This is a comprehensive guide that will hep you understand the differences between Executive Director and Non-Executive Directors in a company.
Overview
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.
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 running of an organisation. They are also responsible for ensuring that everyone in their department works towards 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.
What 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 policy making, 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.
Differences Between Executive Directors and Non-Executive Directors
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 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:
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).
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 whole-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.
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 actually 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.
Importance of Non-Executive Directors
- Non-executive directors bring objectivity and ensure board honesty during conflicts of interest
- They act as liaisons between the company’s leadership and external stakeholders
- Their focus on the company’s best interests aids unbiased monitoring of activities
- The external perspective of non-executive directors enhances decision-making quality
- Their expertise contributes to improving overall business performance.
Duties of Executive and Non-Executive Directors
Both executive and non-executive directors share similar responsibilities, mandated by the Companies Act, 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.
FAQs
What is the difference between executive and non-executive directors?
The primary difference is that the Executive directors are involved in daily management, while non-executive directors provide external perspectives and oversight.
What are the requirements for an executive director?
Executive directors need strong management and decision-making skills, often holding significant operational responsibilities within the company.
What is the difference between executive and non-executive function?
Executive functions involve day-to-day operations, while non-executive functions focus on oversight, strategic guidance, and external representation.
What is the criteria for a non-executive director?
Non-executive directors require industry expertise, independence, and the ability to provide impartial advice to the company.
Can a non-executive director be a CEO?
A CEO typically holds the position of executive director inside the company, which has executive responsibility for the management of the business. A non-executive director is a person who oversees and advises the board but does not have executive authority. As a result, a CEO cannot serve as a non-executive director of the same business, as this would lead to a conflict of interest and go against the idea of a clearly defined role allocation.
What is the minimum number of non-executive directors?
Depending on the kind of business, a board of directors must have a minimum of one non-executive member. A public business shall appoint no fewer than three directors and no more than fifteen, with at least one-third of the directors needing to be independent. A private corporation must appoint at least two directors and up to fifteen in total; a one-person firm must nominate at least one director. A minimum of one-third of the board of directors must be independent directors when the board chairman is a non-executive director, and at least 50% of the board of directors must be non-executive directors.
Conclusion
While it’s easy to think that a Non-Executive Director is not as important as an Executive Director, it’s actually 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 pertaining to running a business, get in touch with the legal experts at Vakilsearch.
