Guest blog from Lawyer and NED, Caroline Dutot at Ardent Chambers.
Dynamic Boards recently heard from Jo Haigh on the legal risks of being a Non-Executive Director. You can watch the full video here:
Haigh highlighted that many Non-Exec Directors make the mistake of not realising they have personal liabilities as a NED and shared ‘fireguards’ Non-Execs can put in place to protect themselves. Haigh’s top fireguard was “getting a really good service contract”.
Here is a 6 point checklist to support NEDs when reviewing their own service contract:
#1 Role and Responsibilities
- Scope of Work: Determine the duties, obligations and expectations from the role.
- Time Commitment: Confirm the expected time commitment, including the number of board meetings per year, committee meetings and any additional duties.
- Length of Appointment: Is the appointment for a set period? NED contracts are often drafted to run annually.
- Contract of Services: Usually NED roles are contracts for services, not contracts of employment (as would be the case in an executive role).
#2 Remuneration and Expenses
- Compensation: The agreement should specify the remuneration structure (e.g. fees or equity) and additional allowances.
- Expense Reimbursement: Confirm reimbursement policies for any reasonable expenses incurred in the course of fulfilling the role (e.g., travel, lodging, professional development).
#3 Liability
- Directors’ and Officers’ (D&O) Insurance: Ensure that the company provides D&O insurance to cover the director’s legal costs should claims be made that relate to their role. Ensure that as a NED you have actually read the D&O cover and understand what is covered and what is not! Make sure this includes run-off cover and applies to you after your tenure ends.
- Limitation of Liability: There should be clear language defining the extent to which the director is liable for actions, usually in cases of fraud or breach of fiduciary duties.
- External Advice: The agreement should clarify the NED’s right to seek external legal, financial or other professional advice at the company’s expense if necessary.
#4 Confidentiality
- Confidential Information: A confidentiality clause should be included, specifying the director’s obligation to keep board information confidential, even after their term ends.
- Data Protection: Any particular requirements or references to other policies that may place obligations on NEDs regarding the handling of personal or sensitive information.
#5 Conflict of Interest
- Conflict Management: The agreement should require the NED to disclose any conflicts of interest and outline how such conflicts will be managed.
- Outside Interests: Define restrictions, if any, on the NED engaging in business activities or serving on other boards that could conflict with the interests of the relevant appointment.
#6 Termination Provisions
- Grounds for Termination: The agreement should outline the grounds under which the NED’s contract of services may be brought to an end, including failure to meet performance expectations or breach of the agreement.
- Resignation: The process and notice period for voluntary resignation should be included.
- Return of Property & Ongoing Access to Information: At the end of a role a NED is likely to be required to return all information they hold relating to that role. It is therefore important that any contract of services gives the NED a route to gain access to information relating to their time on a board, after the role has finished. This is particularly important where for security reasons information may be held on a central platform or portal, with such access revoked at the end of a NED’s tenure. Possible ways to resolve this are to agree that such information can be sought by requesting it in writing from the Chair or requesting it through the company secretary.
By reviewing the terms of service contracts carefully before they accept a role, NEDs can ensure they have the best protection possible in performing their duties.
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