finding the right non-executive director can be challenging. Specifically, family businesses sometimes assume that good non-executive directors are only available to listed companies. By contrast, this is not the case. As a result, the main sources to consider include the following.

First, personal networks. Specifically, recommendations from professional advisers, existing non-executive directors and other family business owners. Importantly, this is often the most effective source. Second, specialist non-executive director recruitment firms. Crucially, the firms that specialise in family business work understand the particular dynamics. Third, organisations that maintain non-executive director networks. For example, Family Business United and the Institute of Directors both maintain networks of non-executive directors with family business experience. Fourth, retired senior executives from related industries. Specifically, retired managing directors and chief executives often make excellent non-executive directors for family businesses. Importantly, they bring the relevant experience and have the time to commit to the role.

Frequently asked questions

What does a non-executive director do in a family business?

In short, a non-executive director in a family business provides strategic oversight, challenges the executive, oversees governance, mentors family members, helps mediate family disagreements, brings outside relationships, and supports succession planning. Specifically, they sit on the board but do not have day-to-day operational responsibility. Importantly, their value comes from their independence and outside perspective.

When should a family business appoint a non-executive director?

Generally, the best time is before the family strictly needs one. Specifically, the most common triggers are the founder approaching retirement, the next generation taking over, the appointment of non-family executives, a major transaction, a near-miss with a dispute, or the resolution of a dispute. Importantly, families that appoint non-executive directors proactively usually fare much better than those that appoint them under pressure.

What should a family business pay a non-executive director?

Market-rate remuneration depends on the size of the business and the time commitment. Specifically, the range for an experienced non-executive chair is typically between £30,000 and £100,000 per year. The range for a non-executive director is typically between £15,000 and £50,000 per year. Importantly, paying significantly below market rate signals that the role is not taken seriously and the best candidates will not accept it.

How long should a non-executive director serve?

Typically, a non-executive chair serves for five to ten years, and a non-executive director serves for three to six years. Importantly, both roles should be subject to regular review. Crucially, the appointment should be ended at the right time rather than allowed to drift on after the value has diminished.

Can a non-executive director help prevent family business disputes?

Yes, significantly. Specifically, a good non-executive director provides independent challenge, oversees governance, helps mediate small disagreements before they escalate, and supports succession planning. Importantly, the non-executive director is often the single most effective intervention a family business can make to reduce dispute risk. For the wider context, see preventing family business disputes.

Further reading on this site

• Family Business Disputes (main page)
• Preventing Family Business Disputes
• The Founder Problem
• The Next Generation
• Succession Planning
• Shareholders’ Agreements
• Family Constitutions and Family Forums
• The Have and Have-Not Pattern
• Settling a Family Business Dispute
• The Legal Framework for Family Business Disputes
• Why Mediation Is Usually the Right Starting Point
• Direct Access Barrister

Get advice on your situation

The appointment of the right non-executive director can transform a family business. Specifically, the right person provides the discipline, perspective and challenge that family members cannot provide for each other. As a result, early specialist advice on governance, including the role of non-executive directors, is one of the most valuable investments you can make. I act as a direct access barrister, commercial mediator and mediation advocate in family business disputes throughout England and Wales.

Call 020 4538 0246, use the contact form, or book a call directly. In addition, my book Winning in Family Business Disputes (forthcoming) covers the role of the non-executive director in detail, alongside my published works on shareholder disputes and commercial mediation. Organisations like Family Business United also publish useful guidance for family business owners.

Important disclaimer: This page is provided for general information purposes only and does not constitute legal advice. The content may not be legally accurate for your situation or at all. You must not rely on anything on this page in respect of your legal rights. Before taking or refraining from taking any legal action, you should seek advice from a qualified lawyer. I disclaim any and all liability for any loss, damage or expense howsoever caused by reliance on the contents of this page. If you would like advice on your specific situation, contact me here.