This is a comprehensive guide that will help you understand the differences between executive and non-executive directors in a company.
A company director is a person who is appointed to manage a company’s business and affairs. Those appointed as directors are accountable for the company’s actions and can be held liable accordingly. Company directors are responsible for the management of operations, with the running and taking of decisions on operations of the company together with investments.
Introduction to Executive and Non-Executive Directors
In general terms, an Executive Director is a full-time employee responsible for the company’s day-to-day processes. This director generally has responsibility for a single department. In contrast, non-executive directors are the non-full-time directors of an organisation. However, the Non-Executive Director participates just as much in policymaking. The non-executive director is generally a buffer to the executive director because it’s his job to challenge and monitor the executive director. Lastly, both types of directors are equal in terms of liability and are appointed by the board of directors. In this comprehensive guide, you will understand the differences between executive and non-executive directors in a company.
Who Is an Executive Director?
An executive director is more or less the full-time working director of an organisation. Also called internal directors, they generally have a specific role in departments like marketing or finance. They are responsible for allocating resources to achieve the department’s goals and may be involved in hiring new employees and overseeing budgeting.
An executive director has overall responsibility for the day-to-day operations of an organisation. They are also responsible for ensuring that everyone in their department works towards corporate decisions, the same goals and objectives. This can be difficult when there are multiple departments within an organisation, but it’s vital for the whole company’s success.
Executive directors must have excellent organisational skills, prioritise tasks according to their importance, and handle multiple projects without getting overwhelmed. They need to be able to think on their feet and make decisions quickly when needed.
The Requirements for Being an Executive Director
The requirements for being an Executive Director of a company are as follows:
- A person must first be a Director of the company in some capacity to be appointed the Executive Director
- A person has to be a full-time Director of the company in question to be appointed the Executive Director
- A person who is both a Director and a full-time employee of the company will be indirectly considered the Executive Director (due to the Companies Act) whether designated by the company as such or not.
Key Responsibilities of Executive Directors
Executive directors are responsible for several aspects involved in an organisation inclusive but not limited to;
- Leadership: An executive director should be a good leader. He or she should listen well, treat people equally and build creativity. They should network with donors and solicit their support while making others feel valued
- Financial management: Executive directors should manage budgets and finances and maintain a company that is financially viable
- Organisational development: Executive directors should develop general goals, review performance measures, and improve organisational progress
- Policy and procedure establishment: The executive directors should formulate policies and procedures for the organisation
- Development of organisational culture: Executive directors should develop the organisational culture
- Community relations: Executive directors should establish relationships with external stakeholders
- Market planning: They should devise a market plan for the business
- Budget: They should formulate and maintain an annual budget
- Cooperation: The executive directors should collaborate with the employees at every level
- Constructive criticism: The executive directors should give constructive criticism to the managers
- Reporting: The executive directors should come up with a report and presentation to be presented to the board of directors
- Coordination investment: The executive directors should coordinate any investment for the company in the future.
Relationship with Company Operations
Executive directors form a part of the management team that runs a firm. These individuals are actively involved in day-to-day activities and are responsible for bringing the board’s vision into physical operations. They are supposed to:
- Perform Strategy Implementation: Executives are responsible for the creation and introduction of strategies that will be in line with the long-term goals of the company and well within its financial capabilities
- Managing Operations: The operations are run efficiently and productively, along with managing the business activities of the company, such as development plans
- Decision Making: Major decisions of the corporate future lie in the hands of executive directors
- Reporting Structure: They report to CEO, senior executives, or senior management, depending on the organisation size and industry.
Who Is a Non-Executive Director?
A non-executive director is the non-working director of a company or nonprofit organisation. While they do not participate in day-to-day activities, they have a big say in policymaking, strategic planning and fundraising.
In most cases, non-executive directors are responsible for conducting meetings, setting agendas, and keeping an eye out for potential conflicts of interest among other directors. They also liaise between their organisation’s leadership team and external stakeholders such as investors and customers.
The term “non-executive director” is not well defined, making it challenging to find just the right person for a particular position. Many companies use the phrase “non-executive” when describing this type of position because it could be anyone with a background in business management or outside accounting but without an active role on their Board.
The Requirements for Being a Non-Executive Director
- Personal Attributes: A NED has to be an independent, challenging individual willing to contribute time and effort to the business. They must be objective, challenge the Executive Director to ensure everything is thought over twice, and be accurate, analytical, mature, and intelligent in their discourse. The NED may be a Director of another company but not a whole-time employee. They must also be able to devote sufficient time and effort to the business for it to be effective in their role.
- Business Background: In most cases, it’s easier for professionals with an established business background (like financial analysts or MBAs) to get a position as a Non-Executive Director. However, experience in any related field can be beneficial if the candidate has proven their ability to lead.
- Passing the Interview: When everything else is done as mentioned above, the final hurdle is passing the interview to become a NED. These interviews generally focus on your knowledge of the business world and even have aptitude-based questions where you have to say how you would act or respond in a particular scenario. This is to make sure that the NED will be able to challenge the other Directors when needed properly.
Key Responsibilities of Non-Executive Directors
Non-executive directors (NEDs) hold several key responsibilities, including:
- Providing Independent Perspective: They offer an external view on business and governance, enhancing decision-making with impartiality
- Overseeing Performance: NEDs monitor the executive team’s performance and ensure the company meets its goals
- Contributing to Strategy: They provide input on strategic development and help set committee meeting agendas
- Managing Risk: NEDs establish frameworks for risk management, ensuring adherence to the company’s risk appetite
- Representing the Company: They represent the company at external events and engage with shareholders
- Participating in Board Meetings: NEDs attend and contribute to board and committee meetings, assigning roles and reviewing agendas
- Updating Knowledge: They keep their expertise current regarding the business, risks, and regulations.
Independence and Objectivity in Decision-Making
Non-executive directors (NEDs) are chosen for a corporate board for outside oversight and independent advice to the process of decision-making. This role is required in the pursuit of detaching things for objectivity with outside views. Some major contributions include:
- Independent Counsel: NEDs can provide other perspectives through which the executive directors can make better decisions and take on risks
- Good Governance: The board acts transparently and ethically, which can encourage accountability and effective composition
- Diverse Perspectives: NEDs can provide different experiences that can bring innovative thinking. This means they are involved in strategic decisions that guard the interests of the stakeholders.
- Qualification based and Expertise: NEDs are appointed, play an important part in the board structure but have no day-to-day management responsibility.
Executive Directors vs. Non-Executive Directors: Key Differences
Executive directors are responsible for the overall functioning of a company. They are the ones who deal with matters related to the company’s growth, development, and performance. These directors have a wide range of responsibilities and are expected to oversee all the activities of their organisation. They are also responsible for the smooth running of their company and its employees.
Non-executive directors (NEDs) hold a position that is not as demanding as that of executive director, but they still have many responsibilities. The main difference between these two positions is that while an executive director has to manage day-to-day affairs and take care of other issues that may arise at any point in time, a NED deals only with matters related to the running of an organisation. With that said, here’s a more precise breakdown of the differences between executive directors and non-executive directors:
Involvement in Day-to-Day Operations
Executive directors involve themselves with hands-on contributions in running the affairs of the business on a daily basis, while non-executive directors are not involved in the running of the day-to-day business and focus their activities on matters of governance and oversight.
Strategic vs. Operational Focus
Executive directors are necessarily tactical leadership and business execution, while non-executive directors focus on strategy formulation and longer-run planning.
Board Attendance and Influence
Executive directors are always highly representative and have an authority of principle in board meetings while other non-executive directors attend board meetings as advisors; they have nothing to say, but they instead provide information to guide the executive directors.
Direct Employee
In most cases, an executive director is the direct employee of executive functions in the administration of a company. On the other hand, NEDs are separate from corporate management.
Working Hours
Executive directors often work long hours weekly to be good at their job (up to 70 hours a week or a little more). However, NEDs have to work much shorter hours since they don’t have to be concerned about the company’s day-to-day activities (up to 25 hours a week).
Division of Power
Executive directors generally have more power than their non-executive counterparts as they can hire and fire employees and other vital functions. However, since one significant purpose of Non-Executive directors is to challenge the Executive director, they are not entirely powerless.
Referring to the Board of Directors
On the same topic of power division, the Executive director can exercise his power without referring to the Board of directors first. However, being appointed a Non-Executive director comes with no inherent authority over the company’s processes, affairs, capital, and human resources.
Requirement of Skill
There is generally a requirement for skill for an Executive director. The individual has to be exceptionally skilled at managing the employees and capital of a company, among other things. On the contrary, NEDs have no such skill requirement (mainly because they aren’t responsible for the company’s day-to-day functioning).
Importance of Both Roles in Corporate Governance
Executives and non-executives in corporate governance play complementary important roles. Executive directors are characterised by hands-on management, a fact that allows them to execute their company’s strategies. Non-executive directors, on the other hand, provide independent oversight and strategic guidance, ensuring the company meets all its accountability and transparency requirements. Together, they yield a balanced board dynamic conducive to informed decision-making, enhanced risk management, protection of stakeholder interests, and ultimately, drives success for the company in the long run.
How Executive Directors Drive Operations
Executive Directors are ultimately responsible for the strategic vision for organisational decisions. The strategic vision includes things like evaluating and implementing changes to business operations, growth strategies, executive leadership, programming, staffing, vendors, policies, long-term company goals, and benchmarks of success.
How Non-Executive Directors Provide Strategic Oversight
- The non-executive directors offer independent oversight and objectivity in corporate decision-making
- Their experience and expertise can strengthen risk oversight and compliance with regulation
- Non-executive directors provide strategic input as well as diverse experiences around the board, which encourages innovative thinking
- They contribute to stronger corporate governance and make sure an effective board composition and ethical standards satisfy accountability
- Non-executive directors bring broader perspectives and promote diversity in the decision-making processes.
Legal and Regulatory Framework for Executive and Non-Executive Directors
Executive and non-executive directors fall under the legal and regulatory framework provided by the Companies Act, 2013, Company Directors Disqualification Act 1986, and sector-specific rules and requirements: All the duties set out in this act are to be observed by the executive and non-executive directors.
Company Directors Disqualification Act 1986 protects the interests of stakeholders and the integrity of corporate governance through the disqualification and liability of non-executive directors who misconduct themselves or are found unfit to act as a company director.
Companies Act Provisions on Director Roles
- Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company
- A director of a company shall act in good faith for promoting the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment
- A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgement
- A director of a company shall not involve in a situation in which they may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company
- A director of a company shall not derive or attempt to derive any unlawful or undue advantage or any other gain benefit for himself or his family members, spouses, partners, or associates and if such a director is held guilty of derivation of any such undue advantage he shall make a repayment to the company of an amount equal to that advantage
- A director of a company shall not assign their office and any assignment so made shall be void
- If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than ₹1 lakh but which may extend to ₹5 lakhs.
Fiduciary Duties and Accountability
Section 166 of the Companies Act 2013 outlines the duties of directors, encapsulating their fiduciary responsibilities towards the company and its stakeholders. These duties include acting in good faith, exercising due care and diligence, and promoting the success of the company.
- Breach of Fiduciary Duty: Directors are required to act with integrity, good faith, and honesty. Failure in the same may entail liability on their part, especially if the organisation suffers a loss because of their actions.
- Ultra Vires Acts: Any acts beyond the scope of authority allowed by the memorandum and articles of association rendered liable on their persons.
- Negligence: They were bound to act with proper diligence in the course of their duties. Failure to do so exposes them to liability, for whatever loss or injury to the company may arise.
- Malafide acts: directors can be held liable for the losses suffered by a company on account of dishonest or fraudulent activity.
Duties of Executive and Non-Executive Directors
Both executive and non-executive directors share similar responsibilities, mandated by the Companies Act, of 2013. Both can face liability for breaching directors’ duties, including fiduciary obligations. Here are the duties applicable to both types of directors:
- Exercise due diligence, care, and independent decision-making
- Act in good faith to advance the company’s objectives for the benefit of its members and shareholders
- Refrain from seeking any undue advantage or gain.
- Maintain confidentiality concerning company information and decisions.
Despite the relatively lesser involvement of non-executive directors in company management compared to their executive counterparts, they remain accountable for any violations of the aforementioned duties.
Conclusion
While it’s easy to think that a Non-Executive Director is not as important as an Executive Director, it’s not so true. Both of these professionals balance each others’ responsibilities in an organisation: while an Executive Director has full reign over the day-to-day functioning of the company (or a department), the Non-Executive Director’s constant challenges make sure the Executive Director remains focused and on-point.
However, finding a professional to act as a Non-Executive Director of a company can be difficult if there are no applicants in hand. So, you must act cautiously. Also, in case of any help related to company formation or legalities about running a business, get in touch with the legal experts at Vakilsearch.
FAQs
What is the main difference between executive and non-executive directors?
The primary difference lies in their work; executive directors are operationally involved while the focus of non-executive directors lies more on strategy.
Do non-executive directors have the same legal responsibilities as executive directors?
Yes, non-executives have almost the same legal rights and board responsibility as executive directors.
Can a company have both executive and non-executive directors?
Yes, it enhances board structure and corporate governance.
How does a non-executive director contribute to risk management?
Non-executive directors provide an independent oversight role and perform strategic review to enhance corporate governance and minimise risks.
Are non-executive directors involved in daily management?
No, non-executive directors hold advisory but don't engage in operational management.
What qualifications are needed to be an executive director?
Executive directors usually need prior management experience and strong leadership qualities as well.
How do executive directors influence company growth?
Executive directors stimulate business growth by operational management and executive leadership.
